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Recurring payment processing has permeated nearly every aspect of a consumer’s life, whether they are aware of it or not. From the auto-shipping of pet supplies to in-auto and at-home streaming audio services to local car washes, to, well, just about everything you can imagine, it’s clear the recurring service model has taken hold.

As a business owner, offering products and services on a recurring basis equates to recurring revenue and more predictable operating expenses (OPEX) while your customers benefit from a faster, more seamless experience. It also means you need to be prepared to support those recurring services with recurring payments. This comprehensive guide to recurring payments will offer insights into how recurring payment processing works, the benefits of a recurring payment model, and what to look for when choosing a recurring payment processing provider.

“The average consumer (of 2,500 surveyed) spends on average $273 per month on TV streaming subscriptions, home Wifi, mobile phone services, cloud storage, dating apps, ebooks, pet supplies, meal services and the like.” (source: zdnet.com)

 

What are Recurring Payments?

Pre-scheduled payments that automatically repeat per a billing cycle are known as recurring payments. Recurring payments can occur on a weekly, monthly, bi-annual or annual basis.

This automation is what distinguishes recurring payments from a one-time in-person or online payment, or the processing of an invoice. Customers are given the option to set up automatic payments and then the payment is processed each month (or year) through a payment processing solution.

There are two types of recurring payments:

1. Fixed recurring payments

Fixed recurring payment options are best suited for situations where the bill amount is the same every time. A good example is a gym membership where the membership is set at $50 per month. The payment would be processed at the fixed price each billing period.

2. Variable recurring payments

Variable recurring payments, as the name suggests, vary and can change. This happens when the bill amount is based on usage. Examples of these include utility and telecom bills. Depending on the amount used per month, the amount due will fluctuate each month.

 

The Benefits of a Recurring Payment System

We mentioned how recurring revenue and recurring payments go hand-in-hand. We also noted how recurring payments are often associated with subscriptions. There may be no better case study then a pandemic to illustrate the relationship between the three. COVID-19 has spurred an increase in subscription plan sign-ups. (Zuora’s chief financial officer Todd McElhatton reported the overall subscription model grew 12% during the first year of the pandemic.) Driven by a need to avoid checkouts and other in-person transactions as well as keep themselves entertained and occupied, consumers turned to contactless convenience.

This shift in consumer behavior put a spotlight on the customer experience. It also put a floodlight on the many reasons recurring payments make sense for the business and the consumer.

 

Business Benefits of Recurring Payments

1. Better Cashflow, Predictable Fulfilment

With scheduled recurring payments coming in, it’s easier to predict cash flow and demand. This predictability can help you better manage inventory, plan for growth, and scale for success. You can also use it as a financial indicator for investors or lending institutions.

2. Improves Customer Loyalty

Recurring payments provide an opportunity to learn more about your customers. The more a consumer relies on you for your product or service, the more chances you have to learn about their buying preferences and habits. That customer knowledge is key to providing personalized offers or experiences. The more personal the exchange between you and your customer, the more likely your brand becomes personal to them – creating loyalty and longevity.

3. Saves Time

Manually processing credit card payments can be a full-time profession. Automate that process and you’ll create operational efficiencies and get much-needed flexibility in assigning resources to other business functions, not to mention reclaiming valuable time.

 

Customer Benefits of Recurring Payments

1. Convenience

Consumers enjoy the convenience of recurring services. They do not enjoy managing payments for recurring services. It’s one of the reasons auto-pay and auto-renewal is a must-have feature. No longer limited to credit card payments, auto-pay allows customers to schedule their payments – keeping them up-to-date, reducing the risk of late fees, and possibly helping build their credit.  Auto-renewal reduces the risk of service interruption thereby keeping the customer happy.

2. Flexibility

Recurring services bring customers convenience and flexibility. They can have services they choose  – from self care to animal care to car car and house care and everything in between – and use them as little or as often as they’d like.

