What is a recurring payment?
Recurring payment refers to the payment which is paid on multiple bases either on a daily, monthly, or yearly basis for the goods and services consumed. Recurring payment requires a deal between both the customer and merchant periodically where the consumer consumes goods or services out of his needs and loyalty towards any entity.
It involves any payment made to the business, organization, or government entity for the consumption of goods and services regularly or in any specific period. The purchases from stores can’t be referred to as recurring payments because it depends upon the customer’s choice and it’s only a one-time payment made by customers to the merchant. This type of payment offers convenience for the customers. Businesses can add the recurring payment option to save their own as well as the customer’s time. You can click here to know more about recurring payment options for your business.
Types of Recurring Payments
There are two types of recurring payments as mentioned below:
- Fixed recurring payment
In this type of payment, the customer pays the same amount every time for the goods and services consumed. For example insurance premiums, cable bills, and more.
- Variable recurring payment
The amount being transacted is not the same every time. For example transfer of excess funds from the recurring account to a loan or some other account.
Business examples of recurring payments
To understand these payments better, here are a few day-to-day examples:
- Financial Assistance
Everyone plans for after retirement earnings, so they opt for several schemes like insurance benefit schemes, PPF, mutual funds, etc. The investor makes payments either on a monthly or yearly basis.
The best example of this is GYM. We take membership either in GYM or any other club recurring payment systems are appreciated either on a monthly or yearly basis.
For entertainment purposes, subscriptions of various applications such as Netflix, Amazon Prime, Spotify, etc are taken by customers. Most of these applications have a recurring payment every month.
- Daily household payments
Payments like electricity bills, cable bills, telephone bills, etc are repeated payments done by the users mostly every month and it can also be on yearly basis, depending upon the customer’s mindset.
Benefits of Recurring Payment
These payments offer a host of benefits for both businesses and customers, a few of which are mentioned below:
- Payment in Instalments
While making any recurring payment one is not required to pay the full amount at one time. So you do not have to keep more idle cash. Thus, you can pay in certain installments as you do in paying insurance premiums i.e every month.
- Good relations with customers
In a business whenever there is a concept of recurring payment and not the lump sum payment, the businesses are likely to have more good relations with its customers and related parties. Because everyone is not in a state to pay the whole amount in a single moment. Thus it provides flexibility to all the people related to the business for payment.
- Minimal efforts
Wherever you are required to pay in recurring mode, you can tell your bank to cut the amount directly from your account and deposit it from where the services are rendered. For example insurance, mutual fund, PPF, electricity expenses, etc all these have this type of payment so you are not required to pay for all the expenses individually.
- Timely collection of payment
In case of a recurring payment, there’s always a timely collection of the amount as it acts as a buzzer at the end of every month for the payment.
Disadvantages of Recurring Payment
A few disadvantages of recurring payment are:
- Your bank account can go on overdraw mode if you don’t have sufficient balance at the time of recurring payment.
- Billing errors can be exhausting work.
- Even if you render services from banks for online recurring payments still you need to keep track of the amount spent and also there are charges taken by the bank for these payments.