A recurring payment is a method of automatically paying for goods or services according to a prearranged schedule.
Recurring payments explained
Recurring payments are an integral part of the subscription economy that enables customers and merchants to engage in an ongoing relationship instead of a one-time purchase. A business obtains the customer’s permission to charge a credit or debit card upfront. The merchant will automatically make recurring charges to the customer’s account with no further permissions needed. The processing of these charges will continue until a customer decides to cancel the arrangement.
Recurring payments are also known as regular payments, recurring billing, or subscription payments. Examples of products or services that have recurring payments include cable bills, cell phone bills, gym membership fees, utility bills, and magazine subscriptions.
Merchants need several things to start processing recurring payments, including:
- Merchant account: A merchant account is where the payments that are regularly charged to customers’ cards are transferred. The account can be a bank account owned by the merchant or the brand.
- Payment gateway: A payment gateway connects an online store with credit card companies, making it easy to accept online payments. It handles all aspects of electronic payments to ensure that transactions are secure.
- Subscription management: A subscription management system ensures that the customers that signed up for recurring payments are charged regularly. The system also carries out regular product deliveries according to the prearranged schedule.
Here are the main steps involved in processing recurring payments:
- A customer visits the merchant’s Direct-to-Consumer (DTC) store and chooses recurring payments for a product from the payment options list.
- The customer accepts the terms and conditions for recurring billing during the checkout process, including the amount charged, fee structures, and payment schedule.
- The customer enters their billing information and agrees to save it within the merchant’s system.
- The billing information goes through a payment gateway to authorize the transaction between the acquiring bank, issuing bank, and credit card network.
- The customer will receive an invoice informing them of their payment every time they process the recurring payment. Some businesses will also notify their customers ahead of the transaction should they opt to cancel the arrangement.
The benefits of recurring payments
Implementing a recurring payments model has many benefits:
- Increased customer retention: The complexity of the checkout process can affect a business’ sales. Up to 21% of shoppers will abandon their carts if the process is too long or complicated. Recurring payments offer a seamless checkout experience and only require the customer to input their billing information once, thus having positive effects on customer retention. Multiple payments are also simplified into one, incorporating hassle-free automation functions so that customers don’t have to go through the checkout process every billing cycle.
- Steady cash flow: Accepting recurring payments means businesses can expect a steady flow of cash each month. With a predictable cash flow, merchants can manage operations costs better.
- Accurate budgeting outlook: Recurring payments give customers a clear view of their monthly or annual expenses to better budget their funds. Subscription payments also offer businesses a stable outlook on revenue. The foresight can help companies plan better, produce less waste, and have a higher return on investment (ROI).
- Better customer relationships: Offering a recurring payments option can improve business relationships by helping customers save time and energy. By providing security and consistent, high-quality service, merchants can establish a long-term relationship with customers based on recurring billing.
Enable recurring payments with Cafe24
Recurring payments are gaining steam in e-commerce, and it’s easy to see why. Research from international growth strategy experts Manifesto Growth Architects revealed that 70% of businesses believe that subscription models are fundamental to future commercial growth. Supporting market trends show that companies should consider investing in their DTC offerings to gain market share, boost revenues, and develop sustainable customer relationships. As more businesses and industries enable the subscription model, recurring payment transactions in the US may reach 473 billion dollars by 2021.
Cafe24 supports merchants who want to enter the subscription economy and enable recurring payments. Home to more than 1.8 million DTC brands, the e-commerce platform provides tools, systems, and technologies that empower businesses of various sizes to improve all aspects of their business. Cafe24’ss recurring payments service automatically processes regular payments and carries out deliveries. The system allows merchants to add subscription-based products and manage them with ease. With recurring payments, DTC stores can provide shoppers with an enhanced payment convenience while boosting revenues, increasing ROI, and improving customer relationships.