Introduction to Recurring Billing

The purpose of the mini-series of articles we are going to publish is to familiarize businesses with the concept of recurring billing and the most important recurring billing-related features to be considered by a business while choosing a payment system to partner with.

Many people feel that recurring billing is just an ability to charge the same amount every month over and over again, and whichever system can do this for the lowest price, is the one to go with. In reality, the situation is more complicated, because there are various paradigms and specific features that may be required. These features will make recurring billing process extremely easy on one system, and extremely complex and limiting on another.

Subsequent sections will describe various recurring billing aspects and features.

Recurring billing types

There are two recurring billing types which can be defined as committed and uncommitted recurring billing.

  • Uncommitted recurring billing carries no minimum time commitment and requires no special handling in case of delinquency (when the service or subscription just gets discontinued). A common example of uncommitted billing would be a subscription to news or dating web-site
  • In case of committed recurring billing 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. Examples of committed billing include term gym memberships and cell phone contracts

Types of recurring payments

All recurring payments can be classified as falling into a regular scheduling pattern or an irregular one.

  • Regular payment schedule – recurring payments fall into some regular schedule (weekly, monthly, weekly, quarterly, annually). An example is a gym membership billed every 5th of the month
  • Irregular payment schedule – payments are made on specific, arbitrarily chosen (pre-defined) dates, depending on specific business context. An example is a payment arrangement for debt repayment

When regular payment schedule is followed, the terms of the recurring payment are represented with a payment schedule (also referred to as a payment plan). There are several payment schedule types available.

Payment schedule (or payment plan) types

  • Fixed (term) payment plan – a certain payment amount is agreed upon, and the number of payments is limited (fixed) by the agreement/contract. For example, $1,200 can be paid during a 12-month period at $100 a month
  • Unlimited (pay-as-you-go) payment plan – payment is going to recur until the plan is explicitly cancelled. For example, $40 a month web-site subscription can recur as long as it is not explicitly cancelled by the client
  • Hybrid (rollover or open-ended) payment plan – initially consists of a fixed (defined) number of payments, however, after the initial fixed number of payments, the billing continues to recur (the plan becomes unlimited) until it is explicitly cancelled. For example, 6 monthly payments, $100 each are required, however, the billing continues at $50 per month (after the initial 6 months) as long as the customer desires to use the service.

While regular payment schedule can use any of the three aforementioned payment plan types, irregular payment schedule relies on fixed pre-defined dates only.

Now that recurring billing types and payment plans are described, it is appropriate to move on to specific recurring billing features. The next post will describe essential features, which are typical for recurring billing process.