Recurring Payments: The Trend of the Future

You're likely familiar with recurring payments if you've ever joined a gym. They are charged regularly, and the billing cycle repeats until the service is canceled or paid off.

Juniper Research estimated the value of recurring payments to be $13.2 trillion in 2023. By 2027, the group predicted the market size would surge by 17% to $15.4 trillion. Explosive growth across subscription-based business models, especially in streaming services, SaaS, and digital media, is fuelling the popularity of this payment method.

How recurring payments work

The critical advantage of recurring payments is convenience for both consumers and merchants. Once set up, they happen automatically. This ensures predictable cash flow, reduced missed payments, and customer retention. For individuals, recurring payments save time and effort. Imagine if paying for a Netflix subscription involved entering card details every month.

Recurring payments can be fixed or variable. Fixed payments enable businesses to charge specific, regular amounts. It's straightforward and offers peace of mind for both merchants and clients. Variable recurring payments are more adaptable as the amount can fluctuate based on factors like consumption. Think of utility bills or mobile plans.

Typically, recurring payments are executed via direct debit or card payments. Customers set up a direct debit instruction for their bank to authorize a recurring payment from a specific merchant. They can do so online, by post, or by phone.

Yet there is a key disadvantage of direct debits - they are processed by BACS, which has a three-day settlement cycle. This processing schedule governs how long it takes to get paid for the first time.

Recurring payments and open banking

Open banking has the potential to solve this issue. It’s an innovative infrastructure where traditional banks share data with licensed fintech companies, providing consumer consent.

They do so via open APIs regulated in Europe under PSD2. Open banking providers, like Noda, use the data to create better, more personalized products and simplify the payment experience.

When powered by open banking, recurring payments can become faster and more efficient than direct debits. Yet, their performance currently falls short of expectations, said Nikola Tchakarov, Director of Market Expansion at Noda.

“Unfortunately, currently, they work very poorly with open banking due to technological difficulties. For them to work properly, the banking infrastructure of a country must be fully digitalized, and the quality of the APIs provided must be improved — an issue which PSD3 and PSR are expected to resolve,” he said.

Future of recurring payments

Yet the future may change that, especially with the upcoming PSD3. In June 2023, the European Commission released the first draft of the updated open banking and payments regulation.

Some key proposals are better API requirements and more access to EU payment systems for non-bank service providers. The directive will be finalized by the end of 2024.

Many fintech companies, including Noda, are actively developing ways to integrate recurring payments into the open banking ecosystem. Yet, they require cooperation from traditional banks.

“We need banks to improve this process on their side. We do everything we can but depend on banks,” said Tchakarov.

He hopes the new regulation will encourage banks to fix the payment infrastructure for recurring payments and open banking.

“This is most certainly the future trend,” he said. “Europe will not leave it unchanged. Yet banks don’t want to improve; therefore, we need a solution from the regulators.”