What Are Recurring Payments? A Guide for Businesses

A recurring payment allows businesses to charge customers at regular intervals for ongoing services or products, improving revenue, reducing churn, and minimizing administrative overhead.

12 min read

Feb 4, 2025

(Last Updated: Feb 4, 2025)

What Are Recurring Payments? A Guide for Businesses

A recurring payment allows businesses to charge customers at regular intervals for ongoing services or products, improving revenue, reducing churn, and minimizing administrative overhead.

12 min read

Feb 4, 2025

(Last Updated: Feb 4, 2025)

What Are Recurring Payments? A Guide for Businesses

A recurring payment allows businesses to charge customers at regular intervals for ongoing services or products, improving revenue, reducing churn, and minimizing administrative overhead.

12 min read

Feb 4, 2025

(Last Updated: Feb 4, 2025)

What Are Recurring Payments? A Guide for Businesses

A recurring payment allows businesses to charge customers at regular intervals for ongoing services or products, improving revenue, reducing churn, and minimizing administrative overhead.

12 min read

Feb 4, 2025

(Last Updated: Feb 4, 2025)

Recurring Payments have become an integral part of modern business operations, revolutionizing how companies manage their revenue streams and customer relationships. This automated billing system allows businesses to charge customers at regular intervals for ongoing services or products, providing a steady and predictable income. As the global economy shifts towards subscription-based models and digital services, understanding and implementing recurring payments has become crucial for businesses of all sizes and across various industries.

The importance of recurring payments becomes even more apparent when considering the challenges of traditional billing methods. Manual invoicing and payment collection can be time-consuming and error-prone, leading to cash flow issues and delayed payments. 

With research suggesting that 40% of small & medium businesses experience negative impacts to their business from late payments, recurring payments can offer a solution, streamlining the billing process and ensuring timely payments.

What is a Recurring Payment?

A recurring payment is a financial arrangement where a customer authorizes a business to automatically charge their payment method (such as a credit card or bank account) at regular intervals for ongoing access to a product or service. This billing model eliminates the need for manual invoicing and payment processing for each transaction, creating a seamless and efficient payment experience for both the business and the customer.

Recurring payments are commonly used for a wide range of products and services, including:

  1. Subscription-based digital services (e.g., streaming platforms, software licenses)

  2. Utility bills (electricity, water, internet)

  3. Membership fees (gyms, clubs, professional associations)

  4. Insurance premiums

  5. Loan or lease payments

  6. Ongoing service contracts (e.g., pest control, lawn care)

The key characteristic of recurring payments is that they're automatic and regular. Once set up, these payments occur without requiring further action from the customer, ensuring consistent revenue for the business and uninterrupted access to services for the customer.

How Do Recurring Payments Work?

Understanding the mechanics of recurring payments is crucial for businesses looking to implement this billing model effectively. The process involves several stages, from initial setup to ongoing management. Let's break down the workflow of recurring payments:

Authorization

The first step in the recurring payment process is obtaining customer authorization. This typically involves the customer providing their payment details (such as credit card information or bank account details) and explicitly agreeing to be charged on a recurring basis. This agreement, often called a mandate, can be obtained through various means, including:

  • Online forms during sign-up

  • Paper agreements

  • Verbal consent (for phone-based services)

  • Digital acceptance (e.g., checking a box during online registration)

Scheduling

Once authorization is obtained, the business sets up the payment schedule in their billing system. This includes defining:

  • Payment frequency (e.g., weekly, monthly, annually)

  • Payment amount (fixed or variable)

  • Start date and, if applicable, end date

Automatic Processing

On the scheduled date, the payment is automatically initiated by the business's billing system. This process typically involves:

  • The billing system sending a payment request to the payment gateway or processor

  • The payment gateway communicating with the relevant financial networks (e.g., credit card networks, ACH, SEPA)

  • Funds being transferred from the customer's account to the business's account

Notifications

After each successful payment, both the customer and the business typically receive notifications. These can include:

  • Email receipts or invoices sent to customers

  • Payment confirmation alerts for the business

  • Notifications of upcoming payments to customers (as a courtesy)

Failure Handling

In cases where a payment fails (e.g., due to insufficient funds or an expired card), most systems have automated retry mechanisms:

  • The system may attempt to process the payment again after a set period

  • Customers may receive notifications prompting them to update their payment information

  • Businesses may have the option to manually intervene or set up custom retry rules

Reconciliation

The final step involves reconciling the payments received with the services provided. This ensures that customers have access to the services they've paid for and helps businesses track their revenue accurately.

