Recurring credit card payments are automatic payments where a predetermined amount of money is charged to a credit card on a regular schedule. This could be monthly, quarterly, or annually, depending on the arrangement. These payments are commonly used for subscriptions, memberships, utility bills, and other ongoing services. Once set up, they ensure payments are made on time without the cardholder having to manually initiate the payment. This is convenient for both the customer, who doesn’t have to remember to make the payments, and the service provider, which receives the payments consistently and on time.

The global subscription e-commerce market was valued at over $199 billion USD in 2023, emphasising the strong demand for recurring payments. Below, we’ll cover how recurring credit card payments work, what types of businesses can benefit most from recurring payments, how to successfully implement these types of payments, and more.

What’s in this article?

• How do recurring credit card payments work?
  
• What is the difference between a recurring charge and a one-off charge?
  
• What are the benefits of recurring credit card payments?
  
• What types of businesses benefit most from recurring payments?
  
• How to successfully implement recurring payments
  
• Challenges associated with recurring credit card payments
  

How do recurring credit card payments work?

Recurring credit card payments work through an automated process that authorises businesses to charge a cardholder’s credit card for services or subscriptions at regular intervals. Here’s a step-by-step breakdown of how this process typically works.

• Setup: The cardholder provides their credit card details to the business and authorises them to charge the card for a specified amount at regular intervals. This authorisation can be made online, over the phone, or through a signed form.

• Agreement on terms: The business and the cardholder agree on the amount, frequency, and duration of the payments. This could be monthly for a magazine subscription, annually for software licences, or another arrangement that fits the nature of the transactions.

• Payment processing: On the scheduled date, the business’s payment processor automatically charges the cardholder’s credit card for the agreed upon amount. This is typically handled by payment gateways or merchant service providers.

• Notification: After the payment is processed, both the business and the cardholder are notified (usually via email) with the transaction details for record-keeping and confirmation.

• Renewal or cancellation: The cardholder can usually manage, cancel, or update their payment information with customer service or a self-service portal. If the credit card expires or is replaced, the cardholder needs to update their payment details to avoid interruptions in service.

What is the difference between a recurring charge and a one-off charge?

The primary difference between a recurring charge and a one-off charge on a credit card is the frequency and intent of the payment.

Recurring charges happen at regular intervals, whether that’s monthly, quarterly, or annually. They’re used for ongoing services or subscriptions where the customer agrees to be billed periodically for continued access to a service or product. Examples include payments for subscription services (such as streaming platforms or gym memberships), utility bills, or regular donations. These payments require initial setup for ongoing, automatic charges and typically continue until the customer cancels the service.

One-off charges occur just once. They’re used for single transactions to buy goods or services. Examples include online purchases, restaurant meals, or concert tickets. There’s no need for ongoing management or cancellation.

What are the benefits of recurring credit card payments?

Recurring credit card payments can benefit businesses in several important ways. Here are some of the potential advantages.

• Predictable revenue stream: Recurring payments turn customer relationships into reliable revenue streams. This predictability helps with advanced financial planning and forecasting, allowing businesses to better allocate resources for growth initiatives such as research and development (R&D) and marketing.

• Lower customer churn: Recurring billing reduces churn by lowering barriers to renewal. When customers are enrolled in automatic payments, inertia tends to keep them subscribed. This can substantially increase the lifetime value (LTV) of customers, as it extends the average customer lifespan beyond the typical duration associated with manual renewals.

• Reduced cost of sales: Acquiring new customers is generally more expensive than keeping existing ones. Recurring payments help stabilise retention, which in turn reduces the ongoing cost of sales. By automating the billing cycle, businesses can also reallocate resources from collections and billing departments to growth-focused areas.

• Advanced data insights: Automated recurring payments provide a wealth of data on customer behaviour and financial metrics that can be used to refine business strategies. For example, analysing upgrade and downgrade trends among subscribers can reveal product preferences and pricing tolerance to inform product development and marketing strategies.

• Optimised transaction handling: Recurring payment systems often have sophisticated management tools for handling declines and updating payment details, known as dunning management. These tools proactively address issues such as expired cards or insufficient funds to reduce disruptions in cash flow or service.

• Scalability: Businesses looking to scale often find recurring billing systems more adaptable as they grow. Whether it’s expanding the customer base, offering new services, or entering new markets, the infrastructure that supports recurring payments can scale without a corresponding increase in the transactional workload or demands on customer service.

• Improved customer experience: Customers might value the convenience of recurring payments. They can improve satisfaction, build loyalty, and help create competitive differentiation and customer advocacy.

What types of businesses benefit most from recurring payments?

Recurring payments have advantages for a wide range of businesses. The businesses most likely to benefit from these kinds of payments are outlined below.

Subscription-based businesses

• Streaming services (e.g. Netflix, Spotify): These companies offer continuous access to content for a regular fee.

• Software-as-a-service (SaaS) providers: SaaS providers offer ongoing access to software and updates, which fits well with a recurring payment model.

• Membership platforms: These companies provide exclusive content, benefits, or community access – generally for a monthly or annual fee.

Service-based businesses

• Gyms and fitness centres: These businesses charge monthly or annual membership fees.

• Cleaning services: These services sometimes offer cleaning packages on a weekly or monthly basis.

• Landscaping services: Landscapers often provide ongoing maintenance on a regular schedule.

