The dream scenario for most businesses is to have predictable revenue streams from dedicated customers, which explains why many SaaS companies are adopting recurring payment models (subscriptions).
Predictable, repeat payments also appeal to customers who can now enjoy uninterrupted access to the products and services they love provided the relevant credit and debit cards are funded.
In this article, you will discover how recurring payments work, how to set it up for your business, and practical solutions for resolving the challenges you may encounter.
TL;DR
- Recurring payments are also known as subscription payments and they involve periodic cash withdrawals from the customer’s account to a merchant for a product or service made automatically on a predetermined schedule.
- Subscription payments are complicated transactions that involve multiple parties and platforms, including payment gateways, merchant accounts, automated billing & invoicing platforms, and subscription management platforms.
- You can maximize the revenue-generating potential of recurring payments by offering multiple payment methods, streamlining your checkout process, and effectively utilizing data and analytics.
Understanding Recurring Payments
Recurring payments are regular payments from a customer’s account to a merchant for a product or service made automatically on a predetermined schedule.
Once a customer agrees to the terms and conditions that govern access to a subscription-based product or service, the merchant will be entitled to make periodic cash withdrawals from the customer’s account without any need for the customer to input their credit card information manually.
This contrasts with the one-time payments which are never scheduled and occur once or occasionally.
The customer must reach out to the vendor each time the product or service is required and pay by check, bank transfer, or manual card input.
Recurring payments are also known as subscription payments and you will be familiar with them since that’s the model used by popular SaaS platforms like Netflix, Spotify, Office365, and others.
The model is also used by traditional businesses like gyms (memberships), food delivery companies, and utility companies.
There are two types of recurring payments: fixed recurring payments and variable recurring payments.
Fixed recurring payments involve an exact amount charged regularly to the customer’s account on the agreed date each week, month, year, or any defined period stipulated in the contract between both parties.
For example, people who pay fixed amounts each month for access to Netflix’s library of movies.
Variable recurring payments are consumption-based, and the amount charged for each period is based on the customer’s level of usage of the product or service.
For example, Amazon Web Services (AWS), the IaaS cloud computing platform, charges its customers each month based on the volume of data they store on its servers.
Recurring payment processing refers to the third-party platforms and methods businesses rely on to automatically receive payments from customers on a periodic basis.
Subscription payments are complicated transactions that involve multiple parties, even if everything in the process always seems to take just seconds.
We will explore more on the parties and platforms involved in another section of this article.
Benefits of recurring payments for SaaS companies
Predictable cash flow
Recurring payments mean businesses no longer need to wait for customers to manually send in payments at their discretion, which gives a level of certainty on the amount of revenue to expect for a given period.
The main benefit of such reliable revenue streams is that it reduces the amount of guesswork required for budgeting and other areas of business financial planning.
Fewer payment-related disputes
With recurring payment processing, the entire payment collection process is automated, drastically reducing the risk of human error.
Fewer human involvement means fewer disputed charges, fewer refunds, and even fewer fraudulent activities.
High customer retention rates
Customers are happy when they can always access the products and services they need and love without interruptions.
Happy customers lead to reduced church rates and more stable profits from revenues.
Greater transparency
Platform providers of payment gateways and subscription management software are obligated to securely store the financial data of your customers.
Both you and your customers can access payment information, which makes it easy to track and resolve any issues with your online transactions.
Cost savings
Automated recurring payments help to significantly reduce operational costs that would have been spent on manual payment collection and processing.
And when a robust accounting team and sales staff already exists, they will be free to focus on other tasks where they can better impact productivity and customer-focused innovation.
Key Components of Recurring Payment Processing
Research by UBS Global shows that the subscription economy will be worth $1.5 trillion by 2025, and you can’t afford to ignore offering the payment model as an option to your customers.
Below are the parties involved in subscription payment processing.
Payment gateways
Your payment gateway is what you use to accept credit and debit card payments from your customers.
