What are recurring payments?

Types of recurring payments

In the UK, recurring payments primarily fall into two categories: fixed and variable.

• Fixed recurring payments: These are consistent in amount and deducted at regular intervals. They're often used for services where the cost doesn't change, such as a monthly gym membership or a flat-rate internet service. Fixed payments allow for predictable budgeting since the amounts don't vary.
• Variable recurring payments: Variable recurring payments can change in amount. These are commonly linked to usage-based services or products. For instance, utility bills like electricity or water often use variable payments, as the charges depend on the actual consumption for the period. Because the amount billed can vary month to month, this type of payment may require more attentive financial tracking — potentially impacting one's budget more unpredictably.¹

Examples of recurring payments

Recurring payments are generally common in the UK, particularly in the form of subscription payments and billing. These can include:

• Gym memberships: Regular monthly payments for continuous access to fitness facilities.
• Food delivery boxes: Weekly or monthly deliveries of meal kits or groceries, billed per delivery cycle.
• Utility bills: Monthly or quarterly payments for gas, electricity, or water services.
• Mobile phone plans: Fixed monthly fees for mobile services, including data and call packages.
• TV subscriptions: Monthly fees for streaming platforms.
• Magazine and newspaper subscriptions: Regular charges for ongoing deliveries of print or digital publications.
• Software licences: Monthly or annual fees for the use of software or digital platforms, often seen in business environments.

How recurring payments work

In the UK, recurring payments typically operate through a series of systematic steps, helping to ensure a smooth, secure transaction process:

1. Customer authorisation: This occurs when an individual agrees to the terms of the recurring payment, often via a signed mandate or an online agreement. It grants the business permission to withdraw funds from their bank account or charge their credit card on file.
2. Provide secure payment details: The individual provides their payment details, which are stored by the business or a third-party payment processor. This information typically includes bank account or credit card data.
3. Create a billing schedule: The business sets up a billing schedule, determining the frequency and dates of the payments. This could be monthly, quarterly, or annually, depending on the service agreement.
4. Automated payment processing: The payment is automatically processed on the scheduled date. The amount is debited from the customer's account and credited to the business. This process is usually seamless and requires no action from the customer after the initial setup.

Potential benefits of recurring payments

Recurring payments may offer several potential advantages that streamline financial management and enhance convenience.

• Simplify budgeting: Recurring payments can make it easy to predict monthly expenses, especially with fixed payments. This predictability aids in creating a more accurate, effective personal budget.
• Help improve financial planning: Since the amounts and dates of payments are often known in advance, recurring payments may make it simple to plan finances in the short and long-term.
• Convenience: There's no need to remember to make manual payments each month with recurring payments. This can save time and reduce the risk of missed payments and the potential for late fees or service interruptions.

Potential disadvantages of recurring payments

While recurring payments can offer convenience, they may also come with potential drawbacks. Here are some examples:

• Risk of overspending: Recurring payments are usually easy to set up, which can lead to unintentional overspending. Without regular monitoring, one may lose track of how various subscriptions and services rapidly add up.
• Automatic renewals and trial periods: Many services offer initial trial periods at a lower cost or even for free. However, after the trial period, the service automatically renews at a higher, regular rate. Consumers may forget to cancel these trials, resulting in unexpected charges.
• Difficulty tracking payments: With multiple subscriptions and automated payments, it can be difficult to keep track of all outgoing payments. This can lead to financial disorganisation and a lack of control over finances.

How to accept and manage recurring payments

Effectively managing recurring payments can be crucial for maintaining financial health. Here are a few strategies that may help:

• Regularly review subscriptions: Periodically assess all subscriptions and recurring payments. Ensure they are still necessary and align with current needs and financial goals.
• Understand consumer rights: It can be useful to be familiar with the Consumer Rights Act and the Direct Debit Guarantee. These provide protections such as the right to cancel subscriptions and receive refunds under certain conditions.
• Set reminders for trial periods: To avoid unexpected charges, set reminders to review and possibly cancel subscriptions before trial periods end.
• Use money management apps: Use budgeting apps or tools to track and manage recurring payments. This can help in maintaining an overview of one’s finances and identifying areas to cut back.

Explore this guide to money management apps for more personal budgeting tips.