Many recurring revenue and subscription businesses now have an option to skip a month of service or pause their subscription. This is a benefit for customers who may need a break either due to budget or usage.  It’s also better than the alternative – having a customer cancel their plan. Your customer will appreciate this flexibility. It puts them in control, and, as they have more options, they’re more likely to stay engaged with your service.

3. Personalization

Customers like to know you’re paying attention. They want suggestions on what they may also be interested in, or, get an early invite to a try out a new feature or service. They also want you to notice how they’ve set up their recurring payment. It may be tied to a pay cycle, or a specific day of the week. It may be paid by a debit card, credit card, crypto, ACH transaction or wallet. There’s likely a reason for this, and these insights can help you adjust your offer strategy and your payment scheduling options.

 

Types of Businesses that use Recurring Payments 

Many businesses today offer a subscription-based payment option. However, you don’t have to be a subscription-type business to use recurring payments. Here’s a list of different types of businesses that use recurring payments.

Membership Services

Think gyms, networking memberships, social clubs, or co-working facilities.

Professional & Personal Services

Tutoring, cleaning, personal training, website management, or freelance services — any service that requires customers to book your time.

Subscription Services

Streaming services are the most obvious, but this can also be SaaS products, website subscriptions, magazines, or even meal services like HelloFresh.

 

Getting Started with Recurring Payments

According to CFO Research, subscription revenue business models are on the rise and Global Banking and Finance Review reports 70% of business leaders say subscription business models will be key to their prospects in the years ahead.

Clearly the opportunity for success with subscription companies is there and growing. The opportunity also comes with challenges.

Subscription metrics firm ProfitWell estimates that despite the rise in sign-ups, up to 40% of subscription churn is coming from failed payments.

Knowing that a significant portion of churn has to do with payments, it’s also clear having the right payment partner is critical to successfully supporting subscription-based and recurring revenue-based companies .

The first step in processing recurring payments is to find a payment service provider (PSP) or open a merchant account. Both of these actions make it possible for you to accept card-not-present payments for recurring services. You have two choices, but one is considerably easier than the other.

Payment service providers (PSPs) are one-stop payment processing shops. They’re in charge of every facet of web-based and card-not-present payments. This includes both processing, safeguarding, and depositing payments into your merchant account.

You also have the option of opening a merchant account on your own.

With this option, you’ll have total control over your account but you will need to find a recurring payment provider in addition to the merchant account. Your rates may also be higher than if you were to go with a PSP.

Dealing directly with a PSP is the most convenient alternative. You can learn more about this in our guide “Merchant Accounts vs. Payment Service Providers: Which Should You Choose?”

 

Five Things to Look for in a Recurring Payment Service Provider

You want to partner with a gateway company that has experience in subscriptions so they can provide the tools necessary to set-up recurring payments, such as scheduling.

A recurring payment service provider can offer companies a complete payment solution, eliminating the legwork required to source, set-up, run and manage all the software, hardware, connections, and security yourself. Many companies offer gateway services and it’s important to make an informed decision on which payment partner will help you achieve your business goals.

When choosing or re-evaluating a payment partner, take the following five criteria into consideration:

      1. Ease of Integration

• The last thing anyone wants is extra work. When you’re checking out potential partners, ask about integration. These are all good questions to ask your prospective recurring payment partner:
• How many systems do they connect in to?
• What platforms do they support?
• Do they have documentation and a development environment to work within?
• What platform is their API built upon?
• If it’s a common one, like RESTful web service, then set up and testing is fairly easy. Speaking of testing, what is their testing process?
• Will they create a mirror environment for testing to ensure the pathways are correct? What about timing?

2. Ease of Migration

• If you’re moving from one provider to another, migration should be as easy and seamless as possible for everyone involved. It should include a secure transfer of all account information, such as customer names, address, credit card numbers, expirations and so on. Consider timing implications, as you want to minimize disruptions for you and your customers. Make sure you plan for any needed software upgrades. If your systems are up to date, the switch is simpler.
• If you’re moving a customer from one provider to another, migration should be as easy and seamless as possible for everyone involved. It should include a secure transfer of all account information. Also, consider timing implications, as you want to minimize disruptions for your customers.

