what is recurring payment processing and how does it work?


June 10, 2024

This guide for aspiring ecommerce subscription sellers explains what recurring payment processing is and how you can process recurring payments on your online store.

Consumer setting up a recurring payment online.

A steady and predictable income is the goal of any business owner, and the ever-growing popularity of subscription services has helped many ecommerce merchants achieve this stability. It’s easy to know how much revenue you’ll bring in during any given month when you have a roster of subscribers who have already committed to future purchases.

Recurring payment processing makes these purchases — and subscription products in general — possible. Whether you’re planning to launch a new subscription business or introduce subscription offerings to your ecommerce store, you’ll need to learn how this technology works.

You likely already understand the consumer side of recurring payments — even if you’re not one for monthly subscription boxes, recurring payments are also widely adopted among businesses including utilities and insurance companies. Here’s what you need to know about implementing them as an ecommerce merchant.

What Is Recurring Payment Processing?

Companies that use a recurring payment model charge customers at regular intervals for a product or service. Customers sign up for a subscription by authorizing the merchant to bill them a certain amount every billing period.

Merchants need a recurring payment processing flow to initiate these charges so they can receive the funds subscribers have agreed to pay them.

Who Needs Recurring Payment Processing?

Any business that wants to offer ongoing goods or services to customers can benefit from recurring payment processing. Business types include:

  • Subscription ecommerce companies: Merchants that deliver goods on a regular schedule.
  • Subscription service companies: Businesses that provide access to nontangible goods (like video or music streaming) or software.
  • Membership-based companies: Ventures that offer exclusive access (gyms and warehouse clubs) or perks (VIP programs, free shipping) to members.
  • Businesses that offer payment plans: Merchants that sell expensive goods consumers may not be able to pay for all at once.
  • Rental or lease-based merchants: Companies that lend out expensive products (appliances or cars) in turn for regular payments.
  • Nonprofit organizations: Philanthropic groups that want to solicit ongoing donations.

The shape of your recurring payment processing setup will depend on which of the above business models you use. This blog focuses mainly on what subscription ecommerce merchants need to know before getting started.

80% of consumers now use at least one type of subscription service.

How Companies Process Recurring Payments

Merchants can only offer the convenience of subscriptions by taking on the work of recurring payment processing. We broke the process down into the four major steps a business will need to perform.

Step 1: A Customer Enrolls in Recurring Payments

Most subscription enrollment today happens online. It’s never been simpler; many sites just require customers to press a button or tick a checkbox to start a new subscription. Customers must fill out their payment details, shipping information and a confirmation that they consent to repeated charges. Then, they complete their checkout and the subscription begins.

Step 2: The Merchant Initiates Charges on a Subscription Cycle

After a customer signs up for a subscription, sellers must track their payment information and subscription settings (including billing frequency and amount). Most merchants invest in a tool that stores this information and will either alert them when it’s time to charge each customer or do so for them.

Processing each customer’s payment is a multi-part operation:

  1. The merchant or their subscription management tool (such as initiates the charge.
  2. This tool transmits payment information through a payment gateway.
  3. A payment processor routes this data to the appropriate card association.
  4. The issuing institution decides whether to approve or deny the payment request.
  5. Customers are charged for approvals, and the payment processor returns declines to the merchant as failed transactions.

The beauty of modern recurring payment technologies is that this entire process can be automated. Even the simplest recurring payment processing tools can perform the above workflow for you.

Step 3: The Merchant Creates Payment Records

After a customer is charged, it’s the merchant’s responsibility to inform the subscriber. Typically, merchants create workflows within their subscription management software to automatically send email receipts. You may also enclose printed receipts in your shipments and/or display your transaction records within customers’ online accounts.

More than 80% of subscribers want clear information about charges.

Step 4: The Product or Service Is Delivered

A merchant who receives a successful customer payment then fulfills the subscription. This may mean granting customers another month of access to an online app or shipping out a subscription box full of goodies. Some ecommerce companies allow subscribers to customize each month’s subscription shipments, but others cater to subscribers’ love of convenience by regularly delivering pre-selected products without requiring any input.

Tools Used to Process Recurring Payments

Due to the number of steps involved in recurring payment processing, most companies automate as much of the process as possible. Payment gateways and subscription management platforms are both necessities for ecommerce merchants.

Payment Gateways

Payment gateways allow merchants to accept non-cash payments, including debit or credit cards, ACH (bank payments) or digital wallets. Ecommerce subscription sellers need at least one payment gateway to process sales, so these tools are often the first choice for a merchant who wants to set up recurring payment processing.

PayPal, Stripe and Square are three major payment gateways that include tools for subscription merchants. Their capabilities are limited, but they work well for low-volume sellers or those with only one or two subscription offerings.

All three of these gateways charge per-transaction fees on recurring payments; PayPal adds an additional flat monthly fee for access to its recurring payment capabilities.

Subscription Management Software

Subscription management tools — like — are designed to help your company set up subscription ecommerce workflows as you process recurring payments.

When you invest in one, you’ll be able to integrate it seamlessly with your storefront to create subscription offerings and catalog signups. Each billing cycle, the tool handles the billing logic of each transaction, then passes the information on to payment gateways.

The best subscription management platforms make it easy for buyers to edit their subscription information and settings. They also create sales reports to show your team how different subscription products are performing.

These platforms typically charge a monthly fee for access. You’ll have to pay this fee plus the transaction fees for each payment gateway you use, but you’ll also get access to a much more comprehensive suite of capabilities than if you just use a gateway.

Strengthen Your Company With Recurring Payments

The increased revenue you stand to earn from subscription payments is just one benefit of implementing recurring payments for your business. Once you’ve found the right recurring revenue model, you can start fostering a loyal community of customers.

Subscription payments combined with an excellent customer experience makes a strong, sustainable brand. Once customers become subscribers, you’ll earn more revenue to improve your brand experience further — leading to even greater retention.

Building this positive loop takes time, but you'll find that the effort pays off once customers start investing in long-term subscriptions. A company with a self-sustaining subscription program can reallocate much of its advertising budget to retention-focused measures. Keeping customers around longer, and thereby increasing your average customer lifetime value, will set you up for sustainable growth.

Are you ready to take the next step? Read our guide to setting up recurring payments for practical tips to help you launch your ecommerce subscription program.

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