A Guide To Understanding Recurring Payments

As the name suggests, Recurring Payments are those which occur repeatedly. Simply put, these are automatic payments that occur at regular intervals and are commonly charged to a customer's credit card or bank account. Also known as subscription payments, these are processed automatically according to the agreed-upon schedule – whether it's daily, weekly, biweekly, monthly, quarterly, or annually.

Importance and Benefits of Recurring Payments

Recurring payments are designed to make lives easier—for the customer, the banker, and the merchants—all by the power of automation. Setting them up once ensures:

• Seamless collections on the due date
• Customer stickiness or loyalty
• Reduced expenditure on field collection.

This model grants customers the freedom to select the duration and frequency of their subscription with the option to renew or cancel it at any time.

What Types of Businesses Use Recurring Payments?

Today, there are hardly any online service-based companies that don’t offer subscription-based models. Many companies employ recurring payments as part of a subscription-based business. Subscription-based businesses have gained significant popularity in various industries, on the B2B and B2C front. The reason is that a subscription gives a company steady, default-free revenues while taking the hassle out of the customers’ lives.

Historically, the recurring billing model was primarily observed in telecommunications where there is a continuous supply—measured in units. Also popular are media subscriptions (newspapers, magazines) and gym memberships because these are generally simpler as the recurring payments tend to remain constant every month.

However, with the onset of digital services like online streaming (Netflix, Prime Video, Hotstar), music streaming (Spotify Premium), online gaming (Dream11), and online services (Urban Company, Swiggy) – the subscription renewal has become a big source of recurring revenue.

The advent of cloud computing and Software as a Service (SaaS) has significantly broadened the scope of recurring billing. Many cloud-based and professional software products now (Zoho, Jira, Slack) offer licensing through monthly subscription models, replacing the traditional approach of purchasing software outright.

Last but not least, recurring payments are the backbone of many financial services, especially EMIs, insurance premiums, Mutual Fund SIPs, credit card payments, and bill settlements. The industry was the first to adopt recurring payments because the complicated process of billing and EMIs in a bank set-up was solved drastically with auto-deduct.

For example, EMIs are a common method used by banks and lending institutions to allow individuals to make regular payments towards their loans or credit purchases. By setting up recurring payments, borrowers can automate the process of repaying their debts, reducing the risk of missing payments and incurring late fees.

Mutual Fund SIPs (Systematic Investment Plans) are a popular investment option for individuals seeking to build wealth over time. SIPs allow investors to contribute a fixed amount regularly to a mutual fund, typically every month. Recurring payments enable investors to automate investment strategy, ensuring consistent contributions and potentially benefiting from rupee-cost averaging.

Credit card payments are another significant area where recurring payments are extensively employed. Many individuals have their credit card bills automatically deducted from bank accounts regularly. This feature enables cardholders to avoid late payment charges and maintain a good credit score by ensuring timely bill settlements.

In summary, recurring payments are integral to the functioning of numerous financial services.

Understanding the Recurring Payments Process

Recurring payments, prima facie, would involve three parties: the customer (B2B or B2C), the financial institution (banks of both parties), and the merchant (product or service provider). But nowadays, there is a fourth party involved which has drastically changed and simplified the recurring payments process for the better – the payment service provider.

These payment service providers, also known as payment aggregators, serve as an all-in-one payment solution provider, handling every aspect of online payments. They collect and process recurring payments for customers, ensure the highest levels of security and compliance, and deposit the funds into the merchant's business account – all in a matter of seconds.

How do Recurring Payments work?

Here is the recurring payment process, explained in five easy steps:

• The customer invests in Mutual Fund SIP. The merchant can provide various payment options to their customers such as paper NACH, eNACH, eSign, UPI AutoPay or SI on Card to register a recurring mandate with multiple payment schedules available such as monthly, quarterly, and yearly. Let's say the customer selects a monthly option, with a SIP of INR 500 per month.
• The customer registers a one-time mandate by entering his bank account number/ VPA id or credit card details.
• The customer authenticates either through Net Banking, Debit Card, Aadhar details, UPI Pin, OTP, or Card details.
• Once the mandate has been successfully registered the merchant can schedule transactions either through an automatic scheduler/ through APIs / SFTP or an email.
• The payment service provider will debit the agreed-upon amount from the customer’s chosen method of payment and send a credit to the merchant's account with the settlement amount.

Recurring Payment Models

Recurring payment models can be different, depending on the merchant's business models, and payment needs. Below mentioned are the most popular recurring payment models:

• Fixed Payment Model: As the name suggests, this model is where customers pay a consistent or fixed amount for each billing cycle—often seen in the case of EMI collection or subscription businesses. When the quantity of the product or service consumed remains constant or when the price of a product or service remains unchanged, the fixed payment model is the one to go for. Fixed recurring payments can be observed in loan collection, SIPs, OTT billing, etc.
• Usage-Based Model: Under this model, customers are charged according to a predetermined quantity or metric that was established when the initial purchase happened. An example of this could be a postpaid model wherein the customer pays for the plan decided, say 2GB per day plan. He/she will be charged recurrently based on the quantity decided.
• Variable Model: In this model, the customer is levied both fixed rental and ad-hoc charges like late fees. This is done when the limit is exceeded based on usage across variable periods. For example, furniture rental for some time, auto-recharge of wallets, etc.