The payment gateway provider is responsible for verifying the identity of the customer and ensuring they have sufficient funds before processing the payment.
Merchant accounts
The funds collected from your customer’s bank account via credit cards or ACH transfer are first deposited in your merchant account before being transferred to your standard business account.
You can’t process credit card payments without a merchant account and you must get one from a merchant acquiring bank or a payment gateway software provider like Stax Pay can make one available for you.
Automated billing and invoicing systems
Your billing and invoicing platform will provide the tools you need to set up subscription payment plans and accept recurring payments.
The platform will integrate with your payment processing services provider to facilitate the processing of the incoming recurring customer payments, while ensuring airtight data security for your online payments.
Business management platforms
There are all-in-one accounting software platforms out there on the market with ERP (enterprise resource planning), CRM (customer relationship management), and HRM (human resource management) features, as well as payment processing functionality.
These platforms can also handle subscription billing, but they lack the robust features you will require if you offer a wide range of subscription plans and process huge amounts of money.
Direct debit payments
A bank can be given a direct debit mandate to allow certain merchants to regularly deduct a fixed sum from a business account according to a predetermined schedule.
This option is generally used in b2b transactions that involve huge sums. For example, recurring utility bill payments for a large manufacturing site.
Setting Up Recurring Payments
Below is a three-step process for integrating recurring payment processing into your SaaS platform.
Step 1: Choosing the right recurring payment platform
There are many payment processing platforms on the market, and the right provider for you will depend on your business model, product or service type, transaction volume, customer preferences, and budget.
Each recurring payment services provider tends to have a core strength that will make it more appealing to a particular type of business customer.
That notwithstanding, every decent provider should offer the following services and tools as a bare minimum:
- Automated billing and invoicing
- Multiple payment methods
- Debit and credit card processing
- ACH processing
- Subscription management features
- ASC 606-compliant revenue recognition
- Robust integration with existing business management apps
- Detailed analytics and reporting
- Fraud detection and prevention tools
- World-class encryption and other data security measures
- Compliance with relevant statutory regulations
All these features and services must be automated and deeply integrated to ensure a seamless experience for your customers.
A free trial of any platform that catches your eye is a good idea, so you can be sure it’s what you are looking for.
In fact, you don’t need to look far given that Stax Bill is the best automated subscription and payments management platform on the market.
It will help you set up any type of recurring billing model (fixed or usage-based) and automate your entire recurring payment processing workflow.
You will also have access to features for tasks like dunning and analytics to help you collect more invoices and obtain higher revenues.
Step 2: Integrating with your SaaS platform
The very best payment processing platforms are designed to plug-and-play standards.
If customizations are required, as is often the case for large SaaS companies, your provider will be more than willing to work with you to configure their platform to suit your specific needs.
If you are moving from one payment processor to another, you must take extra measures to ensure a secure transfer of data during the migration process.
Consider the impact of the migration on your business operations, and be sure to time the migration to occur when it will have the least impact on your customers.
This is also the stage where you integrate your new payment processing platform with your existing business management apps.
For example, Stax Bill API is designed to integrate seamlessly with your website, CRM systems, mobile apps, and other existing third-party software platforms.
Step 3: Configuring automated billing and invoicing
There are many approaches to setting up a recurring payment schedule. You can decide to accept payments monthly, annually, or even weekly.
Your automated billing and invoicing platform will give you a range of options to pick from.
Once you are set up, it’s a one-time thing, and you won’t need to reconfigure your platform in every billing cycle.
Payments will be collected and paid into the right business accounts, and you can view your revenue reports from your dashboard.
If you opt for Stax Bill, your public-facing platform will have a customer portal that lets your subscribers self-manage subscriptions.
They will be able to migrate from one subscription to another or cancel existing plans.
Payment Security and Fraud Prevention
A typical recurring payment process begins when the customer signs up for perpetual access to a product or service, agrees to the merchant or vendor’s terms and conditions, and provides relevant credit card or bank account information.