3. Security

• When it comes to taking payments, security and compliance are paramount. Many online retailers don’t realize they, like their brick-and-mortar counterparts, are required to meet standards set by the Payment Card Industry Data Security Standard (PCI DSS).
• Point-to-point encryption (P2PE) is one of the best methods you can use to protect yourself, as well as your customers, and prevent a credit card breach. While P2PE has been around for many years, only PCI-validated P2PE technologies have been tested to the rigorous standards and should be trusted to reduce risk and PCI DSS scope at a merchant.
• The simplest way to ensure you’re protected is to partner with a company listed as a Point-to-Point Encryption (P2PE) provider. This way you can verify the gateway is both certified and PCI-compliant.
• You also want to protect your company against credit card fraud. At a minimum, the gateway you’re considering should encrypt data at the time of transaction, offer address verification and be security code configurable. It should also be able to check and block transactions, be configurable by transaction source since the characteristics of transaction risks vary by source.

4. Customer Service

• Every payment service company will tell you they know the various systems and how they work. Well, they should. The question to ask is “how satisfied their customers are with the level of service they’re receiving?” Problems happen, and how quickly they’re resolved could be the difference between you keeping a customer and you losing one. When vetting a company, check to see where their support team is located. Ask if you’ll receive personalized service, or will you be re-directed through a series of menus. The more time you spend trying to get service is less time you have to serve your customers.
• Make sure to ask about their customer service and technical support. Problems happen, and how quickly they’re resolved makes a big difference to customers. When vetting a company, check to see where their support team is located.  Ask if you’ll receive personalized service, or will you be re-directed through a series of menus. The more time spent on calls is less time you have to serve your customers.

5. Features

• If you run a subscription or recurring revenue business, make sure your payment gateway has features such as fraud protection, payment scheduling, account updater and Level III processing.
•  You want to partner with a gateway company that has experience in subscriptions so they can provide the tools necessary to set-up recurring payments, such as scheduling.
• Account Updater should be one of their key features – it queries the banks regularly to ensure the card data is correct, cutting down on decline rates and reducing churn.
• Same goes for Automated Level III processing. It autodetects and fills in information necessary for corporate and procurement cards to process at a lower interchange rate – oftentimes leading to significant savings.
• You should also look for gateways that can handle multiple payment methods. This goes beyond your typical charge and credit cards.
• Consumers are demanding more access to payment methods and your customers will have to be ready to support them. Having options such as Apple Pay and Google Pay wallet opens the door to more customers.
• Another feature to look for is Direct Debit ACH scheduling – it allows merchants to get paid directly from a customer’s bank account, and they, in turn, pay less in processing fees.

Summary

While offering and accepting recurring payments can be a direct line to success, it can also be daunting when you consider all that goes into it. Hopefully this guide provided you the insights to better understand how recurring payments work and why they’re important, and the questions to ask when talking to a payment service provider.

Customers always figure out the good from the not-so-good, and companies that can deliver consistent experiences and provide frictionless payment options will thrive and continue to grow. There’s plenty of data to support that position as well.

Our expertise in recurring payments is unlike any other’s in this space. In our over three decades of service we’ve seen first-hand the growth in recurring payments and the expansion of the subscription model. It’s why we are continually evolving our cloud-based payment solution – to better help you support and scale your recurring revenue business. Payway has understood the subscription economy long before it was a hashtag and we’re here to help you make the most of recurring payments.

 

 

Have you ever wondered about the differences between a merchant account and a payment service provider? Even more, have you wondered which may better for your business?

You have two options for accepting credit card payments; obtain a merchant account or use an all-in-one payment service provider. How to select the option that is right for you depends on variables that are unique to your business like:

• How you sell your products
• Monthly transaction and volume amount
• Integrations into other software

 

Payment Service Providers

Several merchant account alternatives exist for businesses that have higher-than-normal requirements to obtain a merchant account or are unable to fit a merchant account provider into their current budget. You can opt for a streamlined payment service provider (PSP). A PSP is a third party that helps merchants to accept payments. Popular examples of PSPs include Stripe, Square, and PayPal.

