Many businesses have incorporated recurring revenue models into their operations due to the appeal of predictable, repeat income. But managing recurring payments involves more than just collecting funds from customers at regular intervals. It also involves ensuring transaction security, managing customer data, dealing with payment errors or failed transactions, and providing a simple user experience.

Handling recurring payments effectively can significantly affect a business’s success. Businesses that use subscription models—a particularly common recurring payment model—experience 34% higher customer retention rates and 46% less revenue volatility month to month. It allows businesses to predict their cash flow more accurately, improve customer retention, and minimize the administrative tasks associated with billing and collections. It also provides customers with an easy way to enjoy a product or service without interruptions, increasing their overall satisfaction and loyalty.

However, setting up a system for managing recurring payments can be complex. It requires the right technology and systems to securely store and handle sensitive customer data. It also involves complying with various financial and data protection regulations. And businesses need to select a system that fits with their business model and meets their customers’ expectations. Here’s what you need to know.

What’s in this article?

• What are recurring payments?
  
• What is recurring payment processing?
  
• How does recurring payment processing work?
  
• Ways to process recurring payments
  
• How Stripe can help
  

What are recurring payments?

Recurring payments, also known as subscription payments, autodebit, or automatic payments, refer to transactions that are automatically processed on a predetermined schedule. They are regular payments made by a customer to a business for a service or product, charged on automated billing cycles. Recurring payments can be implemented in many different increments, such as daily, weekly, monthly, biannually, or annually. A common time frame is a monthly recurring payment.

For instance, you may have recurring payments set up for your monthly utility bills, such as electricity or internet service. They could also be applied for subscriptions like gym memberships, streaming services (e.g., Netflix, Spotify), or software-as-a-service (SaaS) platforms.

Recurring payments can benefit both businesses and customers. They provide businesses with predictable income and help improve customer retention. And they are convenient for customers, since they no longer need to remember to manually initiate each payment.

What is recurring payment processing?

Recurring payment processing refers to the methods and systems businesses use to automatically collect recurring payments from customers. It’s an important part of managing subscriptions and other recurring revenue models. Recurring revenue models make it easier for businesses to forecast future revenue. A few other examples of recurring revenue models are membership programs, recurring seasonal services, and retainers. Customers will typically give a business permission to regularly charge their credit card or debit their bank account for products or services. It’s ideal to offer customers multiple payment frequencies (such as monthly or annual) and several convenient payment methods to choose from.

How does recurring payment processing work?

Recurring payment processing involves the following sequence of steps:

• Obtain customer authorization: The process begins when the customer consents to recurring charges. During the sign-up or checkout process, the customer provides their credit card or bank account information and agrees to the terms of the recurring payment. The terms of this agreement should clearly state the amount the customer will be charged, how often they will be charged, and which services or products they will be charged for. From a legal standpoint, it’s also important to let the customer know that they have a right to cancel recurring payments. If you have any questions about what language should be used in the customer authorization process, consult a lawyer.

• Securely store payment information: Once the customer has provided payment information, the business must store this data securely for future transactions. This is usually done via a payment gateway or a third-party service provider that complies with Payment Card Industry Data Security Standards (PCI DSS). The customer’s payment details are typically tokenized. This means they’re replaced with a unique string of characters (a “token”) that is meaningless if intercepted, adding an extra layer of security.

• Set the payment schedule: The business sets up a payment schedule based on the agreed-upon frequency of the recurring payment. This could be weekly, monthly, annually, or any other time frame the customer agrees to. Automated systems then ensure that the payment is processed at the correct intervals.

• Process the transaction: When the scheduled payment date arrives, the payment gateway or processor initiates the transaction. It sends a request to the customer’s bank or credit card company to charge the agreed-upon amount. This process typically happens without any action needed from the customer.

• Confirm the transaction: Once the transaction has been approved, the customer’s account is debited, and the funds are transferred to the business’s account. A confirmation is usually sent to the customer notifying them of the successful transaction.

