The Merchant’s Guide To Recurring Payments & Billing
Photoshop. Dropbox. Microsoft Office 365. Netflix. These are just a few of the products and services I’ve used in the last few days that require a monthly or annual subscription. There are several others that I’m paying for as well but haven’t used recently. If you’re old enough, you might remember the bad old days of personal computing when software came in big, shiny boxes that held a thick manual (that no one ever read) and a stack of 3.5” disks that you’d have to feed one at a time into your computer just to install the program. A year or so later, the company would come out with a new version, and you’d have to buy it and repeat the installation process all over again — if you wanted the latest and greatest, at least.
Today, many major software applications are available over the internet at the click of a mouse, and they don’t come in a box at all. Instead, they’re offered via a monthly subscription service. For a few dollars a month, you can download the software onto your computer in minutes, and it will update automatically whenever a new version is released. Subscription-based software is very convenient, and it can seem like a real bargain to pay $9.99 per month for an expensive program such as Photoshop rather than shelling out $500 for a stand-alone product.
The subscription-based model of selling products and services has proven so successful that you can now get a subscription to just about anything. Subscription box services such as Birchbox and Loot Crate deliver random trinkets you didn’t know you needed every month. Other services, such as Hello Fresh and Blue Apron, solve the “what do you want for dinner?” riddle by dropping pre-packaged meal kits right on your doorstep.
If you’re a merchant looking to increase sales and ensure a steady stream of revenue, you might wonder how you can enable multiple, recurring (and automatic!) payments from your customers. That’s where recurring billing comes in. This service allows you to set up repeating payments without your customers having to authorize each payment separately or enter their credit card information more than once.
In this article, we’ll explain what recurring payments and recurring billing are and give you a rundown of the types of businesses that use them. We’ll explain the advantages and disadvantages of using recurring billing, and we’ll show you important features to look for in finding a provider that supports it. Finally, we’ll show you how several popular merchant services providers implement recurring billing and how much it will cost you to set up this popular feature.
Table of Contents
What Is A Recurring Payment?
Recurring payments are quite simple to understand. Instead of making a one-time purchase of goods or services, the customer signs up for a subscription where products or services are delivered on a recurring, prearranged schedule. This schedule could be monthly, weekly, annually, or whatever is appropriate under the circumstances. Monthly subscriptions are the most common, but just about any other period is also possible. For example, Amazon’s Subscribe and Save feature allows customers to reorder common household products on a recurring schedule, with the interval being determined by how often they need to replenish the product in question.
To establish a subscription, the consumer needs to provide a card on file. This is any valid payment method (e.g., credit card, debit card, or bank account number) from which all payments will be made. In establishing a card on file, the consumer agrees to authorize both the initial payment and all subsequent payments as well. Most subscriptions are open-ended, meaning that the consumer will continue to be charged indefinitely until the subscription is either canceled or the submitted card on file is no longer valid.
Because most subscription-based services require online payments, recurring billing features are usually offered as part of a provider’s payment gateway. However, retail merchants can get in on the action too, as long as they use a payment gateway or virtual terminal to process the recurring transactions. For example, almost all of the wineries in the area where I live offer a wine club membership that automatically ships several bottles of wine to participating club members according to a predetermined schedule.
What Kinds Of Businesses Use Recurring Payments?
We’ve already given several common examples of businesses that offer their products or services on a subscription basis, but there are many others as well. Software and cloud backup services use recurring billing almost exclusively, and health clubs wouldn’t be able to stay in business without it. Just about any type of business could, in theory, use subscriptions and recurring billing to sell their products or services to the public.
Although most subscriptions are open-ended, recurring billing can also be used to spread a large, single bill over a more extended period. Attorneys and wedding planners, for example, could use recurring billing to allow a customer to spread a single, expensive bill over several months.
