Subscription business models thrive on optimizing the convenience for customers, because the reduced expenditure when shopping is often the decisive factor in a purchase decision. You don’t want to keep placing the same orders and entering payment details. The desire to be easily supplied with goods ordered online or permanently with a service is growing noticeably and is reflected in the success of subscription commerce providers such as Amazon, Spotify and Netflix. Payment defaults are to be avoided.
For many companies that want to survive in subscription commerce, the focus is on a good user experience. They often attach only minor importance to the optimization of the payment process. Surprising, because the payment process stands for the “conversion”, ie the moment in which the prospect becomes a customer.
Payment defaults – an underestimated business risk
Optimized payment processing in e-commerce has great potential for growth and cost savings. At the same time, payment defaults are a strongly underestimated business risk: While a single payment default is at best annoying, the sum of open bills quickly represents a substantial or even existential problem for many retailers and service providers. Especially in times that are difficult to estimate economically, as we are currently experiencing, companies should In the truest sense of the word, don’t let money slip through your fingers.
A payment problem often leads to dissatisfaction and, last but not least, customer churn, which should not happen, especially with regularly paying customers. The cause can usually be found in transaction methods that do not fit the business model of regular bookings. This becomes clear from the average failure rate by payment method: In German-speaking countries, around seven percent of recurring payments by credit card fail, with direct debits the value in the first quarter of 2020 was 4.7 percent, like the one Payment success index 2020 from GoCardless shows. There are other influences: During the first corona wave, numerous invoice amounts were received late, which sometimes threatened the very existence of companies. Almost half (47 percent) of the companies confirmed in one Study by Forrester Consulting, who were commissioned by GoCardless that the time it took to settle their accounts receivable has increased over the past twelve months.
The good news: companies can counteract both problems themselves and optimize their payment flow. “With the right means, the default rate can be reduced to up to two percent,” explains Sascha Nagel, Sales Director DACH GoCardless. “Experience has shown that after optimizing their payment strategy, companies have better cash flow and a higher conversion rate because consumers cancel payments less often in the checkout process. At the same time, companies reduce the unwanted loss of existing customers. Because payment defaults often lead to reminders that permanently damage the customer relationship – even if only technical problems are behind them. It is important to avoid any default in payment for the sake of customer loyalty. ”
Digital wallets and credit cards lead the way in payment defaults
It is important to determine the reasons for payment defaults in order to be able to take appropriate countermeasures. On the one hand, not every payment method fits every business model and, on the other hand, customers have certain preferences depending on the market and country. In the category of recurring payments, which are part of the business model of energy suppliers, food delivery services or streaming providers, two payment methods in the DACH region are particularly susceptible to failure: credit cards with seven percent and digital wallets with 10.3 percent.
“This is because these methods are not made for recurring payments. Credit cards expire regularly. Apart from that, they can be lost, stolen or have to be blocked due to GDPR violations. This is why direct debit is more reliable for recurring payments and also costs fewer fees, ”emphasizes Nagel. In Germany, Austria and Switzerland, direct debits have an average default rate of 4.7 percent. “It is important that the payment mix fits both the customer and the business model. In our experience, a top payment success rate across all industries in B2C business is around 97.5 percent. In B2B even at 98.5 percent. If the error rate for the first direct debit is over five percent, it becomes clear that there is still a lot of room for improvement, ”says Nagel.
Payment defaults: small businesses particularly hard hit
In Germany, small companies in particular lose a lot of income due to failed payments – they lose an average of 4.9 percent of all bookings. They are hit so hard by defaults because a weak cash flow due to small liquidity margins can quickly threaten their existence. Although the rate of payment defaults is lower for medium-sized companies, according to the GoCardless payment success index, every medium-sized company loses 155,000 euros per year due to payment defaults. And that’s only because transactions fail.
The index also reveals that payments over 200 euros have significantly higher default rates than payments with a lower value. For invoice amounts of more than 200 euros, the failure rate jumps to over 6 percent. For amounts of 1,000 to 5,000 euros, companies even have an average payment default rate of 9.7 percent.
Automation improves sales balance
The level of the failure rate has a considerable influence on the sales balance and thus on the overall business success. It is all the more fundamental to counteract the phenomenon of payment defaults. Automation helps especially with many small amounts – after all, fixing a high failure rate by hand becomes cost-driving Sisyphus work. GoCardless automatically handles the payment process for recurring direct debits from the debiting to the confirmation of the payment status and can be broken down into numerous via the REST API Partner solutions like Salesforce, Zuora or Debitoor.
Avoid booking problems
Payment defaults also arise from accounts that are not covered. This can put a strain on the relationship with the customer: The issue becomes uncomfortable for both parties, especially with large amounts, and quickly leads to dissatisfaction. That is why GoCardless not only automates the direct debit process, but also automatically re-debits failed payments, namely when accounts are covered. This has two advantages, explains Sascha Nagel: “With the help of Payment Intelligence, we can determine the best time for a direct debit with the help of data analysis and have a very high success rate. Companies have to invest significantly fewer resources to chase after outstanding amounts. ”
An IDC survey among GoCardless customers shows that automation will reduce expenses in finance departments by around 21 percent. Customer service also saves up to twelve percent time. These freed-up resources can be used where it is worthwhile: For high payments that have failed and cannot be automatically collected.
Determine the payment default rate
The default rate should be as low as possible. Businesses can determine their own failure rate by dividing the number of failed payments by the number of attempted withdrawals. Depending on the transaction method, companies can use the study results as a guide and see where they stand compared to other companies in the DACH region. “The international average payment success rate for GoCardless customers is 97.5 percent. Companies that optimize their payment flow to this extent create room for maneuver that is particularly important in economically difficult times like these. But above all, they can achieve a lot in the areas of customer satisfaction, loyalty and growth and increase their revenue, ”explains Sascha Nagel.
GoCardless has analyzed over 52 million payments from 55,000 companies using GoCardless in over 30 countries worldwide and surveyed 900 external companies to evaluate and compare payment success. The main goal was to get a better understanding of non-payment of recurring payments. The report provides information on the failure rates of various payment methods, sales volume and loss shares due to payment defaults as well as average transaction values.
GoCardless is a fintech company in the field of recurring payments. Thanks to its platform and global payment network, the provider enables companies to collect payments from customers worldwide. More than 55,000 companies worldwide, from multinationals to small and medium-sized businesses, transact $ 15 billion in GoCardless transactions each month in over 30 countries.