• Handle errors and retry payments: Sometimes, transactions can fail due to reasons such as insufficient funds or an expired credit card. Most payment processors have systems to handle failed recurring payments. This could involve notifying the customer about the issue and retrying the charge after a certain period.

• Manage subscriptions: Recurring payment processing also includes managing the customer’s subscription: upgrading or downgrading plans, canceling subscriptions, issuing refunds, and handling customer inquiries. Another part of this process involves dunning: communicating with customers to collect payments that are due or overdue. This is a useful step to help reduce churn. Effective management can improve customer satisfaction and retention.

• Ensure compliance and generate reports: Finally, businesses must comply with various regulations and standards that govern recurring payments, such as PCI DSS and General Data Protection Regulation (GDPR). They also need to regularly analyze payment data to track business performance, identify trends, and make informed decisions.

Recurring payment processing can benefit both businesses and customers. For businesses, it provides predictable revenue and reduces administrative work. For customers, it offers convenience and ensures uninterrupted access to products or services. However, it’s important to handle this process correctly to maintain customer trust and satisfaction.

Ways to process recurring payments

There are a variety of systems available to process recurring payments. The choice of system can depend on factors such as the nature of the business, transaction volume and frequency, geographical location of the business and its customers, and type of products or services.

Here are some of the most common tools businesses can implement to process recurring payments:

• Payment gateways: A payment gateway is a technology used by businesses to accept debit or credit card purchases from customers. These gateways can be configured to manage recurring payments, storing customer payment information and automatically charging customers on a set schedule.

• Merchant accounts: Merchant accounts are bank accounts that allow a business to accept payments in multiple ways, usually via debit or credit cards. Merchant service providers can offer tools or partner with payment gateways to handle recurring payments.

• Direct debit providers: Businesses can use direct debit providers to automatically debit a customer’s bank account on a recurring schedule. This is often used for larger payments or B2B transactions. It requires obtaining permission from the customer to debit from their account.

• ACH processors: Businesses with customers in the US can use ACH (Automated Clearing House) processors to handle recurring payments. They pull funds directly from the customer’s bank account and push them to the business’s account.

• Subscription management platforms: These platforms specialize in managing subscriptions and recurring payments. They usually offer a range of features, such as different pricing plans, discount management, trial periods, and automated email responses.

• Integrated solutions: Some businesses might use integrated solutions like enterprise resource planning (ERP) or customer relationship management (CRM) software that have built-in recurring payment processing capabilities. This can consolidate and streamline business operations.

When choosing how to process recurring payments, businesses need to consider factors such as the solution’s ability to integrate with other systems they use, the provider’s reputation for security and reliability, and the overall customer experience.

Businesses should also consider the cost of the solution. This can vary widely, from a set fee of a few hundred dollars per month to a percentage of billing volume (anywhere from 0.4% to 3.0%) or a flat rate per payment. The final cost ultimately depends on factors such as which type of system a business chooses and the business’s monthly payment volume.

It’s also important to ensure the chosen method complies with all relevant financial regulations and data security standards.

How Stripe can help

Stripe Billing lets you bill and manage customers however you want—from simple recurring billing to usage-based billing and sales-negotiated contracts. Start accepting recurring payments globally in minutes—no code required—or build a custom integration using the API.

Stripe Billing can help you:

• Offer flexible pricing: Respond to user demand faster with flexible pricing models, including usage-based, tiered, flat-fee plus overage, and more. Support for coupons, free trials, prorations, and add-ons is built-in.

• Expand globally: Increase conversion by offering customers’ preferred payment methods. Stripe supports 125+ local payment methods and 130+ currencies.

• Increase revenue and reduce churn: Improve revenue capture and reduce involuntary churn with Smart Retries and recovery workflow automations. Stripe recovery tools helped users recover over $6.5 billion in revenue in 2024.

• Boost efficiency: Use Stripe’s modular tax, revenue reporting, and data tools to consolidate multiple revenue systems into one. Easily integrate with third-party software.

Learn more about Stripe Billing, or get started today.