What are automatic payments and how can they benefit your business

Automatic payments are used in almost all industries that support our daily lives, including leisure, finance, entertainment, and others. Today, we'd like to focus on the concept of automatic payments, their benefits for merchants, and some setup tips.

Automatic payment definition

An automatic payment is one that is set up to cover a recurring billing process. Recurring billing occurs when a merchant automatically collects payment from a customer for goods or services within an agreed-upon time frame. However, keep in mind that not every online payment gateway offers the option of recurring payments; to find one that does, click on this link.

So, in essence, an automatic payment is a mutual agreement between a merchant and a customer that allows the merchant to withdraw funds from the customer's bank account on a regular basis. A merchant is always required to obtain the customer's official permission to collect payments automatically when accepting automatic payments. Following that, each subsequent payment would be deducted from the customer's bank account without the need for a special permit until the agreement was completed or extended.

Types of automatic payments by payment quality

Automatic payment is set up. In this case, the same amount of money is deducted from a customer's account during each charge cycle. Fixed automatic payment is commonly used by businesses and industries that provide goods and services at a fixed price.

Automatic payment that varies. It means that the amount deducted from the account can vary with each charge cycle. It is determined by the customer's use of a specific product or service. A recurring bill is issued for each cycle in this case.

Types of automatic payments by industry

Subscription. One of the most prevalent types of automated payments. Subscription includes any service or product that a customer can obtain by purchasing a subscription rather than an item. For example, a movie streaming service may charge a subscription fee in exchange for its content, a smartphone app may charge a fee by subscribing, and various professional software may do the same.

Membership. It is a payment made in order to provide a client with a specific type of service or product, or access to it. Membership is commonly found in delivery companies for faster delivery, in the aviation industry to propose special favours, and in makeup online stores to deliver personalised goods at a lower price on a regular basis.

Municipal and government services Governmental services, such as taxes and utility bills, can charge citizens on a regular basis, with the price of each payment cycle varying. Bills for electricity, water, and building services are specific examples.

Services provided one-on-one. One-on-one services refer to professional and business assistance, including but not limited to legal assistance, tutoring, childcare, cleaning services, coaching and personal training, and any other type of scheduled one-on-one service.

Services related to finance. Automatic payments can play a significant role in personal finance, particularly in saving and retirement planning. A customer, for example, can manage a recurring loan payment to avoid going into default.

How do automatic payments work?

A customer authorises a merchant to take money for each billing cycle during the mutual agreement with credit card automated payments. First and foremost, a customer must agree to a merchant's recurring billing agreement. It contains information about the goods or services offered, the amount of money that would be taken each payment cycle or how it would be calculated (in the case of variable automatic payment), the length of a payment cycle, and information about cancelling the automatic payment agreement.

Following that, a customer provides a merchant with their bank account information and authorises them to store this payment data for future transactions. A customer is subscribed to automatic payments from the moment an agreement is set up.

Benefits of automatic payments

Customer retention is important. Customers who use automatic payments tend to stay longer. It's not necessarily because they forgot to cancel the recurring payment agreement, but rather because an automatic payment allows them to stay with the company without missing a regular payment.

Ensures prompt payment. When a customer authorises a merchant to keep payment data and take funds automatically, they save time and ensure that each payment is made on time.

Ensures a positive credit history. A merchant who receives recurring payments looks better in the eyes of acquiring banks because these transfers guarantee money flow for a set period of time.

Increases cash flow. A bank account, like a good credit history, benefits from being paid frequently and precisely on a scheduled basis.

Reduces the cost of billing and collection. A merchant can use automatic payments to provide a customer with special offers, discounts, and other services to make the product more appealing.

Maintains records in a systematic manner. A merchant can automate invoicing by collecting payments frequently and repeatedly. Also, for recordkeeping purposes, keep track of payment details and sales.

Enhances marketing and planning. Customers who make purchases on a regular basis help with budget planning and provide data for marketing and sales analytics.

Customers save time. Finally, a customer does not have to enter payment and personal information each billing cycle in order to maintain the attachment to the company's goods and services.

What to consider when setting up automatic payments for your business

The first consideration for a merchant is selecting the appropriate best online payment gateway or payment service provider. The problem is that not all service providers offer recurring billing. PayPal, for example, is a well-known PSP that does not offer merchants automatic payment collection.

The active reporting is the next thing to look for. We strongly advise selecting a payment provider that includes detailed reporting as part of its services. This feature is beneficial to a merchant because it reveals information about the business. Payment options, in addition to active reporting, are very important. A merchant must provide payment options that are popular in the area or among the target demographic.

We also recommend that you check to see if there are any upgrade options and that you manage your members. The first parameter enables a merchant to easily upgrade a customer's plan with one click and without re-entering payment information. The second refers to the members' internal tracking. A merchant can use this option to view and edit the list of automatic payments, as well as manage invoices and other attributes.