Types of Recurring Payments 

Recurring payments come in various forms, each tailored to meet the unique needs of different business models. These payment structures provide businesses with flexibility and predictability, making them an essential tool for modern commerce. Broadly, recurring payments can be categorized based on payment modes and usage patterns. Below is a detailed exploration of these types.

Based on Payment Modes

Recurring payments differ in how they are processed, depending on the payment method used. Here are the primary types:

Recurring Card Payments

Recurring card payments involve automatically charging a customer’s saved credit or debit card at regular intervals. This method is widely used for digital subscriptions, streaming services, and SaaS platforms. Its popularity stems from its convenience for customers and its ability to process payments quickly. For example, platforms like Netflix rely on recurring card payments to charge customers monthly for their subscriptions.

However, recurring card payments come with some challenges. One major drawback is their relatively high failure rate due to issues such as card expiration or replacement. This can lead to involuntary customer churn and cash flow disruptions for businesses. 

Recurring ACH Payments

Automated Clearing House (ACH) payments are electronic bank transfers commonly used in the United States. This payment method is ideal for payroll processing, rent collection, and subscription services. For example, a property management company might use ACH payments to collect monthly rent from tenants.

Recurring SEPA Payments

Single Euro Payments Area (SEPA) direct debits facilitate cross-border recurring transactions within Europe using Euro-denominated accounts. This payment mode is particularly useful for subscription services operating across multiple European countries. For instance, a pan-European SaaS company might use SEPA direct debits to collect subscription fees from customers in different EU nations.

SEPA payments offer lower transaction fees than card-based systems and simplify cross-border billing within Europe. Additionally, starting January 9, 2025, IPR will mandate that all banks and payment service providers operating in the Single Euro Payments Area must be ready to receive instant payments (<10 seconds). Starting October 9 2025, they will also be required to support instant sending capabilities. Furthermore, the price of instant credit transfers cannot be higher than that of ordinary credit transfers, which will reduce transaction costs. 

Based on Usage Patterns

In addition to payment modes, recurring payments can also be categorized based on how charges are structured relative to usage:

Fixed Recurring Payments

Fixed recurring payments involve charging customers the same amount at each billing interval. This model is commonly used for services with stable costs or fixed-price subscriptions. For example, a gym membership costing €20 per month falls under this category.

The primary advantage of fixed recurring payments is their predictability—for both businesses and customers. Businesses benefit from stable revenue streams that simplify financial planning, while customers appreciate the consistency in pricing that aids budgeting. However, this model lacks flexibility and may not be suitable for services where costs vary based on usage or other factors.

Variable Recurring Payments

Variable recurring payments involve charges that fluctuate based on usage or other factors during each billing cycle. This model is often used by utility companies or cloud storage providers where charges depend on consumption levels. For instance, a cloud service provider might bill customers based on the amount of data stored each month.

The flexibility of variable recurring payments aligns costs with actual usage, which can enhance customer satisfaction by ensuring fairness in billing. However, this model introduces revenue unpredictability for businesses and may require more complex billing systems capable of tracking usage metrics accurately.

Types of Businesses that Use Recurring Payments 

Recurring payments have become essential across various industries, enabling businesses to streamline operations, maintain steady cash flow, and build lasting customer relationships. While traditionally popular among subscription-based services, this model is now widely adopted in diverse sectors.

SaaS providers rely on recurring payments for monthly or annual subscriptions, ensuring predictable revenue while simplifying updates and feature rollouts. Similarly, streaming platforms such as Netflix and Spotify use this model to generate consistent income for content creation and user experience improvements.

Utility companies (electricity, water, and internet providers) automate recurring billing for usage-based services, reducing administrative costs and ensuring timely payments. 

