Many experts claim that automatic recurring payment functionality is one of the most significant innovations in the world of online payments. We are not sure it is the most significant, but there is no doubt that it is a very powerful tool that serves both customers and merchants. The only question is how to make the most of the potential that recurring payments offer.
Customers are increasingly aware of the advantages of automatic payment of subscriptions and membership fees. Probably the main reason for this is the fact that automatic payment of membership fees does not require much effort and, on top of that, eliminates the need for reminders that a payment is due. The advantages of recurring payments are evident for sellers too. Namely, e-merchants can regularly bill for their services without having to remind customers of amounts due, so they can also forecast their revenue more accurately, improving collection. So, everyone is happy!
Because of the convenience it provides and because it makes everyday work easier, we believe that you too, if you haven’t already, will at some point start using this billing model. That is exactly why we will try to explain some of the basic elements of recurring payments.
Payment cards are the most commonly used payment method when it comes to recurring payments. This popularity is no accident; it comes from the fact that card payments offer the most options. One of the main ones is that most cards today allow recurring payments, with potential restrictions (e.g. a limited daily limit).
Amounts billed to the customer this way can be charged to the card at previously agreed time intervals (whether regular or not) and in agreed amounts, which may or may not be fixed. Once agreed, the arrangement means that, while it is in effect, no other special formalities are required (e.g. written contracts and the like), nor does the customer need to give special permission before each individual payment. Best of all, the amount is collected immediately and the merchant is notified.
How do recurring payments work?
We will try to describe a typical scenario. After creating an account on a site that offers a subscription to some content, the customer is often offered a free trial period of the service. During that time, the user can test the content or check whether the site’s features suit them. To get free access, the e-merchant asks the user to register the payment card that will be used for billing if the user continues to use the site after the free period ends. In another example, the e-merchant may ask for card registration only after the trial period expires, if the user wants to continue using the site.
In both variants, the customer fills in a payment form containing all the mandatory card details (first and last name, card number, card expiration date and CVV number) and confirms that the card may be used for automatic billing at predefined time intervals. Card data deposited this way is converted into so-called “tokens” and stored on the merchant’s system. It is important to note that the use of tokenization means that at no point does the e-merchant have access to the card data – not even when it is entered.
From that moment on, the e-merchant’s job comes down to sending, through its system and at the agreed time interval, a payment request with the token data, without anyone having to re-enter the card details that were entered once.
Automatic monthly payments are the most common, but payments can also be made once a year, every two weeks or even every week. The decision depends primarily on the e-merchant’s business model. It is also possible to charge the user an amount that is not fixed but depends on the level of service usage (pay per use), where the agreed amount is charged when a certain level of consumption is reached. A good example is Skype Credit, where the user can choose the option of having their Skype account automatically topped up by charging the deposited card as soon as their Skype Credit falls below a certain amount.
Most often, the customer is left with the ability to control their payments. This is achieved by allowing them to choose or change service packages without having to deposit their card data again.
There are many options, and that is exactly what makes recurring payments incredibly popular.
This, in short, is the essence of recurring payments. With this subscription model, your clients can be sure that their subscription will not be interrupted just because they forgot to renew it, and you can freely forget about sending warnings or reminders to your forgetful users.
If you think carefully about all the possibilities that recurring payments give you, and especially the advantages they bring, we are sure that you too will soon become a satisfied user of recurring payment services.