The merchant is then required to store that card and bank information securely as it will be used to process future payments from the same customer.
The best way to ensure adequate security is to work with a payment service provider that implements robust security measures, especially the advanced point-to-point encryption (P2PE) techniques proscribed by the Payment Card Industry Data Security Standards (PCI DSS).
So, you must ensure your provider is PCI-compliant.
Stax Bill complies with PCI DSS Level 1 standards and the payment details of your customers are tokenized to add another layer of security.
For fraud protection, Stax offers features like multi-factor authentication, email alerts, unique passwords, and real-time monitoring of transaction patterns.
Managing Recurring Payments
It’s one thing to set up a safe and secure automated billing and invoicing platform, it’s another thing to effectively manage how your customers interact with that platform on a day-to-day basis and ensure utmost customer satisfaction and retention.
Below are three key tasks central to effective recurring payment processing.
Managing failed payments and retries
Once payment has been deducted from a customer’s account according to the predetermined schedule, and the funds have been transferred to your merchant account, a confirmation email will be sent to your customers alerting them to the transaction.
However, there will be instances where payment is not effected and the customer’s account won’t be debited.
This can happen because of an expired credit card or insufficient funds in the customer’s account.
You can preempt this problem by using a platform like Stax Bill that lets notify your customers of the upcoming subscription payment ahead of the agreed date, so they can ensure their account is adequately funded.
And if the payment still fails, Stax will let you notify your customers of the issue and retry the payment collection a few days later.
Addressing customer disputes and chargebacks
Research by Amazon shows that chargebacks consume between 13-20% of the budgets of most eCommerce merchants.
You may face complaints from customers who dispute your charges on their credit cards or may want to change their subscription plans midway through an existing billing cycle.
If the customer successfully disputes the transaction, you will have to refund the payment, and that can be a very complicated process since everything is automated in recurring payment processing.
Also, when customers want to migrate subscription plans, you may have to prorate the amount charged to ensure the customer is only billed for the product or service consumed.
So, these are more reasons why choosing the right recurring payment system is important.
A top-notch payment solution provider will provide a dedicated customer support staff to help you navigate such issues.
Ensuring compliance with relevant regulations
You must comply with all the applicable data security and tax regulations.
The PCI DSS standards we mentioned earlier is a good example, there is also GDPR (general data protection regulation) for your website, and VAT (value-added tax) laws applicable to customer invoices.
In addition, you are obligated to provide your customers with detailed information about your payment terms and subscription plans.
You must be transparent about your exact pricing, subscription timeframes, penalties for payment defaults or overdue payments, and the available payment methods.
Optimizing Recurring Payment Processes
To ensure you effectively maximize the revenue-generating potential of recurring payments, here are a few industry best practices to follow:
Multiple payment options
Customers today expect to be offered multiple payment methods and they can be turned off if their preferred payment option is not available on your platform.
You can significantly reduce your churn rates by offering a wide range of payment options, including credit & debit cards, digital wallets (Apple Pay, Google Pay, PayPal), ACH transfers, direct debit payments, and even accepting payments made with international currencies.
Streamlined checkout flows
You should make life easy for your customers by cutting down the number of form fields on your sign-up pages.
A simpler checkout process will reduce cart abandonment and boost your conversion rates.
Also, in a mobile-driven market where most customers effect transactions on their mobile devices, it’s crucial that checkout pages on your website and mobile app are optimized for all the popular mobile phone screen sizes.
Flexible billing cycles
Customers may struggle to keep up with subscription payments if your billing cycle usually arrives when they lack sufficient funds.
This is particularly applicable to B2B customers who may face cash constraints in specific periods of the year due to the seasonal nature of their business.
It’s also possible that the amount is too much for the customer to pay once upfront.
You can resolve this by working with your customers to set billing cycles and billing cycle lengths that best align with revenue flows in your industry and their budgets.
