How to get the most from using Direct Debit

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When deciding how to collect recurring payments, it’s important to pick a payment method that’s simple for both you and your customers to set up and use. Ideally, it should also be cost-effective, helping you keep more of every payment you collect.

One of the most popular options is Direct Debit. It’s the UK’s most popular payment method for recurring payments, chosen by over half of consumers to pay for their traditional subscriptions (58%), digital subscriptions (53%) and instalment plans (53%).

You will likely have used Direct Debit before, perhaps to pay your own utility or energy bills, but there are lots of hidden benefits to using it for your business that you may not have been aware of before.

Time is money - automating your payments with Direct Debit

You may associate the cost of collecting recurring payments with transaction fees. This may vary a lot depending on each method and provider used, and whilst some methods do have higher upfront costs the reality is this is just one piece of the puzzle.

Pull payments

Direct Debit is a pull payment method. This means you “pull” the money directly from your customer’s bank account rather than wait for them to “push” the money to you. Manual bank transfers or individual card payments are examples of push payments. Using Direct Debit to automate pulling money means that you can essentially set and forget payments, with the full amount owed collected on pre-agreed intervals. This reduces the likelihood of a payment failing or having the incorrect amount paid to you, which then, in turn, reduces the amount of time spent chasing late or failed payments.

You may be surprised at how much of a drain on your time this can be. Research has found that, on average, small and medium-sized businesses spend up to 30 hours a month chasing owed payments. In fact, as much as two-thirds of the cost of accepting recurring payments comes from admin time, not processing fees.

Retaining your customers

There’s a direct link between payment failure and customer churn. In the UK, failed payments result in losing a customer anywhere from 11-15% of the time. This includes involuntary churn - when a customer doesn’t even realise their payment has failed. This happens because some payment methods can expire, have maximum withdrawal amounts or require re-authentication for each payment. Some are also more vulnerable to getting lost or stolen. On average, Direct Debit has one of the lowest associated churn rates:

• Average annual bank debit churn - 4%
• Average annual PayPal churn - 16%
• Average annual credit card churn - 14% 

The toll of awkward money conversations

There are a lot of things that can keep you up at night when running or working as part of a small business. Unfortunately, for one in six decision-makers, the worry of cash flow and the need to have uncomfortable conversations with customers who owe you money is one of them. 73% would even go so far as to forgo up to 10% of annual revenue if it meant avoiding an awkward money conversation.

GoCardless, a direct bank payments company, also found in a 2021 survey of their UK customers that around eight in 10 decision-makers noticed an improvement in their stress levels after switching to Direct Debit for their recurring payments.

Flexible payments with minimal administration

With Direct Debit, you can change the amount and frequency your business charges to your existing customers without them needing to cancel, re-set up and re-authorise the collections. So, you can increase your prices or a customer can change their subscription, and you can make all of the necessary changes on your end without the customer needing to take any action. This gives you the peace of mind that cashflow will be predictable with no delayed or missed payments in the adjustment period, and your customers can enjoy a consistent payment experience.

Recurring payments for businesses of all sizes

To summarise, there are lots of benefits that Direct Debit can provide your business regardless of whether you’re a sole trader, a growing team, or just getting started.

These include:

• Automated payments that you have control over
• Predictable cash flow
• Minimal failed payments which, in turn, means lower chances that repeat customers will churn (whether they mean to or not)
• Less of your time spent on admin and chasing payments
• Less stress thanks to needing fewer awkward money conversations
• The ability to adjust your pricing over time without needing customers to re-authorise payments or to implement new payment methods

If you’d like to find out more about Direct Debit and how it works behind the scenes, you can read GoCardless’ ‘Introduction to Direct Debit’. This guide shares practical tips, real-life stories and examples from businesses who use it, and more information on how to start using it for your own business.