A toss between recurring card payments vs. direct debit: What’s your bet?

If you are running a gym and wellness centre or a product delivery business, then recurring payments are an essential part of your business. Even the modern food and drink industry is embracing this payment method as it reduces repetitive tasks and, in the process, minimises human errors. Direct debits and recurring card payments are the most common forms of scheduling a predetermined payment, making it convenient for the retailer and the customer.

We will explore the pros and cons of recurring card payment vs. direct debit to give you a clear perspective of which method is ideal for your specific business needs.

What is a recurring payment?

A recurrent payment is an automated transaction in which a firm charges a consumer on a regular basis (typically, monthly). Organisations with a typical business model of repeat monthly payments, such as a membership fee, benefit from this payment mode. Clients/members can enjoy disruption-free services as their memberships are auto-renewed periodically without them having to initiate each payment.

How does a recurring payment work?

A few critical stages are involved in the process of setting up and processing a recurring payment:

●  Customer authorisation: The consumer consents to recurring payments by providing their payment information (typically a debit or credit card) to the system.

●  Storage of payment information: To prevent fraud, businesses have to mandatorily abide by rigorous standardisation, such as PCI-DSS (Payment Card Industry Data Security Standard), when storing payment details which use debit and credit cards.

●  Automated billing: The business's payment processor charges the customer's card on the agreed-upon schedule without the need for any manual intervention from either party.

What is a recurring card payment?

Recurring payments are typically processed via debit or credit cards (a card on file). When a consumer signs up for a service, such as a gym membership or a food delivery plan, they authorise the company to automatically charge their credit card on a recurrent basis. This convenience benefits both businesses and customers by ensuring on-time payments and minimising friction.

Health and wellness businesses may profit from recurring payments since they simplify membership renewals. Gyms can extend uninterrupted service to their members while ensuring a steady flow of revenue. Product delivery services ensure subscribers receive regular deliveries, saving companies from pursuing clients for payment. Recurring payments ensure a continuous revenue stream for meal plans, subscription box suppliers, and other food and drink companies.

What is a direct debit?

With a direct debit, customers can authorise businesses to withdraw funds directly from their bank accounts as per prefixed terms. Direct debits bypass the need for the customer's card information and instead go straight to their bank. Since they sidestep the possibility of a card's expiration or cancellation and instead deduct funds directly from an account, they are exceptionally safe and dependable.

Many essential services in the UK accept direct debit as a payment option, including utility bills and subscriptions. Businesses that have recurring payment needs, like fitness centres or subscription-based product delivery services, might benefit greatly from direct debits.

How does direct debit work?

The process of a direct debit is as follows:

●  Authorisation: The consumer completes a direct debit mandate form, either digitally or on paper, granting the business permission to collect payments from their bank account.

●  Bank notification: The merchant submits the mandate to the customer's bank, which retains the instruction to authorise automatic payments.

●  Pre-scheduled payments: The seller withdraws the payment from the customer's account on the specified date. The consumer may be notified, or the payment may be returned if there are insufficient funds.

Recurring card payments vs. direct debit

While both recurring card payments and direct debit form the backbone of the recurring payments industry, they have their own unique benefits and shortcomings. Let’s look at the pros and cons of both subscription payment modes:

Benefits of recurring card payments

Subscription-based businesses, like food and drinks, gyms and wellness, and product delivery service providers, can reap the following benefits of recurring payments:

1. Better cash flow control

Recurring payments provide firms with reliable income. Automated payments save firms from manual invoicing and reminders and provide a consistent cash stream. Fitness centres and wellness centres benefit from this reliable income flow because it covers operational costs and promotes growth.

A gym with 500 monthly payment plan members can predict its income, making budgeting and investment planning easier.

2. Enhanced customer loyalty

Eliminating manual payment friction makes the experience smoother and reduces the likelihood of customers disengaging due to forgetfulness or inconvenience. This is particularly beneficial for services that rely on subscription billing, such as meal planning and exercise courses, where accessibility is key.

Recurring card payments ensure prompt meal delivery, boosting customer loyalty and lowering turnover.

3. Lower administrative burden

Businesses benefit from automating payments by minimising late payments, reminders, and human processing. This allows employees to focus on improving services and client experience.

Automated recurring payments can ensure prompt billing for all subscription box clients, freeing up resources for product development and marketing.

4. Faster settlement time

Recurring card payments have quicker settlement time (typically within 1-2 days), thus positively impacting cash flow management.

The flip side of recurring card payments

Despite the obvious advantages, recurring payments come with their share of probable pitfalls.

1. Customer Disengagement

Automatic payments can enable users to forget they're subscribed, resulting in unpleasantness when they see costs for services they no longer utilise. Negative customer experiences and refund demands can tarnish customer-merchant relationships.

