What Are Recurring Payments? (Full Explanation)
You don’t give your products & services away for free & neither do payments companies. Whether you like it or not, getting money from your customers’ bank accounts to yours has its costs. As a result, you pay rates & fees on every transaction that your business processes.
This is, however, avoidable if you choose to only accept cash. However, by doing this, you’d alienate a large majority of consumers who may want to visit your business, but do not carry cash at all times. As a result, every business owner needs to accept credit cards in order to reach their earning potential.
Payment Processors vs Payment Facilitators
Due to high demand in the market for payments solutions, there are tons of entities trying to get a piece of the pie. Specifically, third-party payment processors & ISOs resell the payment solutions of payment facilitators. As a result, they must charge the merchant for an additional ‘layer’ of fees.
Payment facilitators, on the other hand, eliminate middlemen from the equation & provide the leanest pricing in the industry. When you work with a payment facilitator, you open a merchant account directly with them. As a result, you eliminate most, if not all, unnecessary fees when you work with a payment facilitator.
Avoidable Credit Card Processing Fees
If you look at your merchant statement & find it hard to make sense of all the numbers on it, then you are not alone. This is done by design. The more complex your merchant statement is, the easier it is for less than transparent payment companies to sneak in unnecessary fees to grow their margins.
- IRS Reporting Fees: The IRS does not charge payment processors a reporting fee. Therefore, an IRS Reporting Fee is most likely a fabrication.
- PCI Compliance Fees: Maintaining PCI compliance at the merchant-level does not cost any money. Therefore, a PCI Compliance fee is often unnecessary.
- Statement Fees: Unless your statement is being physically mailed to your address, then there is often no cost associated with the delivery of your monthly statement.
- Payment Gateway Fees: In essence, the use of a gateway is the service provided to a merchant. Therefore, a ‘payment gateway fee’ is the service fee associated with the service. While this fee may not be completely avoidable, it can be negotiated.
Take a look at your merchant statement to see if you can spot any of these fees. If you can, then your current provider is most likely using these fees to mask the reality of them being unnecessary markups.
Unavoidable Credit Card Processing Fees
Interchange fees are the unavoidable fees that card brands charge merchants for the use of their cards. Major card brands in the United States include Visa, MasterCard, Discover, & American Express. These costs are often passed on to merchants by payment companies.
To illustrate this, think about how often you see that a business does not accept American Express. The reason is that interchange rates are generally high for American Express cards. As a result, many merchants refuse to accept the cost of processing American Express transactions (and they don’t).
This is not the best business practice. Not only does this show that the business does not possess the resources necessary to accept a common form of payment, it also shows that the business does not value convenience for its customers.
So what can a business owner do? The business owner can eliminate as many of the unnecessary fees as possible. By doing so, he or she will have more resources to fund the unavoidable costs of interchange.
The Payment Facilitation Model Is Lean
The payment facilitation model is the leanest, most transparent model in the payments industry. With the understanding that accepting payments is a common practice in business, payment facilitators have chosen to make the required solutions more accessible to business owners.
However, this comes with great cost, the requirements for becoming a payment facilitator are comparable to that of becoming a small bank.
Nevertheless, by eliminating middlemen, payment facilitators are able to eliminate unnecessary fees, only charging merchants for the costs involved in the actual processing of transactions.
Your Bank Won’t Offer 2.5% Flat Rate & Neither Do Our Competitors
Our pricing structure is as follows:
- Card present transactions – 2.5% + $0.10 per transaction
- Card not-present transactions – 3.05% + $0.10 per transaction
- $0 in unnecessary fees
- Free merchant account set up
That’s for all card types! The reason we offer flat rate is pricing is to offer our clients transparency & consistency. To see how our pricing stacks up to the competition, click here.
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Odds are that, if you provide a service that people use regularly, you could benefit from allowing your customers to set up recurring payments.
You probably use recurring payments in your own life, even more so than you’d think. However, you may not often think what it takes for a business to allow recurring billing & payment from its customers. I know that I was shocked when I finally took a personal inventory of all the recurring payments that I have set up.
Think about your Netflix account or the Auto-Pay setting that you enabled for your monthly energy bill.
Recurring payments are definitely here to stay, especially as people opt for added convenience. Therefore, as a business owner, you need to think about these requirements so that you can deploy a recurring payment solution yourself. By doing so, you’ll stay current with the times & experience a lift in conversions, retention, and overall customer satisfaction.
Why Recurring Payments Are Necessary
To illustrate how a recurring billing solution works as well as the requirements of one, let’s use an example. Image that you’re a landscaper. You visit most of your customers biweekly. Being an on-site service provider, you have a few ways that you can accept payment for your services:
- You could accept cash or check.
- Face-to-face interaction required unless payment is to be left somewhere on premises, which can lead to theft.
- You could use a mobile payment solution to accept payments on the go.
- Face-to-face interaction required.
- You could send a bi-weekly invoice to your client.
- Client will have to pay each invoice. May be overdue some weeks.
As you may have already noticed, all of these examples are inconvenient for you the business owner AND your customer. For regular services, you cannot expect your customers to meet you in person every time they pay you. And for membership or subscription products, the necessity of recurring payments becomes even more necessary.
Benefits of Recurring Payments
Recurring payments do a bunch of great things for business owners & customers including:
- Offering convenience
- Increasing customer satisfaction
- Preventing past due payments
- Improving cash flow
- Freeing up resources from your workforce
- Increasing organizational efficiency
As you can see, recurring payments can be great for businesses that fit a certain profile!
Which Types Of Businesses Are Recurring Payments Best For?
- Home Services – plumbers, cleaners, landscapers, pool maintenance
- Auto Services – car washes, detailers, auto dealers, auto shops
- Professional Services – attorneys, accountants, staffers, real estate
- Contractors – construction, consultants, designers
- Gyms – memberships
- Spas – memberships
- eCommerce – subscriptions/memberships
How Recurring Payments Work
The key to making recurring payments work for your business is maintaining the convenience that they are supposed to offer you & your customers. In order to do that, you need to find a payment solution that has a simple invoicing platform for you to set up and manage recurring billing. You also need to make sure that the recurring payments solution is intuitive on the customer-facing side. In other words, it should be easy for your customers to enroll in automatic payments.
With that being said, recurring payments solutions are not as complex as you’d think. In essence, here is how all solutions should work.
- You enable recurring payments on your website or invoice, which allows your customers to set up recurring payments.
- Customer opts-in to recurring payments by clicking a box.
- Then, customer enters their payment info (Credit/Debit, Account Number-ACH).
- Finally, customer is charged for the initial invoice/purchase.
- From then on, the customer’s payment method is automatically charged every pre-defined billing cycle.
What Sets Recurring Payments Solutions Apart?
All recurring billing solutions generally work the same. However, you, as the business owner, should look at for a few discerning factors that will shape your overall experience & use case.
- Management Platform
Be sure to ask about each of these areas when considering a payment solution provider.
We pride ourselves on cost, integration, & management platform, specifically because we are a direct payment provider.
What does that mean? It means that we developed our own end-to-end payment solution, which allows us to offer lean pricing, seamless integration, endless customization, & robust features.