Recurring Pay Meaning, Types, Benefits and How It Works

A business that collects the same amount from the same customers every month has two choices. Either chase every payment manually, or build a system that collects automatically.

Today, many businesses prefer to employ an automated payment collection system, which enables them to get their payments on schedule. You may know this collection system as a mandate-based recurring payment.

What is a recurring payment, and how is it impactful for businesses operating at scale in India? We'll find out in this blog.

What Are Recurring Payments and Why They Matter

A recurring pay is a scheduled, automatic debit authorized by a customer that allows a business to collect a fixed or variable amount on a regular cycle. This can be weekly, monthly, quarterly, or annually. Recurring payments are made mostly for subscriptions or any type of installments (loans, EMIs, SIPs, etc).

The opposite of this is a non recurring payment. It is a one-time transaction initiated separately each time money needs to move. These are the payments we normally make for any type of standalone purchases.

For businesses with predictable, repeating collections, relying on non-recurring payments might not be the best idea. It will mean restarting the collection process every single cycle. However, a recurring payment facility eliminates this bottleneck entirely.

What Types of Businesses Use Recurring Payments

The option of setting up a recurring pay for subscription-like purchases is used across every industry where collections happen on a schedule. Here are a few common use cases of recurring pay:

1. Lenders and NBFCs: Financial institutions employ autopayment mandates to collect loan EMIs from borrowers every month. It helps them prevent a potential default on the books, a manual follow-up, and a gap in cash flow that compounds across a portfolio.
2. Subscription businesses: SaaS platforms, OTT services, and membership clubs collect recurring monthly payments from customers who've agreed to ongoing access. With the recurring payment option, customers don't have to remember the renewal date of each subscription. The autopay feature automatically deducts the user fees on the scheduled date, renewing the subscription.
3. Insurance companies: Collection of recurring fees in the form of premiums on fixed schedules is easier with the autopay feature. It helps their customers avoid missing a premium, which can cause a policy to lapse, thus creating liability for both the insurer and the customer.
4. Microfinance institutions and cooperative societies: Group loan repayments and deposits from member bases spread across geographies become convenient and timely if the payment is debited on schedule, automatically.
5. Trade credit businesses: Businesses like distributors, wholesalers, and electronics financiers end up collecting payments from retailers on deferred payment cycles. Recurring payment provides them with a predictable, automated cash flow recovery.

How Recurring Payments Work Step by Step

Here is a step-by-step on how recurring payment mandates work for businesses:

• Mandate creation: The collecting business initiates a mandate request specifying the amount, frequency, start date, and duration. For variable billing, a maximum cap is set.
• Customer authorization: The customer receives the request and authenticates it once, via UPI PIN, net banking OTP, or debit card. This is the only time customer action is required.
• NPCI validation: The mandate is validated through NPCI's infrastructure and registered with the customer's bank.
• Automatic collection: On each due date, the debit executes automatically. A pre-debit notification goes to the customer 24 hours in advance. A post-debit confirmation follows every successful collection.
• Settlement: Funds settle into the business's account on T+1, which is the next business day after a successful debit.
• Exception management: Failed debits are flagged automatically. Retry logic runs within NPCI-defined windows. Persistent failures are escalated for manual follow-up.

Types of Recurring Payments

Businesses and customers can opt for different types of recurring payments. The categories are based on the amount to be debited and the frequency of the payment.

The following are the types of recurring payments:

• Fixed recurring payments: Fixed recurring payments deduct the same amount in every cycle. These are mostly suited for loan EMIs, fixed subscription fees, and monthly recurring charges, i.e, where the payment amount never changes.
• Variable recurring payments: In this category, the debit amount changes with each cycle, but within a customer-defined cap. Variable payments are suited for utility billing, usage-based SaaS pricing, and credit card bill payments, i.e. in every instance where the recurring credit amount fluctuates month to month.
• Usage-based recurring payments: With usage-based payments, the billable amount is based on the actual usage rather than a fixed amount. This is very common in cloud services and metered SaaS products.
• Installment-based payments: Installment-based recurring payments can be chosen when a larger amount is to be split across multiple scheduled debits. This option is mostly used for device financing, education fee collections, trade credit recovery, etc.