Utility and telecommunications companies

• Electricity, water, and gas providers: These companies charge for essential services on a monthly basis.

• Internet and mobile phone providers: These providers offer various plans and bill on a recurring basis.

Educational platforms

• Online courses and learning platforms: These businesses provide access to ongoing courses or materials.

• Language learning apps: Apps for language instruction offer subscribers continuous learning and other resources.

• Tutoring services: These services charge for regularly scheduled sessions or access to their platforms.

Other businesses

• Magazine and newspaper subscriptions: These subscriptions regularly deliver content for a fee.

• Food and beverage delivery services: These delivery services have subscriptions for regular deliveries.

• Personal care services (e.g. shaving, cosmetics): These companies provide products on a regular basis.

How to successfully implement recurring payments

Here are some best practices for implementing recurring payments at your business.

Strategic pricing

• Provide multiple subscription tiers with varying features and price points to support diverse customer needs and budgets.

• Attract new customers with discounted introductory periods or free trials, then gradually transition them to full-priced plans.

• Consider dynamic pricing models that align costs with actual usage, providing flexibility for both customers and the business.

• Package multiple products or services together at a discounted rate to incentivise broader adoption and increase average order value.

• Continuously experiment with different pricing strategies to identify optimal price points that maximise revenue and customer satisfaction.

Advanced payment gateway integration

• Implement account updater tools that automatically update customers’ payment information to reduce involuntary churn.

• Automatically retry failed payments at different intervals to recover lost revenue and improve retention.

• Integrate advanced fraud detection and prevention tools to safeguard customer data and reduce chargebacks.

• Use subscription management application programming interfaces (APIs) to automate billing cycles, manage subscriptions, and offer customers self-service options.

• Customise the payment gateway experience to match your brand identity and ensure a cohesive customer journey.

Customer communication and engagement

• Provide new subscribers with personalised onboarding experiences, tutorials, and resources to maximise value and combat churn.

• Send targeted emails or notifications based on customer behaviour, preferences, or subscription milestones to grow engagement and encourage upgrades.

• Actively seek and incorporate customer feedback to improve products, customer support, and the overall experience.

• Implement loyalty programmes to reward long-term subscribers with exclusive perks, discounts, or early access to new features.

• Promote a sense of community among subscribers through forums, events, or social media groups to boost brand loyalty and advocacy.

Data-driven decision-making

• Identify root causes of churn and implement strategies to target them.

• Analyse customer behaviour and performance over time to identify patterns and optimise marketing efforts.

• A/B test different pricing, messaging, or features to identify what resonates best with your target audience.

• Use predictive models to forecast customer lifetime value, identify high-risk churn candidates, and personalise offers.

• Use real-time dashboards to monitor key metrics and make data-driven decisions.

Optimisation and innovation

• Continuously innovate and improve your product or services to maintain a competitive edge.

• Explore new markets or customer segments to expand your recurring revenue potential.

• Partner with complementary businesses to offer bundled services or cross-promote each other’s offerings.

• Strategically adopt emerging technologies such as blockchain or artificial intelligence (AI) to improve payment security and optimise recurring revenue processes.

• Be prepared to adapt to changing market conditions, regulations, and customer expectations for long-term success.

Challenges associated with recurring credit card payments

Recurring credit card payments can boost your business, but they do carry their own unique challenges. Here’s a closer look at some of them.

• Payment declines and expiration issues: One of the most common issues with recurring payments is declined transactions due to expired credit cards, insufficient funds, or bank rejections. This disrupts cash flow and requires administrative effort to resolve.

• Customer updates: Customers might change their payment methods, contact information, or even cancel services. Manually keeping track of these updates can be cumbersome and can introduce errors. Automated systems might help, but they need to be kept up-to-date and fully integrated with customer service processes.

• Regulatory compliance: Non-compliance with regulations such as the Payment Card Industry Data Security Standard (PCI DSS) and data protection laws (such as the EU’s General Data Protection Regulation, or GDPR) can result in heavy fines and reputational damage. Securely handling customer data and payment information is a major responsibility.

• Customer communication: Poor communication about payment schedules, terms of service, and any changes in pricing or policies can lead to misunderstandings, dissatisfaction, and loss of customers.

• Subscription fatigue: With the increasing number of subscription services available, customers might experience subscription fatigue, leading them to reconsider or rationalise their recurring expenses. Businesses need to continually demonstrate value to prevent cancellations and manage customer churn.

• Technical integration and scalability: Integrating recurring payment systems into existing platforms across various devices and interfaces can be technically challenging. The payment system must also scale with the business, which can present further technical complexity.

• Fraud and security risks: Recurring payments increase the risk of fraud, especially if security measures are not strong. Fraudulent actors might target these systems to steal sensitive payment information. Businesses must invest in advanced security technologies to detect and prevent fraud.

• Dunning management: Businesses must develop strategies for dunning, or the process of communicating with customers to resolve failed payments. This should be handled with sensitivity to maintain goodwill while also collecting payments.

• Customer autonomy and satisfaction: Customers value control over their purchases and payments. Recurring payments sometimes create a perception of a loss of control, especially if cancelling is difficult.

• Cultural and regional variations: In some markets, customers might be less familiar or comfortable with automated recurring payments. Cultural preferences for payment methods and intervals also vary, and businesses need to adapt their approaches accordingly.