The purpose of this article is to familiarize the key merchant services industry players with the concept of recurring billing as an advanced feature to be considered during payment gateway selection. If this is the first time you are reading “Payment Gateways II” series, please, start with the Introduction as it will improve your understanding of the current post.
Recently subscription-based payment model has become very popular. The model is predominantly used by membership-centric organizations, such as health clubs, tanning salons, etc. Even traditionally retail industries are implementing the elements of subscription payments into their business practices. For instance, online stores selling such products as water filters, vitamin supplements, skin care products are offering their customers to purchase these products regularly on subscription basis. Because of increased importance of subscription-based business model, recurring billing becomes an essential part of modern payment processing systems, such as payment gateways.
Recurring billing paradigms
When it comes to recurring billing (also known as subscription billing or recurring payment processing) there are two major paradigms, which can be called committed billing and uncommitted billing.
Uncommitted recurring billing would be an on-line subscription, which carries no minimum time commitment and requires no special handling in case of delinquency (usually the service or subscription simply get discontinued). For example, monthly subscription at eFax or premium membership at linked-in.
An example of committed recurring billing would be a term gym membership or a cell phone contract. In both of these examples, if a payment is missed and an account becomes delinquent, a collection attempt is made to reinstate the account and collect any past due. Simply deactivating the service is not an option in such cases.
An important issue arising in connection with recurring billing is cardholder data storage. If a merchant is storing actual payment card data (for recurring billing), it must go through costly PCI compliance certification procedures. Tokenization and profiling provide solutions allowing merchants to reduce their PCI scope or completely get out of it. For more information on tokenization and profiling see here and here.
Another component of recurring billing to be mentioned is decline recovery, as declines tend to happen more frequently when customers are charged on recurring basis. That is why subscription-based businesses should integrate with payment gateways offering decline recovery mechanisms.
Let consider an example of tanning salon to gain better insight into the needs of a business using subscription-based model.
Depending on the type of recurring billing that a merchant needs (committed vs uncommitted), it might want to look for a payment gateway that accommodates that specific feature set. If the business requires committed recurring billing model, it needs to verify, what decline recovery techniques and collection tools are going to be available within the payment gateway it is using.
If repeat purchases are important for a business, then it is critical to find out in advance, whether the processor\payment gateway it deals with offers some form of tokenization.
Out next post will cover credit card BINs and card intelligence.