A PSP and a merchant account aren’t the same thing. With a traditional merchant account, the merchant has its own account. A PSP, on the other hand, combines a variety of different merchants under a single umbrella account. So, instead of getting a specific merchant ID number through a processing bank with a merchant account, you get a license to process payments through the PSP merchant account. You become what’s known as a “sub-merchant.”

 

 Payment Service Provider: Risk and Underwriting

PSPs are free to sign up for and there is minimal documentation that is required to activate your account.

There is no official approval process because there is no “vetting” or background checks. Unlike during the merchant account application process, the PSPs have no information what your company sells, how (or if) you fulfill product orders, or your personal credit or business history of accepting credit card payments. They really don’t know you at all!

Most payment service providers use a flat rate structure for pricing. Basically, this ensures that you pay the same amount for every transaction, no matter what the card type might be. There’s no monthly fee to worry about, and other costs beyond transaction costs or usually non-existent too.

This is a genuine alternative for businesses with a lower-than-average volume of payment transactions or that are trying to avoid the complexities of applications and underwriting that come with merchant account provider services.

 

Payment Service Providers: The Good

If you sign up with a PSP, everything is handled in house through their customer service and their processing network so you will never have communication with the processor itself.

The good thing about taking card payments through a PSP is that you generally don’t need to pay extra fees for security. Things like PCI compliance are already available within your account.

Another advantage of PSP over a merchant account is that you can purchase a whole tool platform. When it comes to payment processing, the help that an acquirer receives from a PSP is frequently far more thorough. Invoicing and reporting functions are included in tools like Square, Shopify, and Stripe, for example.

Many of these solutions also have a one-of-a-kind gateway that makes it easier for consumers to start selling online.

Businesses without much of a budget to spend on their accounts and point of sale can definitely benefit from a payment service provider. However, you won’t get a lot of support if you need help starting from scratch.

 

Payment Service Providers: The Not-So-Good

PSPs are convenient, but they can also come with per-transaction fees that can be pretty expensive.

PSPs have their own risk protocols that allow them to retain or freeze your funds if your account has volume changes or chargebacks, or if they see anything suspicious – and they have complete control over the situation.

Any time the exchange of money is involved, there’s risk of financial loss (again because of chargebacks and fraudulent activity) so they reserve the right to hold your funds IF their algorithm detects a red flag.

PSPs, especially PayPal, have been notoriously known to shut down and freeze accounts without any warning. If that happens to you, you’re at the mercy of that PSP’s customer service and it’s just not a good place to be in.

Generally speaking, PayPal, Stripe and Square are looked at as the quick and easy setup options but as we’ve demonstrated, they all have their drawbacks.

 

Merchant Accounts

Opening a merchant account is the traditional way for businesses to accept credit card payments. A merchant account is essentially a bank account that is used to deposit money from credit card transactions. With this model, the processor (or the Bank) issues a Merchant ID, that is exclusive to your business and no one else.

Because of this, there is a vetting process and formal approval process because you are applying for an account with a bank. So, all those things that PSPs don’t ask for, like your business history and creditworthiness, all come into play here.

Typically, a merchant account application will ask for, your personal credit history, a tax ID number and business history, as well as how you process transactions and other details about your business model.

One of the biggest benefits here is that the merchant account provider actually gets to know you and can gain an understanding about your business and how you operate especially if you’re working with a professional who knows the payments industry.

There are many of merchant account providers available. In most cases, you’ll need to contact a sales professional to get your application started and for assistance throughout the process. Some merchant account providers offer more than just countertop credit card terminals, including mobile card readers and ecommerce payment setup.

 

Merchant Accounts: The Good

If you have an established business with lots of transactions and/or lots of volume per month, you will almost certainly get a lower rate and effective payment cost by going with a merchant account vs. a PSP. To calculate your effective rate, simply take your total fee and divide it into the total monthly volume.

