Recurring Billing 101: The Pros, Cons, & Best Practices of Offering a Recurring Payment Model

Looking for a new way to increase revenue? Of course you are…who isn’t?!

The recurring billing model is a popular option among online merchants looking to accomplish this with a minimal net impact on your costs. But what, exactly, does recurring billing entail? How does this model work? What are the potential pitfalls, and how can you weigh the benefits against the risks?

We’re going to break these questions down today. But, before we get too far into the weeds, let’s begin with the basics.

What is Recurring Billing?

Recurring Billing

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Recurring billing refers to the process of automatically billing customers each month for the same amount of money. This is usually done to pay for an ongoing subscription or service. It’s a popular option, as it’s one of the most consistently profitable business models in the digital economy.

With recurring billing, the customer is electronically notified at a certain point during each billing cycle, after which a payment is automatically made via bank transfer or credit card charge.

Recurring transactions make products more affordable and easily purchasable for shoppers. At the same time, you enjoy a predictable cash flow and timely payments. It’s a win-win.

Implementing a recurring billing plan may not be the most effective choice for every business. However, the more we embrace digital payments, the more the benefits add up. Over time, you might find that the convenience and efficiency of adopting a recurring billing model pays off. You can see:

• Improved customer relationships
• Efficiency; more cost- and time-effective operations
• Increased customer data security
• Reduced waste; better for the environment

Another major benefit to a recurring payment business model is scalability. Most systems are designed to be adaptable to changes in the business and can be adjusted with simple rule changes. But, when managed correctly, that reliable and regular revenue stream can help you prosper even as you scale your business

How Does Recurring Billing Work?

We can break this model down into three primary types of recurring billing: fixed, variable, and tiered.

Different aspects of these billing models can be combined together, depending on the product or service in question. They can also be used to facilitate ongoing, fixed-price, or “freemium” service models.

Learn more about recurring billing models

Technology makes it easy to manage the recurring billing process. There are solutions on the market which can help you with account management, invoicing, recovery in the event of payment failure, accounting, reporting, and more. In many cases, subscription management software can allow you to offload much of this backend work entirely.

Learn more about subscription management software

Is Recurring Billing the Same Thing as a Subscription Payment?

Yes and no. While the two topics are closely related, they are not exactly the same thing.

“Recurring payment” refers a business model through which you and your customer develop an ongoing relationship, as opposed to a one-time purchase. In contrast, a subscription is an arrangement for an automatic, regular rebill after a customer signs up for access to a service, or agrees to receive goods on a recurring basis.

Subscriptions usually involve a recurring payment, whether made actively by the buyer, or passively initiated by you. However, not all recurring payment arrangements involve a subscription.

Learn more about subscription billing

What About Negative-Option Billing?

Negative-option billing is the practice of giving customers a service that was not previously provided, then charging them for the service unless they specifically decline it.

Negative-option billing has a lot of different applications. That said, it’s most commonly used in connection with free trial offers and other similar promotions. As a retailer, you get a reliable source of revenue coming in regularly. In exchange, customers get access to goods or services they want without the need to remember monthly payments or renewals.

Negative-option billing is a great way to boost sales. Of course, it also carries significant risk. So much so, in fact, that it’s generally considered a “high risk” activity by acquirers and processors. Some service providers won’t even do business with merchants who operate using a negative option model.

It’s important to do your research and weigh the pros and cons before adopting a negative option model. Otherwise, you could easily end up losing much more than you gain.

Learn more about negative option billing

Recurring Billing Rules: Visa & Mastercard

So, what about industry rules for recurring billing?

It’s true that there are some basic guidelines that are universal across card brands. For example, you need to ensure that you charge in accordance with the fee schedule agreed to at the beginning of service. However, once we start digging into the specific rules regarding recurring billing best practices, we see that there are some differences.

Threats Associated With Recurring Billing

Recurring billing, in general, is considered a “high risk” business practice by acquirers and card networks. This is because of the greater chargeback exposure involved, which could lead to anything from higher fees and lost revenue to complete business failure.