Advantages To Recurring Payments
Recurring billing offers several benefits to both consumers and merchants. For the consumer, the convenience of having recurring bills paid automatically is perhaps the primary advantage. There’s no need to track when the next bill is due or to have to fill out and mail a paper check on time. The “set it and forget it” nature of recurring billing ensures that consumers don’t have to worry about any interruptions to their services. At the same time, it’s all too easy to keep a subscription going long after you’ve stopped using it. Gym memberships are (ahem) the most obvious example of this situation.
Recurring billing also saves time for merchants, as there’s no need to generate and send out multiple invoices whenever a subscription payment is due. Transactions are processed automatically, requiring no action on the part of the merchant unless there’s a problem (expired credit cards are the most common reason for a recurring authorization to fail). Subscriptions also provide a steady, predictable source of income over time. Naturally, they’re not 100% foolproof. You’ll have to offer top-notch products or services at a fair price all the time to avoid a surge in subscription cancellations.
Disadvantages To Recurring Payments
The advantages of recurring payments generally outweigh the disadvantages, but there are a few downsides that you should be aware of in using them. Payment security, while always extremely important, is even more critical when you’re accepting multiple payments over time from the same customer. This means protecting your customer’s sensitive payment data and protecting yourself from fraud. Your provider can help you implement a strong PCI compliance program that will safeguard your customer’s data according to established industry standards. Many providers also offer fraud detection and prevention measures that can protect you from unscrupulous consumers. The impact of someone submitting a fraudulent payment method will be much higher with multiple, recurring transactions than for a single, one-time purchase.
Storing card-on-file information requires additional work on your part, but most providers offering support for recurring billing include features to automate this process. Nonetheless, you will have more paperwork to deal with if you use recurring billing.
Another minor disadvantage of recurring payments is that it can be more difficult to correct a billing error. If a customer is charged in error, you’ll have to issue a refund. For this reason, we recommend that you use a recurring billing service that allows customers to change their payment information or cancel a subscription directly from your website. Otherwise, you’ll have to make these changes yourself before the next automatic payment is processed.
How To Choose Recurring Billing Software
These days, just about every merchant services provider on the market offers support for recurring billing, usually as a feature of their payment gateway. However, not every business needs it, so in most cases, it’s an optional add-on to the company’s basic payment gateway. Optional add-ons are rarely free, so you can expect to pay extra to enable recurring billing as part of your account. Each provider has a different method of charging you for recurring billing. As we’ll see below, you might pay an additional monthly fee, or you might pay a higher processing rate for each recurring transaction. In some cases, you might pay both an extra fee and higher processing rates. If you need recurring billing support, it’s critically important that you understand how your provider charges you for this service. You should compare multiple providers before signing up for an account.
Features To Look For In Recurring Billing Software
Features of recurring billing services vary from one provider to another. While some are bare-bones and only offer the most basic functions, others are more robust and allow you to customize virtually every aspect of your subscription service. Here are the most important features to look for in selecting a recurring billing service:
- Billing Intervals: Not everyone bills on a once-a-month basis. Your service should provide the ability for you to bill on whatever interval you need.
- Support For Metered Billing: If your subscription service charges by actual use rather than a flat fee, you’ll need the ability to track your customers’ usage and automatically generate a bill from that data.
- Support For Free Trials: Many businesses offer a free trial period before the customer has to start paying for the service. Your recurring billing service should be able to support providing a free trial period of whatever length you specify. Customers should also be able to opt-out at the end of the free trial period rather than being charged automatically.
- Security Features: Tokenization and encryption are usually standard features of payment gateways today. They’re even more important when you have recurring, automatic transactions.
- Customer Information Vault: This is another feature that usually comes standard with a payment gateway. It allows you to store your customers’ payment data securely, so they don’t have to re-enter it every time they shop on your site. To greatly simplify your PCI compliance requirements, this data should be stored on your provider’s server — not on your computer or your website’s server.
- Automatic Card Updater: This feature automatically pulls updated card information from your customer’s issuing bank when a replacement card is issued, allowing a subscription to continue without interruption. Note that this feature won’t work if your customer switches to a different credit card altogether.