Smart payment collections strategies
Dunning management is focused on reducing failed payments as much as possible.
Dunning campaigns typically involve personalized subscription payment email blasts that can be sent as a reminder before the payment date or as a payment failure notification to recover an overdue subscription.
Stax Bill has robust dunning management tools that let you automatically send customizable emails and SMS messages to customers.
Future Trends in Recurring Payment Processing
- 3D Secure authentication: payments security is an ever-present concern for business owners, and 3D Secure introduces two-factor authentication to every online card transaction. It does this by sending a one-off PIN to the customer for confirmation before each subscription payment is completed.
- Credit card account updater services: Here the card issuer automatically updates the credit/debit card information of your customers whenever they are expired or reissued to help you forecast and prevent payment failures. All the major credit card companies now offer this service.
- Artificial intelligence and machine learning: this technology can help predict the best time to collect payments so you can set your billing cycle and subscription models accordingly. It will also help with transaction pattern recognition and advanced fraud detection.
It’s Time to Set Up Recurring Payment Processing for Your SaaS Business
We covered the intricacies of recurring payment processing in this article, solutions to challenges associated with automatic payments, and trends to watch out for in the payments industry.
Now, it’s up to you to choose a robust billing and invoicing platform that provides fully integrated payment processing and supports multiple payment methods. Learn how Stax Bill can help.
Quick FAQs about Recurring Payments
Q: What are recurring payments and how do they work?
Recurring payments, also known as subscription payments, involve periodic withdrawals from a customer’s account to a merchant for a product or service. These payments are made automatically on a predetermined schedule, such as weekly, monthly, or annually, without the customer needing to manually input their payment information each time.
Q: What are the benefits of using recurring payment processing for businesses?
Recurring payment processing provides businesses with predictable revenue streams, reduces human error, minimizes disputed charges, and enhances customer satisfaction by ensuring uninterrupted access to services. It also supports financial planning by reducing revenue uncertainty.
Q: What are the key components of a recurring payment system?
A recurring payment system typically involves payment gateways, merchant accounts, billing and invoicing platforms, and subscription management software. These components work together to automate the payment collection process and ensure secure transactions.
Q: How do fixed and variable recurring payments differ?
Fixed recurring payments involve charging the same amount at regular intervals, such as a monthly subscription fee. In contrast, variable recurring payments are based on the customer’s usage or consumption of a service, leading to different amounts being charged each billing cycle.
Q: What are some common challenges faced in recurring payment processing, and how can they be resolved?
Challenges include payment failures due to expired cards, insufficient funds, or disputes. Solutions involve using platforms with features like advanced notification systems, retry mechanisms, and robust customer support to manage and resolve such issues efficiently.
Q: How can businesses maximize revenue from recurring payments?
Businesses can maximize revenue by offering multiple payment methods, optimizing the checkout process, using data analytics to understand customer behavior, and implementing dunning management strategies to reduce payment failures.
Q: What security measures should be in place for recurring payments?
Security measures should include compliance with PCI DSS standards, tokenization of payment details, point-to-point encryption, and fraud detection tools. Providers should also offer features like multi-factor authentication and real-time transaction monitoring.
Q: Why is it important to choose the right payment processing platform?
The right platform ensures seamless integration with existing business systems, supports a variety of payment methods, provides comprehensive reporting, and offers security and compliance with regulatory standards. It also aids in customer satisfaction and retention by providing a smooth and reliable payment experience.
Q: What role does automation play in recurring payment processing?
Automation is crucial in recurring payment processing as it reduces operational costs, minimizes manual errors, and enhances efficiency. Automated systems handle billing, invoicing, payment collection, and data analytics, allowing businesses to focus on growth and customer service.
Q: How can businesses effectively manage customer interactions with their recurring payment platform?
Businesses should provide a user-friendly customer portal for self-management of subscriptions, transparent communication about billing schedules and changes, and responsive support to address customer inquiries and issues promptly.
