What is Recurring Billing
Recurring billing is when a merchant automatically charges a cardholder for specified goods or services on a prearranged schedule. Recurring billing requires the merchant to get the cardholder’s permission one time up front for recurring charges, then continues with scheduled charges until the cardholder withdraws permission. Any good or service that a customer purchases repeatedly and regularly might be a good candidate for recurring billing. Examples include cable bills, cell phone bills, gym membership fees, utility bills and magazine subscriptions.
BREAKING DOWN Recurring Billing
Recurring billing offers the benefit of convenience. Instead of having to repeatedly provide credit card information for a routine charge, the cardholder can authorize the merchant to keep the card details on file and charge the card each time the merchant delivers agreed upon goods or services. For example, a consumer could set up an order with an online pet store to have three bags of dog food delivered every three months. Authorizing recurring billing would let this purchase happen automatically on a regular schedule.
Recurring Billing Limitations
A drawback of recurring billing for consumers is that it can be more troublesome to correct a billing error. Instead of receiving a bill, noticing a mistake, then refusing to pay the bill until the mistake is corrected, the consumer may be automatically billed for the incorrect amount, requiring additional time to obtain a refund. It’s safest to agree to recurring billing for payments that are always about the same amount and occur on a predictable schedule because you’re more likely to quickly notice a billing error. Recurring billing can also add expenses for customers who forget about the charges.
Advantages for Merchants
Many services only allow customers to sign up if they agree to recurring billing. For example, credit monitoring service agreements often require the customer to agree to be charged for the service every month, indefinitely, unless they explicitly cancel the service. In this way, recurring billing can help merchants with customer retention.
Recurring billing has several other benefits for merchants. It ensures prompt payment from customers, helps with cash flow and lowers billing and collection costs by eliminating paper bills and automating a portion of accounts receivable. It can also improve customer satisfaction by making it more convenient for the customer to do business with that company.
Recurring billing doesn’t eliminate all administrative tasks, however. For example, merchants will need to contact consumers about updating their payment information if a credit card is about to expire or an attempted recurring charge is declined by the credit card issuer. Merchants that offer recurring billing as a way to minimize administrative expenses may want to make it easy for consumers to manage their billing information and preferences online, so they can easily change the credit card on file, opt out of a service before a free trial converts to a paid subscription, or cancel an unwanted subscription.