Recurring payments, also known as auto-pay, are a convenient way to pay for a product or service. If you see a recurring payment on a transaction or bank statement, it can be confusing if you aren’t sure where it came from. What exactly is the meaning of a recurring payment?
A recurring payment is a kind of transaction that occurs when a merchant automatically charges a customer for goods or services on a regular basis. This is also known as automatic bill payment or auto-pay.
If you see a recurring payment appear on a bank statement or transaction, it means that you have permitted a merchant to deduct payments from your credit or debit card on a monthly basis.
There are advantages to recurring payments, with the biggest advantage being their convenience. However, there are also some limitations with recurring payments.
Read on to learn more about the meaning of recurring payments, including the different types.
Recurring Payment Meaning
A recurring payment or recurring billing happens when a merchant automatically charges someone for goods or services on a prearranged schedule. Recurring payments can also be referred to as recurring billing or automatic bill payments.
A recurring payment will appear on a bank statement or transaction history if you have permitted a merchant to deduct payments from your credit or debit card on a monthly basis.
This payment is for the goods or services they provide you every month. Simply put, you are subscribed to their monthly services, and your payment is automatically deducted through a virtual transaction.
The recurring payment scheme is ideal for paying utility bills, such as phone bills, cable bills, and electric bills, among many others. It is also ideal for paying your subscriptions to magazines or even memberships in gyms.
If you don’t recall permitting recurring payments, you should contact that business or vendor to have them stop the recurring payments. Moreover, you can contact your financial institution to have them stop the recurring payments.
The Ease of Enrolling in a Recurring Payment Scheme
Undoubtedly, enrolling in a recurring payment scheme has several benefits. But the ultimate benefit of all is the convenience it brings to consumers.
Consumers have long been familiar with online transactions. But before this AutoPay scheme was introduced, online payments for monthly bills were made by inputting the same payment details every month. It became a routine for most people. And it was already considered a convenient payment method for consumers at that time.
But the emergence of the recurring payment scheme made it even more convenient for consumers. Now, there’s no need to visit the merchant’s site or the bank’s site on a monthly basis anymore just to pay your monthly bills. All you have to do is link your bank account with that of the merchant’s once and set the payment schedule.
Once done, the amount will automatically be deducted from your bank account every month. So, even if paying bills slips your mind, you need not worry anymore. This time, you will always pay your bills on time for as long as your bank account is well funded.
But aside from your bank account or your debit card, you have the option to link your credit card too. Doing so will also allow you to pay your monthly bills on time. When it comes to paying your credit card bills, however, this is where you are supposed to link your bank account or debit card. And just the same, you do not have to worry about forgetting to pay those credit card bills.
Limitations to Recurring Payments
Unfortunately, there are also some disadvantages to recurring payments. They include the following:
- The inconvenience of correcting a billing error
- Paying for unnecessary expenses
- Declined bank accounts
1. The Inconvenience of Correcting a Billing Error
Let’s first talk about how online payment schemes worked before the emergence of the AutoPay scheme.
In the past, we would normally wait for our billing statement before paying. This gave us time to check the billing statement in case of billing errors. And if there were errors, we could contact the merchant to correct them. We could even demand not to pay the bill first until we received the correct billing statement.
Many customers still use this payment scheme, especially those who are not yet enrolled in the recurring payment scheme. But what if you are enrolled in this automatic payment scheme, and there was an error in your billing? This is actually where the problem lies.
It is quite expected that if there is an error in your billing statement, the chances are that you have already paid the bill. What if you paid more than the correct amount? How do you refund it?
To settle this, you have to contact the merchant and relay what has happened. The merchant will then refund the amount, but this does not get settled right away in most cases.
Since the money is transferred to the merchant’s bank account, the bank will process the transaction. In which case, the merchant still has to coordinate with the bank and wait for the bank to finish processing it. In some cases, it can be settled in real-time. But this is not the case all the time.
2. Paying for Unnecessary Expenses
Another disadvantage is if you fail to cancel a monthly mobile app subscription that you no longer use. In this case, you are paying for an unnecessary expense.
A recurring payment scheme is normally applied to pay monthly mobile app subscriptions. This, of course, prevents the termination of your subscription because you get to pay on time. But, sometimes, there are apps that you realize you no longer need and prefer to cancel your subscription. The sad part is if you fail to cancel your subscription before the due date. If this happens, the app will automatically charge you for its services.
3. Declined Bank Accounts
You have to ensure that your bank account has sufficient funds so you can pay your bills on time. Otherwise, failure to pay due to insufficient funds may lead to the cancellation of services. The last thing you would want to happen is to have canceled utility services such as electricity, water, and phone, among others.