They can straighten out issues quickly. Here is a place where selecting the right provider can make a big difference. Make sure to select a merchant account provider that offers 24/7 customer service. That way if the business runs into any issues with setup or day-to-day functioning, it can be corrected immediately, before a big sale might be lost.

Having a merchant account gives you the privilege of a more custom and robust account with the ability to add multiple gateways and tie into software or multiple point of sale software and devices.

Your funds can still be held or frozen if you misrepresented your business or you do something that triggers a risk flag like claiming that you’re selling one product, but you’re actually accepting payments for other products.

 

 Merchant Accounts: The Not-So-Good

The underwriting process varies by the bank account provider and can have different requirements for opening an account.

Understanding fees is more complex. There are many fees associated with a merchant account, including a setup fee, monthly maintenance fees and the per-transaction processing fee. Merchant account fees can be structured in three different ways:

Flat-rate pricing: Flat-rate fees charge the same rate for each kind of card transaction you process, no matter what card issuer or card network. Your statement is quite simple, but you can’t see the actual wholesale cost behind any of your transactions. This is the model most commonly offered by PSPs.

Cost-plus (interchange-plus) pricing: These are the most transparent transaction fee option. This fee consists of the amount it costs to process the payment (wholesale cost) plus an amount that the merchant account will charge you (the markup costs). With cost-plus pricing, you will be able to see exactly how much each transaction costs your business with an itemized monthly statement. Payway uses a cost-plus price model.

Tiered pricing: Tiered fees classify card transactions into three tiers—qualified, mid-qualified, and non-qualified—based on the risk they pose. Transaction fees will be the lowest for the qualified transactions. This form of pricing is pretty specialized and hard to understand.

 

Summary

Should You Use a Payment Service Provider? Here are the pros and cons:

Pros:

• Easier to get set up for beginners
• Excellent for flexibility when you’re not sure what you need long-term
• Lots of extra features built in as standard for companies
• Fewer fees to worry about in general
• Great for credit card payments online and offline

Cons:

• Not as much customer support for beginners
• Could risk frozen or cancelled accounts
• Less specialist guidance
• You may not have direct access to customer data

If you’re a smaller company without a lot of money to spend, you’ll usually get a lot less support working with a PSP. On the other hand, if you’re generating a high monthly revenue, a merchant account provider might be the better choice.

Once your business has reached a certain level of steady revenue, you’ll likely discover that having a merchant account provides you with more flexibility and offers up new opportunities for expansion.

 

Online and offline credit and debit card transactions have grown exponentially over the past two decades. Why? To put it simply, paying by credit or debit card is convenient for consumers. In addition, credit card issuers are encouraging more usage via a wealth of incentives such as points-based programs and cash-back rewards.

Although the benefits of credit cards are straightforward, the ecosystem of electronic payment processing is not. This is especially true for the new merchant or nonprofit organization in the early stages of credit card acceptance.

This “Credit Card Processing 101” eBook was created to serve as a guide to the main components of credit card payment processing. A basic understanding of the players and how the electronic payment ecosystem works will empower you to ask the right questions of potential payment processing partners. As a result, you will be better prepared to create the system that is best suited for your needs and budget.

During the past few years, payment gateways have stepped out from behind the scenes to play a leading role in how companies provide customers with improved methods for online and digital payments.

This emergence is certainly driven by the increase in consumer adoption of online payments. In fact, according to a report by Mordor Intelligence,

“When comparing online/e-commerce (no card present) payments with card-in-hand payments, digital proved to be the higher growth category, accounting for growth up to 23%, over the last year.”
[Mordor Intelligence, DIGITAL PAYMENTS MARKET – GROWTH, TRENDS AND FORECAST (2019 – 2024)]

A recent shift in business models is also having an impact. Taking a cue from the Software-as-a-Service industry, companies have realized the financial benefits of recurring revenue. This has resulted in more companies offering their products and services through a subscription model. Customers pay a monthly fee and receive a regular delivery of clothing (StitchFix, Trunk Club), pet supplies (Barkbox, Chewy), food (Blue Apron, Harry & David), or personal care items (Dollar Shave Club, Birchbox.)