Types of Recurring Payments

In India, the recurring payment space has seen a steady rise in the modes available for registering a recurring mandate thanks to technology, advancements, and backing from the RBI and NPCI. There are multiple modes of registering a mandate for recurring payments.

Let’s Explore Some Modes of Registering Recurring Payments.

1. Paper NACH

In this mode of mandate registration, the merchant collects a paper NACH mandate form from the customer. The customer has to physically sign the mandate form which contains basic mandate registration details eg. From date, end date, debit type, amount, account holder details, frequency of debit etc. This mandate is then scanned and the scanned copy of the mandate along with the mandate data in XML is uploaded to NPCI’s module. NPCI provides a UMRN (Unique Mandate Registration Number) for every mandate updated in their system. The customer can also send the scanned images of the physical mandates for registration in the NPCI format.

2. e-NACH

e-NACH, which stands for Electronic National Automated Clearing House, is an electronic or digital mode of mandate registration, which the merchant can integrate on its website or its mobile app or registration can be done by sending a link to the customers. It is widely used as a mode of collection by various banks, financial institutions, NBFCs, insurance corporates, Mutual Fund Companies, utility companies and the government to facilitate payment integration for high-volume transactions.

This mode of registering recurring mandates has been developed by NPCI and covers around 66+ banks with the numbers only increasing. The ‘e’ which stands for electronic allows a customer to digitally sign a mandate by authentication through their net banking credentials, debit card details, and Aadhar card details. In doing this, NPCI provides a UMRN (Unique Mandate Registration Number) which is generated online at the time of mandate registration. (The turnaround time for registration is real-time). This mandate registration is the permission granted by the customer to periodically debit a mutually agreed-upon amount.

3. Aadhar eNACH

Aadhaar eNACH is an innovative payment solution that allows businesses to register payment mandates effortlessly using an Aadhaar number. It is a paperless recurring payment solution by NPCI to provide a faster and more efficient channel for mandate lodgement at the destination bank.

The process is self-assisted and user-friendly:

• Customer just needs to provide Aadhaar number and bank account details.
• It is another way of Mandate Registration through NACH.

Key Benefits of Aadhar eNACH are:

• Higher success rates (feasible once all banks are onboarded as destination banks)
• High emphasis on security.

All Aadhaar authentications are performed via a secure twostep OTP process, ensuring the transactions are protected every step of the way. Customers validate the mandate through an OTP process (in place of net banking or through a debit card).

4. Aadhar eSign

Aadhar eSign is an electronic or digital mode of mandate registration, which the merchant can integrate on its website or its mobile app or registration can be done by sending a link to the customers. It is widely used as a mode of collection by various banks, financial institutions, NBFCs, insurance corporates, Mutual Fund companies, utility companies, and the government to facilitate payment integration for high-volume transactions.

This mode of registering recurring mandates has been developed by NPCI and covers around 400+ banks with the numbers only increasing. This mode of registration allows a customer to digitally sign a mandate by authentication through Aadhar card details. The turnaround time for registration is 2 days. This mandate registration is the permission granted by the customer to periodically debit a mutually agreed-upon amount.

5. UPI AutoPay

This is the latest and possibly most revolutionary development in the field of recurring payments. As per its name, UPI AutoPay will use UPI as the main source of payment, thereby going cardless.

UPI AutoPay was introduced on 22 July 2020 at the Global Fintech Festival and is the brainchild of the National Payments Corporation of India (NPCI). The reason for this was simple: UPI’s growing popularity in India. UPI can be considered the fastest-adopted financial technology by India with Rs. 126 lakh crore worth of transactions being recorded on UPI in 2022 alone.

UPI AutoPay extends the UPI benefit further by allowing customers to set up real-time recurring e-mandates through any UPI /bank application for eg. Gpay, Phonepe, Paytm iMobile BHIM BOI UPI etc., using their VPA (Virtual Payment Address) for various types of recurring payments, including EMI payments, entertainment subscriptions, insurance premium payments, donations, mobile bills, mutual funds, and more.

How to Choose the Right Payment Partner?

A successful subscription-based model today depends on payment integrations, which in turn, are the by-product of associating with the right payment partner. PSPs can be of various types but while choosing a payment provider for your business, keep the following in mind:

• Extent of options: As we saw above, recurring payments can be of multiple kinds, models, and types. If your PSP does not support even one type of payment, it can make you lose customers looking for a particular type of arrangement. Always ensure that the payment provider is adept with all new technologies and changes.
• APIs and Integrations: In today’s day and age where everything, including subscription payments, is going online—your payment partner must provide you with seamless integrations through the use of APIs, documentation, and engineering support.
• Experiential Metrics: Though most PSPs claim to have the best processing while integrating recurring payments, it is always best to test the time taken for transactions, interface interactions, and card processing. Longer times or poor experiences can make customers drop off.
• Pricing: Last but not least, always check and compare the pricing models offered by different payment aggregators/providers so you can check it against the financial viability of your business.

How to Accept Recurring Payments?

To accept recurring payments, follow these simple steps:

• First, choose a reliable payment processor that supports recurring billing. Set up an account with them and provide the necessary information, such as your business details and banking information.
• Next, integrate the payment processor into your website or app using their provided tools or APIs. Create a subscription plan with the desired billing frequency and price. Notify your customers about the recurring payment terms and obtain their consent.
• Finally, securely store customer payment information or use tokenisation for future transactions. Ensure your payment processor handles automatic debit instructions and provides payment reports with the status of the transaction promptly.