Benefits of Recurring Payments for Businesses

Other than bringing down the cost of the manual collection a business incurs on a regular basis, the recurring payment system also has other advantages. They are:

• Higher collection rates: Mandate-based recurring pay infrastructure removes the dependency on customer action for each cycle. With recurring pay, once a mandate is active, the payment executes on schedule.
• Predictable cash flow: Scheduled debits give businesses visibility into exactly how much money is expected in each payment cycle. This is a big benefit, especially for NBFCs and lenders, since the cash flow visibility directly impacts portfolio health and capital deployment decisions.
• Reduced involuntary churn: For subscription businesses, a failed debit often means a lapsed customer. Setting up a recurring payment automation keeps collections running until the customer cancels the membership from their end.
• Improved customer experience: With the recurring monthly payment feature, customers just have to authorize the mandate once. This means fewer payment-related interruptions mean fewer support tickets and higher retention.
• Scalability: Whether you're collecting recurring fees from 500 customers or 50,000, mandate-based infrastructure scales without adding proportional overhead to the collections operation.

Recurring Payment Models for Customers

To set up a recurring payment option for your customers, you will have to decide which pricing model is best suited for your business.

Here are some options you can offer to your customers:

1. Flat rate: In this model, a fixed amount is debited every cycle. It has one mandate, one amount, one schedule. A flat rate recurring payment is suitable for standard loan EMIs and fixed subscription tiers.
2. Tiered pricing: In the tiered pricing model, different rates apply depending on usage levels or customer segments.
3. Per-unit pricing: Collections are calculated based on units consumed if you choose the per-unit pricing model. This is a very common in metered SaaS and utility billing. However, to onboard this pricing style, you will need to set a variable mandate with a cap at the maximum expected usage value.
4. Freemium to paid conversion: A freemium model is a great way to generate leads. Here, a customer starts on a subscription for free (for a set time period), and then converts to a paid plan. The mandate is registered at the time of conversion, and the recurring monthly payment amount is based on the plan the customer finally opts for.
5. Annual billing with a monthly option: This model offers customers immense flexibility of usage and payment. With this model, businesses can offer both monthly and annual payment cycles to their customers. Additionally, annual billing improves cash flow and reduces churn risk.

How to Accept Recurring Payments Online

Is your business on board with the recurring payment model? Excellent. Now, let's understand how to accept payments online.

1. Choose a gateway: First, you need to decide between eNACH, UPI AutoPay, or both. eNACH is better suited for higher-value, longer-duration collections. But UPI AutoPay is faster to set up and more accessible for the mass market. The best payment gateway for recurring billing typically supports both rails.
2. Onboard with a service provider: Unless you're a bank registering directly with NPCI, you'll need to onboard a registered payment aggregator or automated payment solutions provider.
3. Integration: Next, connect your existing system (billing platform, ERP, loan management system, etc.) via API for full programmatic control over mandate creation, status tracking, and retry logic. Smaller operations can use a dashboard or mobile app if API integration isn't feasible.
4. Configure mandates: Set your collection parameters such as amount or cap, frequency, start date, and validity period.
5. Payments: You are now ready to send mandate requests to customers. They will then authenticate it once. Collections begin automatically from the next scheduled date.

But before you start sending payment mandates to customers, note that to accept recurring payments in India, businesses need access to NPCI's mandate infrastructure. This can be either directly or through a registered service provider.

Conclusion

Seamless payments are an important part of customer management. Think about it.

Every recurring payment that goes through without friction is a client relationship renewal that didn't require a follow-up. It is a relationship that didn't get deterred by a failed debit. It also means that a customer invested in your services without any further convincing.

And how do you ensure that your payments are cleared seamlessly?

For that, you also need a solid recurring payment system.

The best recurring payment systems support all kinds of recurring pay models, from usage-based recurring payments to fixed and variable models. But overall, the mark of a well-built recurring payment operation is that neither side has to think about it.

Your customer authorized the mandate once. Your system collects on schedule.