A toss between recurring card payments vs direct debit: What’s your bet?
Kieron James
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With the subscription box market in the UK expected to cross £1.8 billion by 2025, recurring payments are becoming increasingly significant for membership-based businesses.
With the subscription box market in the UK expected to cross £1.8 billion by 2025, recurring payments are becoming increasingly significant for membership-based businesses.
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.
Let's look at the advantages and disadvantages of recurring card payments vs. direct debit, which will help you make an informed decision ideal for your business.
What is a recurring payment?
A recurrent payment is a pre-scheduled transaction in which a firm charges a consumer periodically (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.
● Storing payment information: Stringent security protocols, such as PCI-DSS (Payment Card Industry Data Security Standard), play a major role in preventing fraud when storing debit and credit card details.
● Automated billing: Pre-approved transactions enable the payment processor to charge the customer on the agreed date without further 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 that subscribers get regular deliveries, saving them from pursuing clients for repeat payments. Recurring payments create a continuous revenue stream for subscription box suppliers, and meal planners, among others in the food and drinks business.
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 card information of the customer altogether and go directly to the bank. This makes the process faster and safer.
Essential service providers are increasingly adopting direct debit payment methods in the UK. The majority of utility bills and subscriptions accept payments via direct debit. This payment system comes in handy for businesses requiring periodic payments, such as gyms or subscription products in the delivery business.
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, each has certain benefits and drawbacks. Let's look at the pros and cons of both subscription payment modes:
Benefits of recurring card payments
Recurring payments support subscription-based businesses, like food and drinks, gyms and wellness, and product delivery service providers, in the following ways:
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
Frictionless manual payments mean the process is seamless, and the likelihood of a customer forgetting or finding it too inconvenient to continue the service is significantly reduced. In particular, this holds for those services that operate on subscription billing, such as meal planning and exercise courses, where accessibility is vital.
Recurring card payments ensure timely meal delivery, boosting customer loyalty and reducing churn.
3. Reduced administrative burden
Automating the payment process reduces late payments, reminders, and other human interventions, traditionally burdensome for businesses. This frees up valuable resources to focus on core areas such as service improvement and customer experience.
Automation of recurring payments ensures timely billing for all subscription box clients, allowing resources to be allocated toward product development and marketing.
4. Reduced settlement time
Recurring card payments settle more quickly, typically within 1-2 days, helping to optimize 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. Customers may demand refunds in this scenario that can tarnish customer-merchant relationships.
2. Transaction Failures
If a customer's card expires, pre-scheduled payments can fail. This can adversely affect cash flow management and lead to 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: Recurring consumer payments by direct debit can save a subscription-based food delivery service a significant amount of money.
2. A higher success rate
Direct debits from customers' bank accounts mean that they are less likely to miss sales due to expired cards or transaction limits. This makes it easier for businesses to collect payments periodically. Monthly or quarterly membership-based businesses, like gyms and wellness centres, can benefit from this feature.
When a fitness club uses Direct Debit, monthly payments don't stop due to card-related issues.
3. Improved customer trust
Direct Debit makes a lot of people feel safer because it's tied to their bank account and protected by direct debit's robust security policies. This fosters customer trust, especially for long-term services like insurance or paying for electricity.
For instance, a broadband utility company can boost customer trust by offering Direct Debit as a safe payment option, knowing that problems can be fixed 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.
Unlike fixed recurring payments, VRPs allow variations in payment amounts and schedules. They operate within parameters set by the payer. This provides a better experience for consumers and merchants. VRPs are a modern alternative to traditional Direct Debit and card-based recurring payments.
In the UK, VRPs are already used for "sweeping." Sweeping automates the movement of money between a customer's accounts. This helps optimize balances. The CMA has mandated this process to ensure seamless account transfers.
Beyond sweeping, VRPs will change how subscriptions and usage-based billing are managed. They will let businesses offer customized and smooth 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 securely processes payments from the customer’s bank account based on pre-set rules, ensuring control, security, and flexibility in automated payments.
Key features
Payment flexibility
VRPs enable flexible payment amounts and schedules, ideal for sectors like utilities, subscriptions, and usage-based models. They ensure accurate billing, preventing overcharges or underpayments.
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
Open banking's robust security, including Strong Customer Authentication (SCA), ensures VRPs are secure, protecting 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.
Businesses find it easier to handle payments, get a better idea of their cash flow, and lower transaction costs by integrating Open Banking tools. Since all orders are carried out directly through customers' banking apps, there is more clarity and better control for the customers.
Key features
Automation of fixed amounts
Fixed-value payments are processed on a regular schedule, reducing the need for manual intervention. This is ideal for consistent expenses, such as gym memberships or rent payments.
Improved integration and better management
Open Banking APIs let customers manage standing orders directly in their banking apps, ensuring a seamless and clear experience.
Cost efficiency
Using this method lowers card network fees, making it a cost-effective way for businesses to handle large purchases like subscription services.
Better cash-flow management
Timely payments help businesses maintain a steady revenue stream, making financial planning and resource allocation easier.
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 store the customer's payment details and prompt for a one-click payment each time the customer makes a transaction. While, this saves time and effort when entering payment details again, it also safeguards customers from unnecessary transactions due to pre-scheduled payments.
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:
● Increased sales: makes future deals easier, which encourages people to buy again.
● Customer convenience: They don't have to enter their credit information every time they buy something.
● Easy payments without a commitment: Unlike regular payments, customers can choose how often they are charged.
Conclusion
We discussed the specifics of direct debit vs. recurring card payments. There are pros and cons to both options, but the type of business you run may help you choose the best one. From a business perspective, direct debit usually means lower transaction fees and fewer chances of payment failure because of card-linked issues. However, direct debit typically has a longer settlement time.
Recurring card payments are faster, easier, and give you quick access, but Direct Debit is the better option for businesses that want to save money and handle a lot of transactions.
Typically, recurring card payments may be more suitable for gyms and fitness centers, eCommerce subscription management, and streaming services. They help streamline repeat payments, lead to better working capital management, and enhance customer satisfaction.
Fixed payment requirements of utility service providers, product delivery services, and insurance companies make direct debit a better alternative as reliability plays a crucial role.
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?
Canceling a debit card will not stop Direct Debit payments, as these are linked to your bank account, not your card. To stop these payments, you must cancel the Direct Debit mandate with your bank or the service provider directly.
What happens if there’s not enough money for a direct debit?
A direct debit will generally fail if your account balance is insufficient, and your bank may charge a fee for the failed transaction. You may need to arrange an alternative payment or ask the service provider to retry the payment once you have added funds to your account.
How to stop a recurring payment on my credit card?
To cancel a recurring payment on your credit card, contact your service provider and formally request a cancellation. Alternatively, you can ask your bank to stop the payment. However, it is essential to confirm the cancellation with the service provider to avoid any future charges.