2. Transaction Failures

If a customer's card expires, payments can fail, affecting cash flow and necessitating unpleasant follow-ups.

3. Involuntary customer churn

Failed payments owing to expired cards can cause involuntary churn, impacting client retention.

Benefits of direct debit

UK businesses, especially those that rely on frequent payments, benefit from Direct Debit. Some important advantages:

1. Lower transaction costs

Direct debits have cheaper processing fees than card payments, making them cost-effective for high-volume firms. This helps product delivery services, as cheaper rates can boost business margins.

Example: Direct debit for recurring consumer payments can save substantial money for a subscription-based food delivery service.

2. Higher payment success rate

Direct debits from customers' bank accounts decrease missed purchases due to outdated cards or card limits. This makes businesses' payment collection more reliable. Monthly membership gyms and wellness centres might profit from this greater payment success rate.

Example: A fitness centre employing Direct Debit avoids monthly payments being interrupted by members forgetting to update card details or having card difficulties.

3. Client trust

Many people feel safer using Direct Debit because it's directly linked to their bank account and protected by Direct Debit protection. This can foster confidence between businesses and customers, especially for long-term services like electricity payments or insurance.

Example: A broadband utility operator can enhance customer confidence by offering Direct Debit as a secure payment option, knowing that faults can be remedied quickly under the guarantee.

4. Simplified cash flow

Direct debit lets firms estimate cash flow better because payment dates are predictable. This is important for food and drink companies selling meal plans or subscription boxes on long-term contracts.

Example: A meal subscription business can schedule direct debit payments on a specified day of the month to better estimate income and manage inventory.

Limitations of direct debit

Even though Direct Debit is an easy way to pay, it's not without its potential shortcomings:

1. Slower payment processing

Direct debits can take a few days to process, which means payments may be late compared to card transactions that happen right away. This could be a problem for companies like delivery services that need to know right away if they've been paid before sending out things.

2. Lack of immediate control

It might be hard for customers to change or stop direct debits at the last minute, which could make them angry. This could lead to a disagreement for companies like gyms and wellness centres if a customer wants to cancel quickly but is still charged because of the processing time.

3. Payment failures

If there aren't enough funds in the customer's account, direct debit payments might not go through. If a business that depends on regular income, like a food service with subscriptions, has to chase customers for late payments, it could affect its cash flow.

4. Complex cancellation procedure

Some companies make it cumbersome to cancel regular payments, which can frustrate customers and ruin their reputation. Maintaining trust requires transparency and easy cancellation.

Direct debit payment processors in the UK

Research shows that direct debit transactions in January 2024 have increased by 3% compared to the corresponding period last year. During the second quarter of 2024, 1.692 billion Bacs payments were processed, with a total value of £1,473 billion. Direct debits constituted 73% of the volume and 25% of the value.

A robust market such as this will encourage strong service providers to augment their offerings to cater to increased demands. Some of the prominent ones in the UK are:

GoCardless

As a leading UK Direct Debit payment processor, GoCardless integrates seamlessly with business platforms like Xero and QuickBooks. It simplifies direct debit setup, management, and collection for businesses. Businesses can automate payment collection, eliminate late payments, and track cash flow in real-time with GoCardless. Subscription services and product delivery companies like its user-friendly interface and minimal transaction fees.

Probable use case: A subscription meal delivery business can use GoCardless to automatically bill consumers each month.

Access PaySuite

Access PaySuite is another significant UK Direct Debit supplier. It provides completely automated Direct Debit solutions to high-volume companies to reduce human processes and improve payment security.

Probable use case: A major gym chain can utilise Access PaySuite to manage recurring membership payments, eliminating missed payments and simplifying the billing process.

While recurring card payments and direct debits have been around for some time, the open banking system is facilitating more advanced recurring payment methods that are faster, safer, and more convenient. Let’s take a closer look at two upcoming trends in this field.

Variable recurring payments

Variable Recurring Payments (VRPs) represent a sophisticated payment solution launched within the framework of Open Banking, aimed at enhancing flexibility, transparency, and control over recurring transactions. In contrast to fixed recurring payments, VRPs enable flexibility in payment amounts and schedules, adhering to pre-established parameters defined by the customer. This approach provides advantages for both consumers and businesses, presenting a contemporary alternative to conventional Direct Debit and card-based recurring payments.

VRPs are currently being implemented for "sweeping" in the UK, a process required by the Competition and Markets Authority (CMA) to facilitate the automatic transfer of funds between a customer’s accounts for balance optimisation. In addition to sweeping changes, VRPs will revolutionise subscription management, usage-based billing, and other areas, allowing businesses to provide customised and seamless payment experiences.

How does it really work?

Under Open Banking, Variable Recurring Payments (VRPs) provide customers with the ability to pre-authorize recurring payments within specific parameters, including the utmost transaction amount and frequency. A third-party provider adheres to the pre-established rules by securely initiating the transaction from the customer's bank account when a payment is due. This procedure guarantees client control, security, and flexibility in the context of automated payments.

