Recurring payment processing 101: A guide for businesses


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  1. Introduction
  2. What are recurring payments?
  3. What is recurring payment processing?
  4. How does recurring payment processing work?
  5. Ways to process recurring payments
  6. How Stripe supports recurring payment processing

Many businesses have incorporated recurring revenue models into their operations due to the appeal of predictable, repeat income. But managing recurring payments involves more than just collecting funds from customers at regular intervals. It also entails ensuring transaction security, managing customer data, dealing with payment errors or failed transactions and providing a simple user experience.

Handling recurring payments effectively can significantly affect a business's success. It allows businesses to predict their cash flow more accurately, improve customer retention and minimise the administrative tasks associated with billing and collections. It also provides customers with an easy way to enjoy a product or service without interruptions, increasing their overall satisfaction and loyalty.

However, setting up a system for managing recurring payments can be complex. It requires the right technology and systems to securely store and handle sensitive customer data. It also involves complying with various financial and data protection regulations. And businesses need to select a system that fits with their business model and meets their customers' expectations. Here's what you need to know.

What's in this article?

  • What are recurring payments?
  • What is recurring payment processing?
  • How does recurring payment processing work?
  • Ways to process recurring payments
  • How Stripe supports recurring payment processing

What are recurring payments?

Recurring payments – also known as subscription payments, auto-debit or automatic payments – refer to transactions that are automatically processed on a predetermined schedule. They are regular payments made by a customer to a business for a service or product, charged on a recurring basis.

For instance, you may have recurring payments set up for your monthly utility bills, such as electricity or internet service. They could also be applied for subscriptions like gym memberships, streaming services (e.g. Netflix, Spotify, etc.), or software-as-a-service (SaaS) platforms.

Recurring payments can benefit both businesses and customers. They provide businesses with predictable income and help improve customer retention. And they are convenient for customers, since they no longer need to remember to manually initiate each payment.

What is recurring payment processing?

Recurring payment processing refers to the methods and systems businesses use to automatically collect recurring payments from customers. It's an important part of managing subscriptions and other recurring revenue models. Customers will typically give a business permission to regularly charge their credit card or debit their bank account for products or services.

How does recurring payment processing work?

Recurring payment processing involves the following sequence of steps:

  • Customer authorisation
    The process begins when the customer consents to recurring charges. During the sign-up or checkout process, the customer provides their credit card or bank account information and agrees to the terms of the recurring payment. The terms of this agreement should clearly state the amount that the customer will be charged, how often they will be charged and which services or products they will be charged for.

  • Payment information storage
    Once the customer has provided payment information, the business must store this data securely for future transactions. This is usually done via a payment gateway or a third-party service provider that complies with Payment Card Industry Data Security Standards (PCI DSS). The customer's payment details are typically tokenised – in this process, they're replaced with a unique string of characters (a "token") that is meaningless if intercepted, adding an extra layer of security.

  • Payment scheduling
    The business sets up a payment schedule based on the agreed-upon frequency of the recurring payment. This could be weekly, monthly, annually or any other time frame that the customer agrees to. Automated systems then ensure that the payment is processed at the correct intervals.

  • Transaction processing
    When the scheduled payment date arrives, the payment gateway or processor initiates the transaction. It sends a request to the customer's bank or credit card company to charge the agreed-upon amount. This process is typically seamless and happens without any action needed from the customer.

  • Transaction confirmation
    Once the transaction has been approved, the customer's account is debited and the funds are transferred to the business's account. A confirmation is usually sent to the customer notifying them of the successful transaction.

  • Error handling and retries
    Sometimes, transactions can fail due to various reasons such as insufficient funds or an expired credit card. Most payment processors have systems in place to handle these errors. This could involve notifying the customer about the issue and retrying the charge after a certain period.

  • Subscription management
    Recurring payment processing also includes managing the customer's subscription: upgrading or downgrading plans, cancelling subscriptions, issuing refunds and handling customer inquiries. Effective management can improve customer satisfaction and retention.

  • Compliance and reporting
    Finally, businesses must comply with various regulations and standards that govern recurring payments, such as PCI DSS and the General Data Protection Regulation (GDPR). They also need to regularly analyse payment data to track business performance, identify trends and make informed decisions.

