Recurring Billing

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Recurring Billing: Definition, How It Works, Types, and Practical Guidance

Key takeaways
* Recurring billing is an automated process where a merchant charges a customer on a prearranged schedule with the customer’s consent.
* Common uses: subscriptions, utilities, memberships, and any service with regular payments.
* Benefits for businesses: predictable revenue, improved cash flow, lower collection costs, and higher retention.
* Benefits for customers: convenience and time savings; risks include overlooked charges and harder error correction.

What is recurring billing?

Recurring billing lets a merchant automatically collect payments from a customer on a regular schedule (daily, weekly, monthly, quarterly, etc.) after the customer authorizes the arrangement. The merchant stores payment details and charges the customer without seeking approval each cycle, according to the agreed terms.

How it works

  • A customer provides payment information and agrees to recurring charges.
  • The merchant stores the payment method (card, bank account, etc.) and schedules automated charges.
  • Merchants may require specific payment types (e.g., checking accounts or credit cards) and sometimes offer discounts for enrolling.
  • Merchants must manage expired cards, declines, and changes to customer payment preferences.

Examples

  • Cable, phone, internet, and utility bills
  • Streaming services and digital news subscriptions
  • Gym memberships and software-as-a-service (SaaS) plans
  • Automatic product replenishment (e.g., pet food delivered every three months)

Types of recurring billing

  1. Fixed recurring billing
  2. The same amount is charged each cycle.
  3. Typical for memberships and subscription plans.

  4. Provides predictable revenue for businesses.

  5. Variable recurring billing

  6. The billed amount can change each cycle based on usage or quantity.
  7. Usage-based billing: charges reflect actual consumption (e.g., utilities).
  8. Quantity- or volume-based billing: charges depend on agreed quantities (e.g., cloud storage).

Subscription billing vs. recurring billing

Both involve automated, periodic charges and stored payment details. The distinction is often in pricing structure: subscription models typically offer multiple pricing tiers or plans, whereas recurring billing may simply charge a single agreed amount on a schedule.

Advantages

For merchants:
* Improves customer retention.
* Ensures prompt, predictable payments and better cash flow.
* Lowers billing and collection costs through automation.
* Reduces accounts receivable risk.

For customers:
* Saves time—only one signup required.
* Reduces the risk of missed payments when managed properly.

Disadvantages and risks

  • Billing errors can be harder to spot and correct because payments are processed automatically.
  • Customers may forget recurring charges and continue paying for unused services.
  • Recurring arrangements can be abused in scams (commonly targeting seniors).
  • Service can be interrupted if a payment is declined or an account lacks funds.

Best practices for customers
* Use recurring billing for predictable, regular charges where errors are unlikely.
* Regularly review statements to catch unwanted or duplicate charges.
* Keep payment information up to date to avoid service interruptions.
* Cancel unwanted services promptly and confirm cancellation.

How to set up and cancel recurring payments

PayPal
* Setup: Merchants use PayPal’s Recurring Payments functionality, which typically requires a PayPal Business account and following PayPal’s merchant setup instructions for subscriptions.
* Cancel: Customers cancel recurring payments in their PayPal account settings under payments or pre-approved payments and follow on-screen instructions.

Credit card
* To stop charges, contact the service provider directly (online, phone, mail, or in person) and request cancellation—ideally at least a few days before the next scheduled charge.
* If the merchant doesn’t stop billing after cancellation, contact your card issuer to dispute unauthorized or recurring charges.

Debit card / bank account
* Notify the company that you revoke authorization for automatic withdrawals.
* Inform your bank or credit union that you’ve revoked authorization and, if necessary, place a stop-payment order on specific debits to prevent future withdrawals.
* Confirm cancellation with both the merchant and your financial institution.

Conclusion

Recurring billing streamlines ongoing payments for both businesses and customers by automating the process and providing predictable cash flow. It works best for predictable, regular charges. Customers should monitor accounts and understand cancellation procedures to avoid unwanted charges or service interruptions.