As a reliable revenue stream, recurring payments help both organizations and their consumers by giving them the option to “set it and forget it.” However, ensuring that these recurring payments run smoothly can be a challenge when businesses face returns or declines due to errors, outdated payment information, insufficient funds or even fraud. With the right partner, a subscription model can help businesses run smoothly while ensuring sustained cash flow.

In a recent PaymentsJournal podcast, Suman Chaudhuri, global vice president of revenue growth at CSG Forte, spoke with Don Apgar, director of the merchant payments practice at Javelin Strategy & Research, about how businesses can take advantage of recurring payments.  

PaymentsJournal
Making the Most of the Recurring Payments Model
PaymentsJournal Making the Most of the Recurring Payments Model

PaymentsJournal

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Building the Model

When Dollar Shave Club first launched its direct-to-consumer subscription model, the company garnered attention by combining a higher level of brand engagement with competitive pricing. This shift from one-time to recurring payments highlights a growing trend among businesses, bringing much-needed stability to their cash flow. That stable income allows them to forecast more accurately, allocate resources more efficiently and invest in growth opportunities with greater confidence.

A good example would be what has transpired in the car wash industry.

“When you look at a business like a car wash as something that’s heavily weather dependent and has extreme revenue swings from day to day or week to week, to be able to stabilize the revenue with the membership and recurring payments is tremendous,” Apgar said. “A business like a car wash was 100% card present, and the migration to a subscription model is moving that payments activity from card present to card not present. From a processing perspective, it presents additional challenges, and the businesses that are making that transition may not be ready for card-not-present transactions.”

There are broader benefits, too. Businesses can leverage data from subscription payment models to gain insights into customer behavior and preferences, enabling them to tailor their offerings and enhance customer satisfaction.

Customer retention is another key advantage. Subscriptions can help create an ongoing relationship between a business and its customer, increasing the likelihood of long-term loyalty and ensuring their ongoing business by automating the repeat purchases.

The Autopay Revolution

Whether from retailers like Costco or Dollar Shave Club or from utility and insurance companies, customers expect to see an autopay option at checkout.  

However, it’s important to note that recurring payments can fail for various reasons. Customers might get a new credit card due to fraudulent activity, or they might have insufficient funds in their bank account. Such declines and returns can cause cash flow issues that put extra stress on customer service teams to contact customers and retry payments. 

Businesses that experience declined card transactions  can consider using an account updater solution, which automatically updates the cardholder information for Visa, Mastercard or Discover. When these cards get replaced or reported stolen or lost, the updater ensures you have the new payment information, reducing the chances of failed payments. Businesses can also automate sending payment reminders ahead of time, so customers are reminded to update their account information or ensure their accounts are funded for the upcoming payment. 

Failed payments can lead to service cancellations, which ultimately cause customer satisfaction issues. An experienced payment provider can guide the business through these challenges and offer solutions to automate payment retries, alleviating the burden on the customer service team. 

While it might sound counterintuitive, businesses also need to make it easy for customers to cancel their recurring payments. 

“We’ve all worked with a business that has their cancel payment button buried seven layers deep inside their website or their application,” Chaudhuri said. “That can be very frustrating, because when a customer makes up their mind to cancel their payment, they will find a way to cancel that payment. If you don’t make it easy for them, you’re increasing the burden on your call center and customer service teams because the customer will fire off a ton of emails or make calls to your call center.” 

The Mechanics of Recurring Payments

Credit cards, debit cards and Automatic Clearing House (ACH) payments are all well-suited for recurring payments. However, ACH offers several advantages over credit cards. For one, accepting ACH payments usually costs the business less. Additionally, account numbers typically change far less frequently than credit or debit card numbers. Another benefit of ACH is that banks can automate retries when an ACH payment fails.

“If you’re using ACH, we would highly recommend using a top-of-the-line validation service to validate the payments before processing the payment,” Chaudhuri said. “When customers make manual errors entering their payment information or are accidentally using cards that have expired or are invalid, a strong validation service can validate this up front and reduce the chances of failed payments.” 

A Lesson Learned

Businesses that have relied on the subscription model in the past are now taking lessons from modern recurring-payments businesses.

“My cable company is happy to charge my rewards Visa card every month, even though for years companies like utilities and cable companies resisted billing on card-based transactions because of the interchange fees, processing fees, etcetera,” Apgar said. “But at the end of the day, when you look at the cost to print and mail the bill then wait for the payment process, in lieu of being able to just charge my card and receive the funds immediately, the fees become cost effective over time.” 

As the cable example shows, the more small and medium business explore recurring payments, the more benefits they see. The consistent cash flow, the improved customer retention and the additional data available all contribute to an environment that benefits not just the enterprise but its customers as well. 

Interested in learning how to offer a smooth and secure payment process?