What Are Recurring Payments?

A recurring payment is not a strange, complex concept. It is simply those predictable, repetitive payments you make weekly, monthly, or yearly. This can be for all kinds of stuff, ranging from utility bills to entertainment subscriptions like Netflix. The money you keep having to pay so that you continue to have access to a particular service or feature is a perfect example of recurring payments.

Unlike in-store purchases, where you make payment for a one-time transaction, recurring payments often occur remotely through a payment processor. These types of payments are ideal for customers that want a certain product or service continuously, whether out of sheer loyalty or survival need.

Recurring Payments Explained

To fully understand recurring payments, it is good to have an idea of establishing the concept. It is pretty straightforward. For a start, the customer selects the recurring payment type. After that, the customer is required to accept the terms and conditions. Then, they need to wait for authorization. Finally, the customer proceeds to enter their payment details and confirm the payment amount.

Once this is done, the customer is charged the fee for the specified period. Once that cycle is over, the customer needs to renew their subscription if they wish to continue to use the product or service.

Types of Recurring Payments

There are two main types of recurring payments. These types vary based on how the customer is charged, whether monthly, yearly, weekly, or even daily. The two types are Fixed and Variable recurring payments.

Fixed Recurring Payments

This type of recurring payment is where a customer pays the same amount every time. Some notable examples are monthly magazine subscriptions, gym membership, and others. As long as you pay the required amount, you will have access to the services and products.

Variable Recurring Payments

On the other hand, variable recurring payments are where the charges vary based on the services the customer receives during the payment cycle. So, for instance, your electricity bill varies monthly based on the amount of energy consumed in that month. Other examples include telephone bills, water bills, and others.

How Do Recurring Payments Work?

Once a customer authorizes a recurring payment for a particular service, it is charged directly to their bank account. To accept these funds, vendors need to have a merchant account and a payment provider. The merchant account will allow vendors to accept payment from the customer’s bank account. The amount charged to the customer’s bank is first transferred to the merchant account before getting to the vendor’s bank account.

The payment service provider then handles the various parts of payment processing. This starts from collecting the recurring payments on the vendor’s behalf and security processing them to depositing the money into the vendor’s bank account.

Recurring Payments Benefits for Business

Recurring payments come with many benefits for both merchants and customers. One of them is that when you use recurring payment processors, it is a lot easier and convenient compared to billing a routine charge consecutively. In addition to that, recurring payments help to ensure healthier cash flow while lowering collection costs. Since the payment is automated, the business accounting team can focus on more valuable tasks.

As a result, the business will be in a better economic position, reducing the amount of guesswork needed in your financial planning. Also, recurring payments strengthen the relationship between customers and businesses. Satisfied customers that do not have to worry about making payments every time tend to stick around longer.