Subscription Billing & Recurring Payments:
Best Practices for High-Retention Revenue
When most people click “Agree & Subscribe” on a new membership, they don’t think twice about what happens next. In reality, that one click triggers several complex systems that work together to process subscription payments.
Let’s peek behind the curtain to understand what actually happens during the subscription billing cycle. We’ll also highlight some best practices for maintaining compliance and retaining your Saas or eCommerce customers.
The Process
Subscription billing involves the customer, their payment method, the merchant, and the payment processor. Here’s how the process goes:
Step 1: Choosing a Plan
The customer selects their subscription plan and price. Usually they can choose between monthly, annual, and usage-based billing.
Compliance: Clear Policies
Explain your renewal, cancellation, and refund policies clearly. This isn’t just polite – it’s necessary to avoid confused, angry customers and expensive chargebacks.
Step 2: Payment Method
The customer selects a payment method: Credit card, digital wallet (Apple Pay, PayPal), and ACH (bank to bank) are the most common.
Compliance: Make agreement a requirement
Require the customer to explicitly agree to the billing plan. On most pages, they can’t make the purchase until they check a box that states “I agree my subscription will auto-renew unless I cancel.”
Step 3: Payment Method Approval and Storage
After the customer provides their payment method and clicks “Agree,” several things need to happen very quickly: Fraud checks run, payment method authorized and stored, subscription activated.
A merchant can perform some of these tasks, but usually the payment processor handles them. Let’s talk about why these steps matter.
Compliance: Fraud Checks
After the customer submits their payment method, it’s not automatically accepted – it has to go through a fraud check. The system examines payer information like billing address, location, and transaction history. Then they compare it to risk models and fraud rules. Depending on how questionable it looks, the system may block, flag, request a manual review, or require additional authentication. This helps guard your system against stolen identities and bots.
If the payment method seems legitimate, the bank authorizes it. However, fraud monitoring never really stops. Banks, card networks, and payment processors are always on the lookout for compromised cards or digital wallets.
Compliance: Payment Token
The next step is to store the customer’s payment info securely. For example, if the customer provided a credit card, the payment processor puts the card number into a digital vault. They then generate a string of numbers called a token, which acts like a placeholder for the card number. Next, the payment processor sends the token to you, the merchant.
Your merchant system doesn’t actually handle the credit card number directly: Your records and systems use that token when creating or updating a customer’s records. When a transaction actually happens, your billing platform sends the token to the payment processor. They then use the token to retrieve the real card number from secure storage and finally send it to the bank.
It seems roundabout, but this keeps the customer’s information safer and lowers your liability: If your system gets compromised, the hacker only has access to the token.
Payments are handled this way to follow compliance rules such as PCI DSS (Payment Card Industry Data Security Standard). These rules are maintained by credit card companies to protect the customers’ data. Merchants who don’t follow these rules can face fines, bigger transaction fees, or terminated accounts.
Step 4: Customer Enrollment
Once the payment info has been safely stored, the merchant enrolls the customer into their plan. In most cases, the payment processor provides software that automatically assembles the customer’s billing frequency, price, usage limits, and trial period.
Step 5: Billing Day
On billing day, the payment processor automatically charges the customer and generates receipts. If the customer’s payment method doesn’t work, the processor sends the customer an email notification.
Compliance: Billing Notifications
Make sure that you send the customer clear billing notifications. This is an important way to avoid expensive chargebacks. A customer who forgets they signed up may see the charge on their credit card, assume it’s fraud, and initiate a chargeback.
Customer Lifetime
At any time in the process, the customer can change, pause, or cancel their subscription. Churn is frustrating, especially to a new business, but it’s important to work amicably with the customer throughout this process.
Compliance: Making Cancellation Easy
Make it easy and straightforward for customers to pause or cancel their subscriptions. You can do this very easily through clear language and easy-to-spot cancellation buttons. Customers will appreciate it – and be less likely to initiate chargebacks, which can drain your cash and flag your accounts.
What You Need
The good news is that most payment processors are designed to make signups, transactions, and compliance easy. A single processor can handle fraud monitoring, payment method storage, and charging. Better yet, a good payment processor works with your CRM and performs analytics – and it does this while respecting relevant laws.
Following laws that protect data and prevent fraud isn’t just the right thing to do – when your business makes subscriptions transparent and easy to navigate, customers appreciate it. It also keeps your account in good standing with banks and payment processors, setting the stage for long-term growth.
Read up on our resources to learn more about subscription and digital service support, or contact our team today!
