The pros and cons of Direct Debit for subscription businesses

October 11, 2017

By Nicki Cho, Head of Content, GoCardless

We were really interested to read our partner, Zuora’s excellent guide B2B vs B2C Subscription Payment Strategies last week.

Iain Hassall, Zuora’s VP Finance & Strategy, highlights that subscription businesses can choose from more than 200 payment methods; but he singles out credit cards, PayPal and Direct Debit as the three most beneficial.

Of course, we wouldn’t be GoCardless if we didn’t stand proudly in support of Direct Debit! And since it’s our specialist subject, here’s our take on the subject:

Global complexity is easily managed

Iain rightly points out that direct debit is more commonly used and more popular than cards and PayPal in many parts of the world; in fact, 75% of recurring payments in the UK are processed using Direct Debit. It also tends to be the most cost-effective payment method of the three, since it doesn’t rely on expensive card networks.

Iain points out that one downside of Direct Debit is the lack of a global standard. Different countries and regions operate their own schemes, with varying rules and regulations. But region-specific complexity isn’t something you need to worry about. It’s one of the reasons that many businesses who use Direct Debit to receive payments internationally, work with GoCardless.

It’s our mission to build a global bank to bank network to allow merchants to take payments from anywhere to anywhere. We already support BACs in the UK, SEPA in Europe and Autogiro in Sweden – and we’re adding more and more schemes, with BECs in Australia and Betalingsservice in Denmark up next. Our Direct Debit platform is fully compliant with all those regional and national schemes, and our team here is fully up-to-date on any changes, meaning our customers can have peace of mind.

As far as user experience goes, we standardise our product across schemes and you can access all of them through the same GoCardless dashboard or API.

Upfront authorisation does not ultimately mean lower payment failure rates

The Zuora Academy guide highlights that Direct Debit does not authorise or guarantee transactions upfront, like cards and PayPal; instead, settlement takes a couple of days. As Iain says, that means: “if somebody is not great at balancing their checkbook, so to speak, and other recurring payments are being drawn from that account, you might get the dreaded ‘insufficient funds’ notice by the time your payment settles.”

It’s true that some Direct Debit payments fail for these reasons, but in reality, failure rates for Direct Debit transactions are much lower than cards. That’s because, unlike cards, Direct Debit used bank details which don’t expire and can’t be physically lost or stolen.

At GoCardless we process more than £3bn worth of transactions a year, with an average first-time failure rate of 2.8% (and some merchants tracking as low as 0.5%. We’ve spoken to some subscription companies with first-time failure rates for cards as high as 20%.

It’s also true that Direct Debit schemes, such as the Direct Debit Guarantee in the UK, protect customers by allowing them to charge back a payment they believe has been mistakenly taken. Keep in mind though, that only a very small proportion of payments are actually charged back; at GoCardless it’s just 0.07% of all the payments we process in the UK.

What’s more, unlike many other Direct Debit providers, we don’t charge you additional fees for failures or chargebacks: we only charge for successful transactions. Using Direct Debit with GoCardless also helps you reduce the possibility of claims occurring in the first place, for example by enabling you to put your name on the customer’s bank statement to avoid confusion.

Payment updates and reconciliation for Direct Debit can be automated

When choosing your payment partner, Iain advises that you stay close to the source of truth. For Direct Debit that means ensuring you have visibility into what state the payment is in, how it’s being processed, what are the reasons for a potential rejection, or its mishandling.

Iain also flags that the importance of the reconciliation process for your payment method of choice, to help you “keep tabs on what transactions have actually settled effectively, what customers may have charged back, and what customers have reversed a transaction, sometimes months after the payment has settled.”

We agree that understanding payment status is crucial, which is why our product is designed to deliver that visibility. In the past, businesses using Direct Debit would be updated on payment status through a bulk file from BACs, which contained codes denoting payment exceptions and was difficult to action or reconcile.

Through our integrations with billing platforms like Zuora, we automatically update each payment status for you in real-time and provide plain English reason codes to make it easier for you to handle exceptions. With these codes, you can automate payment retries and personalise messages to your customers regarding their transactions.

Choosing your payment partners

Finally, we agree with Iain that using a single partner for all your payments isn’t necessarily the best option: “you should look for the right partner for the right payment method for the right region of the world.”

When it comes to meeting your own and your customers needs most effectively: choose best-in-class, over one-stop-shop.

We’d like to end on Iain’s handy checklist for choosing your payment partner. Check that your partner:

  • Has a simple and automated process
  • Minimises middle carriers and other parties so you get minimum fees
  • Offers you complete visibility around every transaction
  • Has deep local expertise where needed

And, one more from us… make sure your payment partner:

  • Has a scalable solution that can grow as your business grows.

Learn more about the GoCardless and Zuora integration here.

And read the Zuora Academy guide B2B vs B2C Subscription Payment Strategies here