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How Does Recurring Payment Management Work?

How Does Recurring Payment Management Work?

December 28, 2022

Remember the last time you subscribed to a popular company like Spotify, Netflix, Apple Music, or Disney+? The process was probably quick and simple - you provided your payment information and started using the service. You probably didn't think much about it, but each month you were automatically charged the agreed-upon amount. Have you ever wondered how this works?

Recurring payments or recurring billing allow businesses to automatically charge customers for products or services on a predetermined schedule, typically monthly. To set up recurring payments, the business obtains authorization from the customer to take money from their account. This way, the customer can use the product or service without having to manually make payments each time.

Recurring payments enable you to process payments from customers who have subscribed to your product or service. Payment gateways are used to securely process these payments. After the transaction is authorized and processed, it can be recorded for accurate revenue tracking. This allows you to easily manage recurring payments from your subscribed customers.

As you can see, there are many steps involved in processing a recurring payment:

  1. Customer decides to make a subscription
  2. Customer sets a preferred billing period
  3. Customer selects the payment source
  4. Customer gives consent to periodical payments
  5. Customer securely links their Bank Account for payments
  6. Withdrawal request on the bank account occurs on the chosen schedule
  7. Bank approves the transaction
  8. The payment processor receives and notifies the business
  9. The fund is transferred to the business’ bank account
  10. Business can fulfill the products/services that the customer was billed for

To summarize, when a customer initiates a purchase by clicking the order button, the merchant receives the payment details and passes them along to Ayoconnect as the payment processor. The payment request is then sent to the gateway, which forwards it to the appropriate debit card or credit card association (e.g. Visa or Mastercard). The payment information is stored in the process.

The issuer reviews the transaction and either approves or denies it, based on the accuracy and fund amount of the customer's payment. If the transaction is approved, the issuer informs the network. The customer is then billed for the purchase on their monthly statement. And that's how the recurring payment process works!

It's important to note that recurring payments are made electronically, so your business will need a merchant account and a payment service provider to receive these payments. Keep this in mind as you set up your business to accept recurring payments from customers.

A merchant account is a special account that holds the funds transferred from the customer after automatic payment. A third party reviews these funds before they are sent to your business account, which typically happens within 1-2 days. This helps to ensure the security and smooth processing of the transferred funds.

It's impressive that this entire payment process takes place in just a few seconds. And with recurring payment processing, this process is repeated every payment cycle. This makes it easy and convenient for both businesses and customers to manage recurring payments.

It's important to understand that the API providers, including Ayoconnect, do not initiate payments on their own. Instead, the merchant's system must send a command to initiate recurring payments. This is an essential aspect of the recurring payment process and helps to ensure that payments are accurately and securely processed.

What happens if a recurring payment fails?

If a recurring payment fails, an email is sent to the merchant first. The payment will then go into Retry status and will be attempted again with the original amount within 24 hours. If it fails again, it will Retry a second time. If the second Retry also fails, the invoice will be updated with a Declined status and will stop trying to process the payment or ask the customers to change their payment details. It remains important for businesses to, at times, check whether customers' recurring payments are successfully processed.

What is the difference between a one-time payment and a recurring payment?

One-Time Payment Recurring Payment
Payment frequency Single Regular
Purpose Single purchase Ongoing service
Examples Furniture purchase, one-time repair service Netflix subscription, monthly gym membership
Payment method Credit card, bank account, cash, etc. Credit card, bank account, automatic withdrawal from a checking account
Scheduling Can be scheduled in advance or made on demand Automatically charged on a predetermined schedule
Cancellation Can be cancelled at any time May require a notice period or may continue until the service is cancelled

A one-time payment is a single charge authorized by a customer for a specific good or service. If the customer wants to make another purchase, they must authorize a separate transaction. In contrast, a recurring transaction involves a single authorization for multiple payments made on a predetermined schedule. These payments can continue until the customer cancels their subscription billing or the end date is reached. Recurring payments let customers make ongoing purchases without having to manually authorize each individual transaction.

Head here to know how Ayoconnect can help your business scale with Recurring Payment Management (RPM) APIs, so you can get paid fast and focus on the more exciting parts of running your business!