Merchant Services Providers Offering Recurring Billing
Below, we’ll look at how several popular merchant services providers handle recurring billing. Some providers are significantly more affordable than others, so it pays to shop around before settling on one choice.
Square (see our review) offers recurring billing through its Square Invoices add-on service. Like most of Square’s offerings, recurring billing charges on a pay-as-you-go model — there are no additional monthly fees. However, you will pay higher processing rates for recurring transactions. Recurring credit or debit card transactions are charged 2.9% + $0.30 per transaction, while card-on-file transactions will cost you 3.5% + $0.15 per transaction.
Although the higher processing rates will cost you more, Square’s lack of monthly fees makes this a very cost-effective alternative for a small or newly-established business. Although it’s very affordable, the recurring billing feature of Square Invoices doesn’t have the robust feature set found in some competitors. For example, you currently cannot integrate Square’s recurring billing feature into an API for in-app recurring billing. However, the company is planning to introduce this feature sometime in the future.
Stripe Payments is a popular ecommerce-only merchant services provider that powers a lot of the web’s most well-known online retailers. Recurring billing support is available through the Stripe Billing feature. Like Square, there’s no additional monthly fee to use this service. Recurring transactions process at a flat rate of 2.9% + $0.30 per transaction for your first $1 million in sales and then Stripe will begin adding a 0.4% transaction fee as well. Most merchants will find that Stripe is less expensive than Square, especially if you process a lot of card-on-file transactions.
PayPal is another payment services provider (PSP) that’s very popular with small business owners and ecommerce merchants. The company charges the same flat rate of 2.9% + $0.30 per transaction as Stripe for recurring transactions. However, they also charge a $10 monthly fee to enable recurring billing on your account. To make matters worse, its recurring billing feature is only available if you use either PayPal Payments Pro or the PayPal Virtual Terminal. Both of these features cost an additional $30 per month. In other words, it will cost you $40 per month just to use recurring billing.
Unfortunately, PayPal is by far the most expensive option we’ve found for getting access to recurring billing. Unless you have another compelling reason for using either PayPal Payments Pro or the PayPal Virtual Terminal, we can’t recommend using them for this purpose.
Dharma Merchant Services
Dharma Merchant Services
If your business needs a full-service merchant account, Dharma Merchant Services (see our review) is one of the best choices available. The company offers competitive interchange-plus pricing, low monthly account fees, and a month-to-month billing system that doesn’t lock you into a long-term contract. They also offer recurring billing as an optional feature of their MX Merchant integrated payments system. While the MX Merchant system is included as a standard feature of all Dharma’s merchant accounts, support for recurring billing is an optional add-on, and it will cost you $10 per month. However, you’ll pay the same interchange-plus rates for recurring transactions as you would for one-time purchases. If you process a lot of recurring transactions, the savings on processing rates should more than make up for the additional monthly fee.
Do you need recurring payments for your business? The answer will depend on your business type and how you make your sales. Many retail-only companies will not need recurring billing at all, while online businesses that sell via a subscription model won’t be able to function without it. As we’ve seen above, selling products and services via subscriptions is becoming more popular all the time. If you think your business could benefit from using a subscription model, you’ll need to add a recurring billing feature to your merchant account to make it happen.
If you’ve determined that you need a recurring billing service, you’ll want to make sure that it includes all the features you need, without paying an additional premium for them. Features such as the ability to store cards on file, customize your subscription intervals, and support free trials are all things to look for in selecting a recurring billing service.
Because recurring billing support is offered as part of a payment gateway, you’ll want to be sure to select a high-quality gateway that’s a good overall fit for your business. To learn more about payment gateways, and how to choose a good one, check out our article The Complete Guide To Online Credit Card Processing With A Payment Gateway. For more information about specific gateway providers, our article The Top 5 Payment Gateways For Online Credit Card Processing is an excellent resource. Finally, our Payment Gateway Comparison Chart allows you to compare popular gateways side-by-side. Good luck!