When choosing or re-evaluating a gateway partner, take the following five criteria into consideration:
1. Ease of Integration
2. Ease of Migration
3. Security
4. Customer Service
5. Features

1. Ease of Integration

When a customer uses a credit card to pay for your goods or services, or make a donation, the transaction must be authorized by the bank that issued the credit card. This ensures that credit is
available to the cardholder and that the purchase amount is within the cardholder’s credit limit.

2. Ease of Migration

If you’re moving from one provider to another, migration should be as easy and seamless as possible for everyone involved. It should include a secure transfer of all account information, such
as customer names, address, credit card numbers, expirations and so on. Consider timing implications, as you want to minimize disruptions for you and your customers. Make sure you plan for any needed software upgrades. If your systems are up to date, the switch is simpler.

3. Security

When it comes to taking payments, security is paramount as is compliance. Many online retailers don’t realize they, like their brick-and-mortar counterparts, are required to meet standards set by
the Payment Card Industry Data Security Standard (PCI DSS). Point-to-point encryption (P2PE) is one of the best methods you can use to protect yourself, as well as your customers, and prevent a credit card breach. While P2PE has been around for many years, only PCI-validated P2PE technologies have been tested to the rigorous standards and should be trusted to reduce risk and PCI DSS scope at a merchant.

The simplest way to ensure you’re protected is to partner with a company listed as a Point-to-Point Encryption (P2PE) provider. This way you can verify the gateway is both certified and PCI-compliant. You also want to protect your company against credit card fraud. At a minimum, the gateway you’re considering should encrypt data at the time of transaction, offer address verification and be security code configurable. It should also be able to check and block transactions, be configurable by transaction source since the characteristics of transaction risks vary by source.

4. Customer Service

Every payment service company will tell you they know the various systems and how they work. Well, they should. The question to ask is “how satisfied their customers are with the level of service they’re receiving?” Problems happen, and how quickly they’re resolved could be the difference between you keeping a customer and you losing one. When vetting a company, check to see where their support team is located. Ask if you’ll receive personalized service, or will you be re-directed through a series of menus. The more time you spend trying to get service is less time
you have to serve your customers.

5. Features

If you run a subscription or recurring revenue business, make sure your payment gateway has features such as fraud protection, account updater and Level III processing.

BONUS: Pricing Models

Almost all payment gateways offer merchant accounts as part of their services. Most offer an all-in-one blended rate for the gateway and the merchant account service. Companies usually advertise 2.9% plus $.30 a transaction*. This model seems pretty straightforward and is convenient.

However, not all gateways require you to sign up with their merchant in order to get the gateway. These providers are system agnostic and can code their gateway to any acquirer or processor. You can bring your own processor on board if you wish or sign on with one of theirs.

There are many advantages to this. You have flexibility – build the solution that will work best for your business. You’ll also benefit from cost-plus pricing. Instead of a blended percentage rate, you pay the published interchange rate, a per transaction fee and basis points (one basis point is 0.01%). When you run the numbers, cost-plus pricing tends to offer significant savings over bundled pricing.

Bundled Pricing vs. Cost-plus Pricing
Here’s an example to give you an idea of the difference in pricing methods
using an average of $10 per transaction, and 10,000 transactions per month.

 

Final Decision

Making decisions that impact your business – and how you go about doing your business – are never easy. Hopefully, our insights on what to consider when choosing a gateway partner help with your choice. If you have any questions or want to talk to someone with 35-years of experience in the card-not-present industry, give us a ring at 800.457.9932.

Already have a partner? That’s okay. There’s never a bad time to assess your payment processing options. After all, the less you spend on payments, the more you can spend on your business.

 

 

*Braintree and Authorize.net published pricing as of November 25, 2019
**2.1% is an average of Card-Not-Present interchange rates published by Visa® and Mastercard®