How are recurring payments processed?
Think back to the last time you signed up for a subscription with a well-known company like Paramount+, Speedo, or PupBox. It was likely a fast and easy process. You provided your payment details, and off you went. From there, you were automatically charged an agreed-upon amount on an annual basis (for the best price), and you might have never given it a second thought.
Processing payments takes more than just running a credit card number–and that’s why many companies rely on a subscription billing platform that can handle all things related to recurring payment processing. There are integrations, revenue recovery, subscription billing models, gateway routing, pricing experiments, and much more to consider.
Check out this diagram about the payment processing process.
The customer hits the order button to initiate a purchase from the merchant.
The merchant receives the credit card information and hands it off to a third-party billing platform, like Recurly, avoiding any PCI liability that could arise from the storage of customer financial information.
The payment details are stored and the online payment request is sent to the gateway.
The gateway sends the request to the payment processor
Then its forwarded on to payment service providers or card associations (such as Visa, Mastercard, American Express, or Discover).
The association takes the request and sends it to the customer’s issuing bank.
The financial institution approves (or denies) the transaction and then informs the network of its decision. It's typically approved if the customer’s card details are accurate and have sufficient funds.
Assuming there were no hiccups, the customer is billed by the issuer on their monthly statement.
What’s remarkable is that this entire payment process takes place within a few seconds—so next time you’re online and waiting for a few seconds for your transaction to get approved, think about everything going on behind the scenes. And, of course, with recurring payment processing, this process repeats itself every payment cycle.
How can recurring payments benefit your business?
Your company can enjoy several benefits when you use a recurring payment processing solution, such as:
Minimized effort: The setup is a one-shot deal, and no more work needs to be done every billing cycle. It sounds like a bonus for your business, but it also helps you build customer relationships. With online recurring payment processing, the invoice and payment information automatically flows into the right systems, preventing missed and late payments–making it easier for your finance team to track a client's payment history.
Error and fraud defense: There is less risk of card detail mistakes or fraud because your customers aren’t required to enter their payment details over and over again. Fraud and chargeback-related expenses make up 13% to 20% of businesses operating budgets. With automated subscription billing cycles, you can protect your business integrity by securing your client's payment methods and streamlining the process.
Flexible payment terms and packages: It’s easier to give your customers a variety of payment, plan, and billing frequency options, which they can change at any time. Some customers may want to make credit or debit card payments, while others want to pay using a virtual terminal like PayPal for automatic payments. Perhaps your value-packed but most expensive plan appeals to a small subset of your customers, but others see it as excessive and wish you had a pared-down offering. Without recurring payment options, this type of flexibility is difficult, if not impossible, to achieve.
The benefits of recurring payment processing are undeniable. But maybe you’re still wondering if it can help your business.
What are the different ways to process recurring payments?
“There’s more than one way to skin a cat” could apply to processing recurring payments. Not every payment solution is created equal:
Accounting software is an option if you have a limited number of plans and a small stable of customers. Accounting software isn’t sufficient for companies with complex needs unless managing tons of disparate spreadsheets is your idea of fun.
Payment gateways are a crucial piece of recurring payment processing. This can be a lower-cost option due to reduced payment processing fees, but relying on just one payment gateway for all your payment processing needs is risky. More on that in a bit.
Subscription management and billing platforms, like Recurly, can handle all billing needs. The best subscription billing software supports multiple gateways, provides subscription model metrics, and gives actionable insights to advance your business. Advanced subscription management platforms can help you recover revenue with automated retries you’d otherwise lose to involuntary churn.
Getting back to gateways, you may be wondering, "Why is it necessary to have multiple gateways?"
Multiple gateways are vital because no electronic gateway supports all types of transactions at a high volume. Geolocation and product type are just two of the variables that impact them.
Additionally, gateway failures happen—Recurly has documented an average of 40 performance issues per year across our supported gateways—and if your business does substantial volume, a gateway outage of a few hours could prove very costly.
Go with a subscription billing platform that integrates with a large number of gateways (Recurly, for example, integrates with more than 22) and supports gateway failover, a critical step to reducing your involuntary churn.
What kinds of businesses need recurring payment processing?
Recurring payment processing is essential for businesses that offer subscription-based products. Here are some examples:
Entertainment platforms: Audio and video streaming companies like Paramount+, SoundCloud, or Twitch, and in-person activities, such as Cinemark.
SaaS companies: Software providers like Sprout Social and Pipedrive.
Subscription Boxes: Subscription box businesses that send curated products to customers on a recurring basis, such as Barkbox or Scentbird.
Subscription businesses have become increasingly popular because they are a win-win for both businesses and consumers. Companies are rushing to move from one-time payments to subscription-based morels to generate a steady revenue stream and make financial forecasting much easier.
How do I choose a recurring payment processing solution?
To grow, businesses need real recurring payment processing solutions. A first-rate recurring payment processing solution does a lot of behind-the-scenes work to ensure that your customers’ payments go through without a hitch at every point in the billing schedule. Your customers likely have diverse preferences, so you should look for a billing solution that can handle every imaginable scenario.
If you need a complete subscription management platform, check out our subscription and billing solution evaluation worksheet to understand what capabilities to look for, what questions to ask your internal stakeholders and vendors, and what terms you need to know.
Recurly allows you to set up various recurring and one-time payments, regardless of business size. Our robust platform accepts major payment methods and is designed for enterprises to maximize profits through simplified recurring payments. In fact, Forbes ranks Recurly as the best payment platform for high revenue.
But don't just take our word for it! See how much ROI, ARR increase, and subscriber growth you could get with Recurly.
