What is recurring payment? Definition, challenges & solutions

Apr 05, 2024

If you’re running a business in the current climate then it's likely that there are a few, if not more, services you have subscribed to. The costs for these services, such as SaaS fees, insurance premiums, etc., are essential to businesses.

However, the task of managing recurring payments has been the root of inefficient accounting and complicated bookkeeping. Subscription billing involves a method of payment where vendors automate the billing process for customers according to a fixed schedule for a particular service or product.

Subscription payment and recurring billing challenges are difficult to manage, so it makes sense to address some common issues associated with them first.

What is recurring payment and how does it work?

The subscription billing or recurring payment is a form of payment where businesses pre-authorize periodic payments to vendors, SaaS providers, etc.

They provide payment and other required details to their vendors who then receive their service charges periodically via AutoPay. When implemented correctly, recurring payments can save businesses a lot of time and money.

All SaaS recurring payments usually follow a similar, general procedural flow.

It starts when a customer visits a vendor's website and chooses recurring payment as their payment option.

The customer accepts the terms and conditions of recurring billing during the checkout process.

At this point, the customer must agree to the chargeable amount, payment schedule, fee structures, and expiration date (if any) on recurring payments.

Next, the customer enters their payment information and agrees to have it saved in the business's invoicing software.

For the recurring payment to go through, the payment processor has to contact the acquiring bank, the client's credit card network, and an issuing bank - similar to normal credit card transactions.

After the transaction is approved by all three parties, the funds are released into the vendor's account.

Every time the business processes recurring payments in accordance with the agreed schedule, the customer receives an invoice informing them that their payment has been successfully processed.

Some businesses even notify clients pre-emptively that their automatic charge will be processed soon.

Additionally, recurring payments also come with certain costs for businesses to accept. This could include card-not present, ACH, recurring invoice, and other such processing charges.

Billing cycle: SaaS recurring payment billing cycles are usually available in two forms.

Automatic payments - These payments occur on the basis of a scheduled charge that is processed and charged without the customer having to take any action. The process in the backend happens the same way as it does when card details are entered every time.

Recurring invoices - Rather than have automatic charges on their card, some businesses prefer recurring invoices being set up. In this type of billing cycle, an invoice is sent to the business as per the schedule and the business owner manually pays the invoice.

Benefits of choosing recurring billing methods for businesses

Subscription billing offers a much easier and more efficient model of payment for those services that work on a subscription basis.

Rather than paying a hefty sum in one go, clients can choose to use a product or service for as long as they want or need, at a fraction of the cost, and then stop or cancel the subscription whenever they want to.

Ultimately, subscription billing or recurring payments offer a variety of benefits for a business. For starters, it can help you speed up transactions without any human or manual intervention required.

Neither does such a system require any particular maintenance. Consequently, SaaS recurring payments can also save your business hours of payment processing time, time that can be spent on more value-producing tasks.

Finally, recurring payments help with budgeting too. Since you have payments already scheduled for a significant portion of time in the future, you can be sure about some of the channels of expenditure.

This can help you take some of the ambiguity out of budgeting decisions.

Challenges of recurring payments for SaaS businesses

While the subscription billing model has been gaining considerable traction in the financial services industry it is, however, not completely free of issues yet.

There are some general problems that your business is bound to come across when dealing with recurring payments.

Some examples of such a situation include, but are not limited to:

1. Real-time changes in billing plans

Client needs and requirements are bound to change with time, especially if you’re dealing with fast-growing small businesses.

For such clients, the same recurring payment plan will not work, and this can become a recurring payment challenge.

2. Managing recurring & flexible billing

For clients such as those mentioned above, it can be challenging to manage the changing demands in recurring and flexible billing plans.

You should look for a SaaS recurring payment provider who can accommodate this.

Check this out - How do virtual cards help in subscription management?

3. Failed & missed payments

Missed payments or payments that failed to go through are fairly common, even in the case of recurring payments.

Payments often don’t go through for a variety of reasons, and clients may forget to pay too. Ideally, your software should be able to notify you before you miss or fail a payment.

4. Automation & integration

Without integration capabilities you might find yourself juggling multiple software, shuffling between piles of notifications in a tight situation.

With the number of software that businesses have to use today the need for integration capacities is highly important.

Without integrations with systems like dunning software, accounting platforms, etc., it can be hard to manage a recurring patent system.

5. Multi-Currency support for payments

Recurring payments challenges can become particularly difficult when a business has to deal with clients from all over the world.

With international clients comes the challenge of accepting payments in multiple different currencies.

In this case, you’ll need to get a recurring payment platform that accepts payments in multiple currencies.

6. Security of user data

Data security is of utmost importance when you’re dealing with important financial information like bank details, card numbers, etc. of your clientele.

In the recurring payment system, customers give a one-time authorization and their payment details; these need to be kept secure throughout the time when the SaaS recurring payments cycle is working.

You need to ensure the payment platform you’re using is specially equipped to deal with this requirement.

Automate your billing process and never miss a pay date again

How to deal with recurring payment issues

1. Failed transactions management

Failed or missed transactions are only natural and are bound to happen now and then. They can happen simply because a customer forgot their deadline.

While they are common they can also grow into a source of both customers as well as revenue loss.

To prevent this from happening you can get a payment processing platform that is capable of tracking these dates, and requirements.

This platform should ideally also be able to send out automatic notifications or reminders to the clients in question.

2. Support major payment methods

As we have already discussed, Different customers will want to pay by different payment methods. Some might want to pay via cards while others prefer direct debit.

Support for major payment methods like major credit cards, global payment gateways, and bank transfers via auto-debit can become a recurring payment challenge.

The best way to deal with this is to get a recurring payment platform that is capable of handling payments coming from all different sorts of payment channels, regardless of where they are coming from in the world.

3. Optimize to reduce churn rates

The average churn rate for most businesses running on a subscription model typically ranges between five to ten percent. Involuntary churn is the biggest problem, in this case, coming from a payment perspective.

This is where you lose clients simply because they have expired payment details or in case of failure of the payment process. Acquiring customers costs higher than retaining old ones.

To ensure you don’t lose out on your usual, retainer clients you need to optimize your system to reduce involuntary churn rates.

Customizing your customer experience and onboarding a payment processing tool that can keep a check on customer details can help you mitigate this issue.

4. Encryption for increased security

When you are dealing with customers on a recurring payment model you’re also responsible for storing and managing sensitive information related to your customers.

This could include bank details, card numbers, phone numbers, and other such important information. If there is a leak it could have a very negative impact on your goodwill.

No matter what payment platform you choose for your SaaS recurring payments model it must be extremely secure.

You should look for and onboard a platform that has bank-level security to ensure none of your customers’ sensitive information is ever compromised.

5. Integration flexibility

We are living in the age of technology and managing multiple software in a flexible manner is a must for any business looking to get ahead of the curve.

Most companies have a range of software like HRMs, ERPs, accounting software, and others to manage daily operations.

If your recurring payments platform does not have seamless integration capabilities you’ll have to go through a lot of work to manage your books.

Instead, get a system that can easily integrate with your existing software.

6. Tracking dynamic user behavior

The market is competitive and you need all the information you can get your hands on for you to develop the perfect market strategy.

The more you know about the customers using recurring payment options the better you will be able to cater to their needs.

Consumer analytics can help you identify critical pain points, what’s working and what’s not.

Get yourself a payment management platform that can do the analytics for you, with full-fledged actionable insights that can make your job a whole lot easier.

Related read - Recurring billing issues and how to overcome these issues?