In simple terms, a recurring billing chargeback could happen if you process a recurring transaction, even though the transaction should’ve been canceled. Several circumstances could precede this:

• You don’t receive a cancellation request
• You receive the cancellation request too late to interrupt the automatic billing
• The credit card charge is higher than the cardholder originally agreed to
• You didn’t notify the cardholder of the charge beforehand
• The transaction was unauthorized (i.e. fraud)
• The cardholder’s credit card account was closed

Despite all the above reasons, the truth is that friendly fraud accounts for a significant portion of recurring billing and subscription chargebacks. This could be an innocent mistake on the customer’s part. Or, it may happen when dishonest players attempt to “get something for free.”

Learn more about recurring billing chargebacks

How to Minimize Recurring Billing Risk

To avoid potential missteps with a recurring billing plan, it’s best to start at the very beginning. Implementing the plan isn’t especially difficult, but it does require careful attention to detail.

Before processing the first recurring transaction, you must request permission from the cardholder to store their payment credentials for future transactions. You’ll need to:

• You don’t receive a cancellation request
• Disclose to cardholders how the stored credentials will be used.
• Notify cardholders whenever changes are made to the terms of use.
• Inform the issuer (by conducting a transaction) that payment credentials are on file.
• Identify transactions with appropriate indicators when using stored credentials.

The initial transaction is very important, as you must process it like any other card-not-present sale. This means deploying an array of fraud prevention tools as part of a multilayer strategy.

Learn more about fraud prevention

What about free trials, though? How do you do this when there is no actual transaction that takes place when the card information is first gathered? In these cases, you’ll need to submit an account verification request (basically, a transaction for $0). If either the initial charge or the account verification request is declined, the payment information should not be stored.

Finally, the initial sales receipt should include the following:

• The phrase “recurring transaction.”
• A clear payment schedule depicting when and how frequently the charges will be made.
• The duration of the payment plan, stating how long the customer agrees to pay.

There are other ways the cardholder may authorize recurring transactions beyond traditional card-not-present processing techniques (i.e. mail, telephone, and online orders). Email can work, for example. In any case, though, it’s important than any non-conventional forms of authorization be kept on file for the duration of the recurring payment plan.

Additional Steps to Eliminate Recurring Billing Threats

There are two specific practices—deploying Visa Account Updater and dynamic descriptions—which can play a big role in stopping fraud and chargebacks while ensuring ongoing revenue.

12 Quick Tips to Help Implement Recurring Billing Best Practices

To minimize the risk associated with recurring transactions, consider adopting these business best practices:

1. Clearly state the terms of service before processing the initial transaction. Make sure the customer understands what is involved in the recurring payment process.
2. Disclose any additional fees or restrictions.
3. Offer a simple and customer-friendly cancelation policy.
4. Grant cancelation or termination requests promptly.
5. Submit expiration dates with each authorization request.
6. Do not store card security codes with the other account information.
7. Ensure all recurring transactions are clearly identified as such.
8. Notify customers in writing and at least 10 days in advance of upcoming changes in the recurring transaction amount.
9. Allow cardholders the option to cancel if they disagree with any changes in service or pricing.
10. Adhere to data security standards and PCI-DSS compliance to ensure data is managed properly.
11. Engage in regular communication with all cardholders. This helps keep your brand fresh in customers’ memory and therefore less likely to cancel.
12. Clearly display policy and contact information in multiple locations: website, emails, marketing materials, shipping receipts, and so on.

Cancelations and customer complaints are never great. Regardless, you want to make it easier for the consumer to contact you. By implementing the above information, you reinforce the idea that it will be much easier to work with you, rather than the bank.

The Subscription Economy is Growing

There are multiple reasons to embrace recurring billing. You can see consistent cash flow and higher customer retention. On the other hand, the elevated risk posed by chargebacks and fraud could negate all the benefits.

You can’t afford to be casual about this. Every incident that leads to a transaction dispute will mean less revenue and more headaches for you. And, these problems will add up over time, which could put your business in a very tenuous situation.

Experiencing chargebacks or elevated risk because of recurring transactions? Don’t worry: we’re here to help.

Chargebacks911® offers services specifically designed to address your business’s needs. With just a few clicks, you can boost profits and position yourself for future success. Get started today.