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Why direct debit could be the future of e-commerce

With the advent of new, subscription-based business models, the role of recurring payments in digital transactions is growing, whether you’re paying Netflix, Amazon Prime, or your phone or power bill. In fact, direct debit has become French consumers' preferred recurring payment method, according to a study conducted by YouGov for GoCardless.

French consumers prefer to use SEPA direct debit when paying for their traditional (tangible) and online subscriptions as well as their monthly bills and payments. That is the lesson that emerged from a study conducted by YouGov for GoCardless in the first half of 2019. The study looked at payment practices for recurring expenses among 10,000 consumers in 10 countries. Direct debit came out on top, with debit/credit cards close behind. For online and traditional subscriptions in particular, consumers are almost as likely to prefer paying by debit card as by direct debit. When those results are compared with those from the United Kingdom and Germany, the French are more reticent overall to use their credit/debit cards to make recurring purchases. It's undeniable: Direct debit is an increasingly prevalent part of French consumers' spending habits. And with good reason! It offers advantages to both the customer and the merchant and is equally suitable for B2C and B2B relationships.

The Many Advantages of Direct Debit

From the merchant's perspective, direct debit reduces the risk that a bank card will be rejected (15%, compared with 1% for direct debits) or that payment will be delayed. Meanwhile, for the customer, it minimizes concerns about fraud and about card expiration dates. Direct debit also makes it possible to offer pay-per-use and installment plans while, once again, limiting the risks inherent in paying over time. "Direct debit is fully consistent with the subscription economy era, and the recurrence aspect represents a substantial growth market, as only about 1 in 44 digital companies currently offer subscription formulas," according to Laurent Péron, vice president for France at GoCardless.

Moreover, automated direct debit indirectly leads to greater consumer loyalty. While a bank card payment solution tends, in the event of a failed transaction, to lead more rapidly to a conflict (reminders, service interruptions) or a risk of losing the customer (expired card), the failure of a direct debit transaction prompts an individualized communication. "All 40 error codes generated by SEPA can be used by the sales administration to personalize the customer reminder," notes Hervé Guyomard, Business Development Director at GoCardless. The sales administration team's customer reminder workload can be cut to as little as one-fifth of its current size, allowing them to concentrate on tasks with a greater added value.

Direct Debit: B2C and B2B

Direct debit is equally suitable for B2C and B2B relationships, where subscription management is critical. For example, the online service Doctolib, paid for by the doctors who subscribe to it, was looking for a management solution for its substantial volume of payments/subscriptions. "A company's health depends on its ability to generate and optimize its payments and thus its cash flow. To facilitate transactions with our clients, we selected the GoCardless direct debit payment solution, which allows us to automate payments via direct debit and SEPA orders," explains Mong-Trang Sarrazin, CFO of Doctolib. "GoCardless integrates perfectly with Zuora, our subscription invoicing solution. We can follow our payments in real time, which facilitates cash and credit management for our team and saves us time and administrative work." While there are a number of methods available to pay a company, cards, bank transfers, and checks all have their constraints: They are difficult to trace and are subject to rejection and lost time processing customer reminders.

Imagining a New Payment Paradigm

As customs have evolved and new growth opportunities have been sought out, new business models have come into play. Consumers expect to find the same services, experiences, and interfaces just about everywhere. That's why the subscription model is on the rise all over the world. In a sense, it is also raising questions about traditional B2C e-commerce, which is going to have to redefine itself. "For the last two decades, e-commerce was perfectly suited to bank card use. These days, consumers' and merchants' expectations are better met by subscription models, so the payment model must be aligned with that. "Direct debit is the future," Laurent Péron emphasizes.

That is especially true as the new European Payment Services Directive (PSD2), set to come into effect on September 14, 2019, will require strong customer authentication for online payments of over €30, in order to reduce online fraud. Two authentication factors will need to be used, as is already the case when a person making an online purchase enters a single-use code received via text message (3D Secure) after entering his/her bank information. However, that level of security is no longer sufficient in view of the new European regulation, which, according to the British Bankers' Association, may lead to the failure of 25-30% of bank card transactions on merchant websites, leading to considerable loss of revenue for e-commerce companies. Meanwhile, direct debit is not subject to this regulation.

As before, the best option is to give customers their choice of payment methods and to select a solution that can be localized to suit payment practices in every corner of the world. "A solution like GoCardless can be integrated into any platform through an API. Retailers must take care to select a trustworthy partner when it comes to integrating their payment solutions, which are inherently a sensitive matter," warns Nicolas Castoriadis, Associate Director of OSF Digital.