What is Recurring Payment Processing?

Everything you need to know

Subscription businesses are sprouting up all over the place because they are a win-win for both companies and consumers.

Companies are rushing to start a subscription business because they generate a steady stream of revenue, making financial forecasting and budgeting a much easier process. This predictability also benefits consumers; putting a fixed number into their monthly budgets for, say, entertainment gives them peace of mind in an uncertain economy.

Of course, subscription businesses process a lot of payments every month. In order to process all of those payments, they have to use some form of recurring payment processing.

What is recurring payment processing?

Recurring payment processing is automatically charging customers for products or services on a consistent basis, whether that’s weekly, monthly, quarterly, or annually. 

In the past, subscriptions were typically reserved for magazines, gym memberships, or cable packages. But as Bob Dylan said, “the times they are a changin’.” More companies are recognizing the benefits of a subscription model and finding ways to do it in their industries, whether they’re augmenting or entirely replacing their existing revenue model. Later on, we’ll look at companies that prove that subscription models work in any industry where there is a recurring need for a product or service.

But let’s start by exploring what goes into recurring payment processing.

How do recurring payments work?

Think back to the last time you signed up for a subscription with a well-known company. 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 every month, and you might have never given it a second thought.

In reality, it’s far from a simple process.

Payments ecosystem

As you can see, there are many steps involved in processing a payment:

  1. The customer hits the order button to initiate a purchase. 

  2. The merchant receives the information and hands it off to a third party billing platform, like Recurly, thereby avoiding any PCI liability

  3. The payment details are stored and the payment request is sent to the gateway. 

  4. The gateway sends the request to the processor, which then forwards it on to the proper card association (such as Visa, Mastercard, American Express, or Discover). 

  5. The association takes the request and sends it to the customer’s issuing bank. 

  6. The issuer approves (or denies) the transaction—it is typically approved if the customer’s payment method is accurate and funded—and informs the network of its decision. 

  7. 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.

A standout recurring payment processing system ensures this multi-step process goes smoothly each and every time.

What are the benefits of recurring payment processing?

Your company can enjoy several benefits when you use a recurring payment processing solution. Here are a few of them:

  • The setup is a one-shot deal. There is no more work that needs to be done every billing cycle by either you or your customers. With online recurring payment processing, the invoice and payment information automatically flows into the right systems.

  • There is less risk of 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 13-20% of merchants’ operating budgets.

  • It’s easier to give your customers a variety of payment and plan options, which they can change at any time. Maybe some of your customers want to pay by credit card and others want to pay using PayPal. 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 a recurring payment processing system, 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 kinds of businesses need recurring payment processing?

When you think of subscription companies, a couple of examples that may come to mind are Netflix and Dollar Shave Club. There is an obvious recurring need for fresh entertainment and razors, so these companies don’t have much trouble convincing customers to part with their hard-earned money month-after-month.

In other industries, the potential of a subscription model isn’t as clear-cut, but it is still viable. Again, if there is a recurring need for a product or service, there is the potential for it to be turned into a subscription. Nicely Noted and Loot Crate show what’s possible if you get creative.

Nicely Noted is a stationary company that sends subscribers three handmade, letterpress cards and three “gorgeous” USPS stamps for $20 each month. While many people don’t send physical cards as much as they once did, a large number still do. There are some occasions—such as birthdays and anniversaries—that are recurring. Others, such as weddings and baby showers, are one-time events, but somebody is always getting married or having a baby. So, for the card enthusiast, Nicely Noted satisfies a recurring need.

Loot Crate is a geek subscription box for gamers and nerds (their words). To start, Loot Crate asks subscribers what their favorite pop culture franchises are. The company uses that information to curate a box filled with collectibles, clothing, art, and more every month. If you know a comic book collector—or you are one yourself—you know that there is a recurring desire to add to a collection. Loot Crate satisfies it.

What are different ways to process recurring payments?

The phrase, “there’s more than one way to skin a cat” can be applied to processing recurring payments. But as you’ll see, not every solution is created equal.

  • Accounting software is an option if you have a limited number of plans and a small stable of customers. While the ability to automatically invoice customers is a step up from paper billing, accounting software isn’t sufficient for companies with complex needs, unless managing tons of disparate spreadsheets is your idea of fun.

  • Payment gateways, as stated earlier, are a crucial piece of recurring payment processing. It turns out that companies can sign up directly with a payment gateway. This can be a lower cost option, 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 for subscription companies. The best subscription billing platforms support multiple gateways. On top of that, they provide subscription model metrics, giving you actionable insights to advance your business. If you want to analyze churn, for example, a subscription billing platform can give you the tools you need to do so. Advanced subscription management platforms can also help you automatically recover revenue that you’d otherwise lose to involuntary churn. 

Getting back to gateways, you may be wondering: why is it necessary to have multiple gateways?

It’s important to have multiple gateways because there is no one gateway that supports all types of transactions at a high level; geolocation and product type are just two of the variables that impact gateways. 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 over 22) and supports gateway failover.

Wrap up

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, every single billing cycle. Your customers likely have a diverse set of preferences, so you should look for a billing solution that can handle every imaginable scenario,

Frequently Asked Questions

How do I choose a recurring payment processing solution?

There are a lot of considerations when it comes to choosing a recurring payment processing solution for your business. If you need a complete subscription management platform, check out our evaluation worksheet to understand what capabilities to look for, what questions to ask your internal stakeholders and your vendor, and what terms you need to know.

Is recurring payment processing complicated?

It can be if you resort to handling it manually. There are integrations, revenue recovery, subscription billing models, gateway routing, and much more to consider. Luckily, you don’t have to do it alone; a well-designed subscription billing platform can handle all things related to recurring payment processing.

What are the costs of recurring payment processing?

Subscription billing platforms typically charge a low flat fee per month, plus a tiny percentage of your total transaction volume. The costs also depend on which capabilities you need. Take a look at Recurly’s plans to get a sense for how we charge our customers.

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