Gyms and fitness centers also benefit by offering memberships that provide steady revenue while catering to customer needs.

The education sector, especially online learning platforms, uses recurring payments for course subscriptions, while subscription box services like Blue Apron deliver curated products monthly. 

Media outlets rely on recurring payments for digital or print subscriptions to sustain journalism. 

Nonprofits use this model for regular donations, ensuring predictable funding for initiatives. 

Meanwhile, property management companies automate rent collection for consistent cash flow.

Benefits of Recurring Payments 

Implementing a recurring payment system offers numerous advantages for businesses across various industries. Let's explore these benefits in detail:

Predictable Cash Flow

One of the most significant advantages of recurring payments is the stability and predictability they bring to a company's cash flow.

  • Consistent Revenue: Regular, scheduled payments create a steady income stream, allowing businesses to better forecast their financial position.

  • Improved Financial Planning: With a more predictable revenue, companies can make more informed decisions about investments, hiring, and expansion plans.

  • Reduced Invoice Chasing: Automated payments minimize the need for follow-ups on overdue invoices, saving time and resources.

Customer Retention

Recurring payments can significantly enhance customer loyalty and reduce churn rates.

  • Convenience Factor: Customers appreciate the ease of automatic payments, which can increase satisfaction and loyalty.

  • Relationship Building: Regular transactions create ongoing touchpoints with customers, providing opportunities for engagement and upselling.

  • Reduced Churn: Subscription models with recurring payments can reduce customer churn — especially involuntary churn — compared to traditional billing methods.

Minimal Manual Effort

Automating the billing process through recurring payments significantly reduces administrative overhead.

  • Time Savings: Automated systems handle invoicing, payment processing, and reconciliation, freeing up staff for more strategic tasks.

  • Error Reduction: Minimizing manual data entry reduces the risk of billing errors and discrepancies.

Enhanced Customer Experience

Recurring payments can significantly improve the overall customer experience:

  • Seamless Transactions: Customers enjoy uninterrupted service without the need to manually make payments each cycle.

  • Flexible Options: Offering various payment frequencies (monthly, quarterly, annually) allows customers to choose what works best for them.

  • Transparency: Regular billing statements keep customers informed about their spending, building trust.

Scalability

Recurring payment systems are designed to handle growth efficiently:

  • Easy Expansion: Add new customers or increase transaction volumes without proportionally increasing administrative work.

  • Global Reach: Many recurring payment platforms support multiple currencies and payment methods, facilitating international expansion.

  • Integration Capabilities: Modern recurring billing systems often integrate with CRM and ERP systems, streamlining operations as the business grows.

By leveraging these benefits, businesses can create a more stable, efficient, and customer-centric operation. The predictability and automation offered by recurring payments not only streamline internal processes but also foster stronger, longer-lasting relationships with customers.

How Open Banking is Changing Recurring Payments 

Open Banking providers like Ivy are revolutionizing recurring payments by offering faster, more secure, and transparent alternatives to traditional methods like card payments. 

With Ivy, businesses can initiate secure open banking transactions while seamlessly setting up a Direct Debit mandate in a single flow for customers, meaning: 

  • Less friction for users and no manual data entry at checkout 

  • More recurring revenue for businesses with a minimized risk of customer churn and 

  • Lower administrative overhead with streamlined recurring payments and mandates vis Ivy’s Open Banking API

Setting Up Recurring Payments with Ivy

Setting up recurring payments with Ivy involves just a few simple steps: 

Want to learn more about how Ivy's open banking-powered payments can transform your business? Drop us a line.

FAQs

What is an example of a recurring transaction?

A recurring transaction is a regular payment made automatically, such as a monthly subscription for Netflix, gym memberships, or utility bills.

Sources: 

Sources last checked on: 2 Feb 2024

This publication is provided for general information purposes and does not constitute legal, tax or other professional advice from Ivy GmbH or its subsidiaries and its affiliates, and it is not intended as a substitute for obtaining advice from a financial advisor or any other professional. We make no representations, warranties or guarantees, whether expressed or implied, that the content in the publication is accurate, complete or up to date.