What’s in It for Merchants?
Merchants may use recurring payment schemes as a tool for customer retention. This is mainly due to the convenience they provide to their customers. But aside from that, this scheme also offers other benefits for merchants.
This automatic payment scheme ensures merchants that the goods or services bought by their customers will get paid. This is advantageous for their cash flow, and it also lowers their expenses by eliminating the cost for billing and collection. Then, of course, it somehow automates a significant portion of their accounts receivable.
However, if there are advantages, there are also disadvantages. One of which is that administrative tasks are not 100 percent eliminated by this scheme. It is troublesome for merchants if their customers’ bank accounts have insufficient funds or if the customers have expired credit cards. And in most cases, it is quite difficult to reach them. The worst part for merchants is that they are unable to collect large amounts of payments.
There are sophisticated systems ideal for merchants to address some of these issues. Other systems are also ideal for customers to allow them to track their online transactions conveniently. Expectantly, these systems will help address these issues.
Reminders for Customers and Merchants Enrolled in Recurring Payment Schemes
Whether you’re a customer or a merchant, it is important to keep these pointers in mind:
- Be diligent when enrolling in a recurring payment platform
- Check if the payment facility has the features that you need
- As a merchant, take into consideration the churn rates
- Monitor transactions regularly
1. Be Diligent When Enrolling in a Recurring Payment Platform
For merchants, do some research before you enroll your business in a recurring payment platform. Make an effort to check if the subscription provider is compliant with the Payment Card Industry (PCI) standard practices specifically for payment security. You must ensure that your funds and your business as a whole are protected from fraud – in the same manner that you ensure that your customers are protected.
For customers, do your research as well. It’s important to check the credibility of the platform provider, as well as the credibility of the merchant. Find articles or write-ups about the companies. Reading consumer reviews helps a lot too.
2. Check If the Payment Facility Has the Features That You Need
If you are a merchant who has customers abroad, you have to make sure that your payment facility is flexible. Ensure that it can accept payments of different currencies.
As a customer, also check if the features are convenient for you. Does the platform accept both debit and credit cards? Does it support other types of online money transfers?
3. As a Merchant, Take into Consideration the Churn Rates
All merchants, of course, always think of business continuity. There are many factors to consider to guarantee continuity, and one of them is your churn rate.
Churn rate is the yearly percentage rate at which clients cancel their subscriptions. As a merchant, you must ensure that the number of your new customers is higher than your existing subscribers. That way, in the event that your existing subscribers terminate their subscription, your business will continue to be lucrative.
4. Monitor Transactions Regularly
Monitoring transactions is an activity that all merchants must strictly do on a daily basis. But this is not only an activity that merchants should do. Customers should do this too.
Consumers must personally monitor their online transactions too. That way, they could detect if there are erroneous billings or some discrepancies in the transactions. Besides, aren’t we always being reminded by banks to be diligent to protect ourselves from fraud?
Types of Recurring Payments
Recurring payments have two types. They are the following:
- Fixed recurring payments
- Variable recurring payments
1. Fixed Recurring Payments
This type of payment is when a consumer pays for the same amount on a regular basis. Examples of this recurring payment are gym memberships, magazine subscriptions, paid TV programs, and film subscriptions.
2. Variable Recurring Payments
Variable recurring payments are those that do not have a fixed price. The amount varies from payment to payment. Examples of this recurring payment include utility bills or telephone bills.
Conclusion – Recurring Payment Meaning
A recurring payment is a kind of transaction that occurs when a merchant automatically charges a customer for availing of goods or services on a regular basis. This is also known as automatic bill payment.
This payment scheme has several benefits. One of which is that it allows both consumers and merchants to save time as it offers a unique and convenient checkout experience.
Another benefit is that it’s easier for both merchants and consumers to predict cash flow. A recurring payment platform allows merchants to generate reports anytime they want to. It also automatically prompts merchants every time payments are being transferred to their bank accounts.
In the case of customers, they also have a way of generating a report listing regarding all their online transactions. They are also prompted every time there are new online transactions made. That way, they can monitor how much has been deducted from their bank accounts.
For merchants, another benefit is customer retention and customer loyalty. For as long as they provide convenience to their customers, they are guaranteed to retain — and increase — their customer base.
Recurring payment schemes indeed offer several advantages to us all. However, we shouldn’t neglect the fact that, of course, there are drawbacks too. We must always be diligent in preventing ourselves from becoming fraud victims. Aside from that, diligence will prevent us from experiencing hassles brought about by erroneous billings.
But the bottom line of this discussion is that the recurring payment scheme is a technology that truly provides convenience for everyone.