Key features

Payment flexibility

Variations in both the quantity and frequency of recurring payments are permitted with VRPs. This is especially beneficial for businesses that operate in sectors with variable costs, such as utilities, subscription services, and usage-based models. Customers can reduce overcharges or underpayments by receiving precise payments that are actually due.

Customer empowerment

Customers establish precise parameters, including transaction frequency and utmost payment limits, to guarantee that they retain complete financial autonomy. This level of transparency fosters trust and reduces the likelihood of disputes.

Improved security

VRPs are supported by the comprehensive security protocols of Open Banking, which include Strong Customer Authentication (SCA). These measures guarantee that payments are authorised and secure, thereby safeguarding both businesses and consumers from fraud.

Cost efficiency

VRPs provide businesses with a more economical option by removing card networks and their related fees. This is especially beneficial for high-volume merchants or sectors functioning with narrow profit margins.

Fixed recurring payments via open banking standing order

Fixed Recurring Payments through Open Banking Standing Orders enhance the conventional standing order framework through the use of Open Banking APIs. This payment method automates the transfer of a predetermined sum at consistent intervals directly from a customer's bank account, thereby removing dependence on cards. These payments are suitable for recurring expenses such as rent, subscriptions, or memberships, providing businesses with a predictable revenue stream and customers with a seamless payment experience.

Integrating Open Banking tools enables businesses to streamline payment management, enhance cash flow predictability, and reduce transaction costs. Customers gain advantages from increased transparency and enhanced control, as all instructions are administered directly through their banking applications.

Key features

Automation of fixed amounts

Fixed-value payments are processed at consistent intervals, minimising the need for manual intervention. This is suitable for consistent expenses such as gym memberships or rent payments.

Improved integration and management

Open Banking APIs enable customers to establish and adjust standing orders via their banking applications, ensuring a smooth and clear experience.

Cost efficiency

Reduces card network fees, providing a cost-effective solution for businesses engaged in high-volume transactions, including subscription services.

Better cash-flow management

Consistency in Cash Flow Timely payments are advantageous for businesses, as they ensure a steady revenue stream and facilitate effective financial planning and resource allocation.

Wonderful, an emerging payment service provider in the UK, is incorporating some of these open banking-enabled services to transform the online payment experience for both consumers and merchants.

What are repeat payments?

Repeat payments are similar to recurring payments, with one key exception: they aren’t pre-scheduled for billing at a specified time interval. Instead, they facilitate one-click payment by storing the customer's preferred payment option and allowing them to re-use it on their next purchase. This saves time and effort when entering payment details again.

Let's take the example of the food and drink business. A customer might place their first order and save their payment information. When they want to order again, the next time on the same platform, they can complete their transaction with just one click, which makes way for convenient ordering.

Benefits of repeat payments:

●  Enhanced sales: Facilitates future transactions, thereby promoting recurrent purchases.

●  Customer convenience: Customers are not required to input their payment information each time they make a purchase.

●  Commitment-free easy payments: Customers can determine the frequency of their charges, in contrast to recurring payments.

Conclusion

We have explored the nitty-gritty of recurring card payments vs. direct debit. While both have their advantages and disadvantages, the nature of your business may help in determining the ideal alternative. From a business perspective, direct debit typically offers lower transaction fees and reduced possibilities of payment failures due to expired cards. On the other hand, businesses stand to gain from faster settlement time in case of recurring card payments.

While recurring card payments offer the advantages of speed, convenience, and instant access, Direct Debit is the superior choice for organisations that prioritise lower costs and process large transaction volumes. Hence, gyms and wellness centres, eCommerce subscriptions, or streaming services may prefer recurring card payment, whereas utility services, product delivery service providers, and insurance companies might opt for direct debit.

FAQs

Is direct debit a recurring payment?

Yes, direct debit is a type of recurring payment. With this method, money is withdrawn from the customer's bank account on a preset schedule, usually for services like memberships, subscriptions, or utilities.

Will cancelling a debit card stop recurring payments?

Cancelling a debit card will not halt Direct Debit payments, as these payments are associated with your bank account rather than your card. To stop the payments, it is necessary to terminate the Direct Debit mandate directly with your bank or the service provider.

What happens if there’s not enough money for a direct debit?

The direct debit normally fails if your account balance is insufficient, and your bank may levy a fee. You may need to establish alternate payment options or ask the service provider to attempt again after funding your account.

How to stop a recurring payment on my credit card?

To discontinue a recurring payment on your credit card, you may reach out to your service provider and formally request cancellation. Furthermore, you may direct your bank to discontinue the payments; however, it is essential to verify the cancellation with the service provider to prevent any future charges.

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