Recurring payment processing can benefit both businesses and customers. For businesses, it provides predictable revenue and reduces administrative work. For customers, it offers convenience and ensures uninterrupted access to products or services. However, it's important to handle this process correctly to maintain customer trust and satisfaction.

Ways to process recurring payments

There are a variety of systems available to process recurring payments. The choice of system can depend on a number of factors, such as the nature of the business, the transaction volume and frequency, the geographic location of the business and its customers and the types of products or services.

Here are some of the most common tools that businesses can implement to process recurring payments:

  • Payment gateways
    A payment gateway is a technology used by businesses to accept debit or credit card purchases from customers. These gateways can be configured to manage recurring payments, store customer payment information and automatically charge customers on a set schedule.

  • Merchant accounts
    Merchant accounts are bank accounts that allow a business to accept payments in multiple ways, usually via debit or credit cards. Merchant service providers can offer tools or partner with payment gateways to handle recurring payments.

  • Direct debit providers
    Businesses can use direct debit providers to automatically debit a customer's bank account on a recurring schedule. This is often used for larger payments or B2B transactions. It requires permission to be obtained from the customer to debit from their account.

  • ACH processors
    Businesses with customers in the US can use ACH (Automated Clearing House) processors to handle recurring payments. They pull funds directly from the customer's bank account and push them to the business's account.

  • Subscription management platforms
    These platforms specialise in managing subscriptions and recurring payments. They usually offer a range of features, such as different pricing plans, discount management, trial periods and automated email responses.

  • Integrated solutions
    Some businesses might use integrated solutions, such as ERP (enterprise resource planning) or CRM (customer relationship management) software, which have built-in recurring payment processing capabilities. This can consolidate and streamline business operations.

When choosing how to process recurring payments, businesses need to consider factors such as the cost of the solution, its ability for integration with other systems that they use and the provider's reputation for security and reliability, as well as the overall customer experience. It's also important to ensure that the chosen method complies with all relevant financial regulations and data security standards.

How Stripe supports recurring payment processing

Stripe Billing includes a suite of tools designed to handle recurring payments. This makes the subscription and invoicing process more efficient for businesses, accommodating the complexity of various payment models and automating several administrative tasks.

Here are some of the ways that Stripe supports recurring payment processing:

  • Subscription models
    Stripe Billing supports a variety of subscription models, allowing businesses to customise pricing, billing intervals and trial periods. It can handle plans with different pricing tiers, per-seat pricing, usage-based pricing and more.

  • Customer portal
    Stripe provides a customer portal where customers can manage their own subscription. They can update their payment methods, choose different subscription plans and view their billing history. This can reduce the administrative burden on the business and improve the customer experience.

  • Payment methods
    Stripe supports a wide range of payment methods, including all major credit and debit cards, many localised payment methods and digital wallets, such as Apple Pay and Google Pay. This makes it easy for businesses to accept payments from customers all around the world.

  • Security
    Stripe complies with the highest industry standards for data security (PCI DSS Level 1) and uses advanced methods such as tokenisation and encryption to protect sensitive data. This can give businesses confidence that their customers' payment information is being handled securely.

  • Automated invoicing
    Businesses can use Stripe to automatically generate and send invoices to their customers. Stripe Billing also supports customisable billing emails and reminders for upcoming and past-due payments.

  • Smart retries and dunning management
    Stripe uses machine learning to optimise the timing of retry attempts when payments fail. It also offers customisable dunning management, automatically emailing customers when payments fail and providing them with a link to update their payment method.

  • Tax and compliance
    Stripe Billing can automatically calculate and add tax to invoices for many countries. It can also help businesses meet compliance requirements such as those related to the European Union's value-added tax (VAT).

  • Reporting and analytics
    Stripe provides detailed reports for business metrics like revenue, churn and active subscriptions. These can help businesses understand their performance and make informed decisions.

Stripe's approach to recurring payment processing provides an extensive toolkit for businesses to effectively manage their subscriptions and invoicing. Stripe emphasises versatility, security and ease of use in its solutions and Stripe Billing provides a user-friendly experience for both businesses and customers. To learn more and get started, go here.

The content in this article is for general information and education purposes only and should not be construed as legal or tax advice. Stripe does not warrant or guarantee the accurateness, completeness, adequacy, or currency of the information in the article. You should seek the advice of a competent attorney or accountant licensed to practice in your jurisdiction for advice on your particular situation.

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