A recurring payment is a type of transaction that allows merchants to charge their customers regularly (e.g., weekly, monthly, quarterly, or annually) for goods or services. Think of it as a system where money is automatically deducted from a customer’s account at regular intervals without requiring manual action. Once the customer authorizes the initial transaction and agrees to the recurring terms, subsequent payments are processed automatically according to the agreed schedule.
It has become the go-to model for subscription-based services or products because it improves customer convenience by removing the need to input payment details repeatedly and helps merchants achieve predictable revenue.
This article discusses how recurring payments work, the types, possible use cases, and the benefits for businesses.
How do Recurring Payments Work?
Below is an overview of how recurring payment works:
- Customer initiates: The first step in the process involves the customer agreeing to the terms of the recurring payment model and providing the required information to process payment using a payment gateway.
- Authorization: The merchant uses a payment provider to process the first payment and ensures that the provided information is valid. This step also accounts for the customer’s consent to automatically deduct future payments without further authorization.
- Automatic Recurring Billing: Based on the agreed schedule (e.g., monthly), the merchant will automatically charge the customer at the designated interval. Before each charge, customers are usually notified of upcoming charges.
- Payment Processing: Once the customer is billed, the payment gateway settles the merchant by sending the funds to their account.
- Renewal or Cancellation: A recurring payment can be canceled or continued indefinitely, depending on the customer’s preference. To build trust and transparency, merchants must provide a clear option for customers to modify or cancel their recurring payments.
Types of Recurring Payments
Recurring payments differ in terms of value, the industries that use them, and the type of subscription model adopted. Generally, they can be broadly categorized into:
- Fixed Recurring Payments
This is a type of recurring payment where customers are charged a fixed amount at regular intervals. It is commonly used in subscription-based services like media streaming, online software, or fitness memberships. For example, as a Netflix subscriber, you pay a fixed amount each month to access the streaming library.
- Variable Recurring Payments
This is a type of recurring payment where the amount charged varies based on usage or any other factors. For example, utility providers like Eko Electricity Distribution Company (EKEDC) may charge you based on your electricity usage, which may vary each month.
Now that we’ve covered the types of recurring payments, let’s explore some use cases for them.
Use Cases for Recurring Payments
Below are some use cases for recurring payments:
- Membership-Based Businesses
- Subscription Services
- Utility and Telecommunication Companies
- Insurance Premium
- Installment Payments
Membership-Based Businesses
Organizations like gyms, clubs, or co-working spaces that require customers to pay membership fees often use recurring payments to charge at agreed intervals. This model ensures continuous access to services as long as the membership is active.
For example, you can use recurring payment to build a membership-based system for a new gym in your area where members are charged monthly to access the facilities and classes. Members also have the flexibility to cancel at any time, but until then, their debit or credit card is charged each month automatically.
Subscription Services
Subscription services are the most common use case of recurring payments. Streaming services (like Netflix and Spotify) and SaaS products (like Microsoft 360 and Adobe Creative Cloud) use recurring payments to charge their customers.
Utility and Telecommunication Companies
Utility providers like MTN and EKEDC more often use variable recurring payments to charge their customers. Monthly bills can fluctuate based on usage, but they allow customers to maintain uninterrupted access to services.
Insurance Premium
Insurance companies can use recurring payments to charge policyholders premiums (often monthly or yearly) to ensure continuous coverage.
Installment Payments
A business might come up with a payment plan for customers to purchase items like electronics, furniture, or travel and allow them to pay in installments.
For example, a travel agency like Wakanow can offer an installment payment option for vacation packages. So instead of paying ₦5,000,000 upfront, the customer can pay ₦200,000 a month for 25 months, with the recurring payments automatically deducted from their account.
Buy Now, Pay Later (BNPL)
When you offer your customer the option to split the cost of a product or service into multiple payments (e.g., 4 installments), recurring payments can automatically deduct each installment on an agreed schedule due date until the payment is completed.
Loan Repayment
Lending platforms can use recurring payments to collect monthly loan repayments. The customer provides their payment details and the system deducts based on the loan agreement.
How Recurring Payments Benefit Businesses
Recurring payments offer several advantages when integrated into a business workflow. Below are some of the benefits of recurring payments:
- Increased Customer Retention
- Reduced Administrative Cost
- Improved Sales Pipeline
- Better Cash Flow and Revenue
Increased Customer Retention
The automatic nature of recurring payments reduces the friction of having to manually renew their subscription and, in turn, increases the likelihood of continuing the engagement.
Reduced Administrative Cost
Administrative costs associated with generating and sending invoices and making follow-up calls for late payments are significantly reduced when a business implements recurring payments.
Improved Sales Pipeline
When a customer is subscribed to a recurring payment plan, businesses have more opportunities to introduce upgrades, add-ons, or complementary services.
Better Cash Flow and Revenue
One of the primary benefits of implementing recurring payments is predictable revenue. With a subscription-based model, businesses can forecast revenue more accurately and plan accordingly. Additionally, because businesses receive regular and scheduled income, they have the cash to cater for emergencies and business operations.
Conclusion
Recurring payment improves the billing experience for both merchants and customers. For merchants, it improves cash flow, creates predictable revenue, and lowers administrative costs. For customers, it simplifies transactions, ensures continuous access to service, and provides a hassle-free billing system.
Flutterwave’s recurring payments cover all these essentials that your business needs while also catering to business-specific needs. These include split payments for collaboration with third-party services, automated billing cycles, and other advanced features to streamline your operations. Sign up in a few steps to get started.