Subscription payments, payment systems and the COVID-coloured future

Over the past weeks, most of us will have noticed that our regular gym payment is not coming out of our bank account (or off our debit/credit card) at the moment. Maybe that regular charge has disappeared or maybe it has been replaced with a  discounted ‘online training’ membership. Either way, there have been changes….

There have been some public missteps of how this transition was handled - people continuing to be charged or left in the dark about their payments, business cash flow ‘turned off’ by payment providers without consultation, cash held up in sudden security holding restrictions - there have been many incidents like these.  I point out gyms because most of us can personally relate to that but, there are so many more businesses this effects - rental car companies, ‘discretionary subscriptions’ (monthly new socks anyone?), sports clubs, car wash memberships etc (pretty much anything that relies on an ‘in-person’ service or is not essential… unlike essential streaming services).  The point is, there are so many companies who are suddenly having to consider how to differently manage their subscriptions or member base.

What has been less publicly spoken about are the payment service providers who aggregate payments and how they are currently facing a bit of a black hole of operations. Aggregators run credit card payments (and to a lesser extent direct debit payments from a bank account) on behalf of their business clients and then settle these payments to the business once they have been cleared. This works well in theory - it allows the aggregator to load a margin onto the credit card surcharge to support their business model and allows the business to easily accept payments… but… if there are any disputes or chargebacks, the aggregator is ultimately liable. This is a manageable risk in ‘normal’ times… it’s really not now. The massive reduction in payments for membership services combined, with a spike in disputes and chargebacks, is the double whammy that is creating a world of pain for aggregators - the small to medium ones anyway and possibly even the larger ones like Stripe.

All this points to the fact that many payment providers are facing some struggles right now with systems that are not designed to cope with bulk and blanket payment updates, risk profiles that have suddenly widened and banks - who provide the accounts that allow aggregators to operate that are feeling most uncomfortable (after all, where does the risk go if the payment provider can’t fulfil their chargeback requirements?).

Actually the banks are having a bit of a hard time in the payments realm right now too - the aggregator’s risk does become their risk at some point that’s true - as well as this, all this online shopping that we are all suddenly doing means that the valuable POS terminals - usually a prime source of revenue for banks - have been lying dormant… meaning bank transactional revenue is taking a hit. Largely, our banks aren’t very well equipped to compete in the e-commerce market and so, those valuable MDR margins are going elsewhere… all this whilst handling a higher-than-usual number of Direct Debit agreement cancellations and chargeback disputes (very manual processes for the bank) - not to mention all the other demands banks are facing right now…

But what does all this mean?

Does it mean that subscription and recurring payments are dead? Does it mean that we all have to go back to paying upfront annual charges if we want to have a new pair of socks every month? No, I don’t think so - and I will explain why shortly. What I do think is that this COVID 19 situation has highlighted the fundamental flaws in our payment operations and may have just accelerated changes that have been looming on the horizon for some time now.

This crisis has shown us as businesses and payers that it is no longer viable or desirable to run ongoing payment arrangements where the payer has no visibility or control - even control under terms set by the business. The ‘old school’ way of operation - we’ve all done it - you complete a form (where you very trustingly record your bank details or debit/credit card details even though you don’t have a clear idea where this form will end up) and that’s it. You will never see that payment schedule again let alone be able to make changes where required, however, the payments keep rolling out of your account.

This type of ‘accepted practice’ has long been favoured by businesses as ‘good’. It means that they get paid no matter what… but, it also has nasty side effects like upset customers, lack of control and most pertinent now - high admin and management costs. It’s these type of arrangements that have caused many of the issues we have seen publicly aired by payers in the past few weeks (and some of the more endemic issues like the horror stories “I thought I had cancelled but I have been paying for years…”). Suddenly having to manually cancel and reset payment agreements is a very big deal for businesses.

Far better to have a 2-way street set up - the payer has visibility and some control and can see what the business can see in regards to the payment schedule, status and amount. This immediately eliminates the ‘blindfold angst’ of waiting for payments to magically debit from your account, and it means that dynamic changes - like reconfirming payer consent to change to paying for an online program as opposed to ‘in person’ for example - is simple and clear. Side note: I sometimes find it crazy that we are talking about ‘Consumer Data Right’ and ‘Consent to Share Data’ when our ‘consent to ongoing payments’ practices are fairly opaque and, often, based on forms designed in 1997.‍

There are many more benefits to operating in a transparent, data-rich and digitally dynamic way -like happier customers (and reduced churn), far fewer failed or overdue payments and lower admin and resource costs. The downside as far as businesses in the past have been concerned is that they can no longer simply charge higher amounts or debit accounts ad-hoc without explicit consent…I would imagine that this ‘downside concern’ has been shuffled duly to the corner closet by now given the rapid change in operations (I doubt that anyone will be advocating for this ability when we go back to ‘normal’).

This brings us to the aggregators - the system I have just described, by its very nature, reduces the likelihood of disputes and charges backs. This narrows that gaping risk canyon that aggregators are suddenly staring into… but what about the business model of aggregators? That need not be disturbed - the fundamental transaction and surcharge based business model runs through this new way of operating - payments run through this system like fuel and aggregators are the petrol stations. 

However, I am interested to see how this whole situation plays out for the aggregators - between the operational and risk upsets and banks shedding these relationships, only the fittest will survive. It will be unfortunate to see any go down as each aggregator has businesses relying on their payment services - not to mention all the employees who go to work every day to run the aggregator systems… still, times are now changing faster than we previously thought.

Which leave us with the banks… the banks who have stepped up in many respects to support businesses through this time, the banks who have lost POS revenue, the banks nervously eyeing aggregator payment risk bubbles and the banks who can see changes to payments blowing towards them like a dust cloud down the road. Well, it’s an ideal time to upskill and offer better payment services - the ability to get paid and access banking payment rails - to their business clients. This achieves 3 things - 

1 - it allows transaction revenue and MDR revenue to stay ‘in-bank’, 

2 - it allows banks to accrue better data about businesses’ cash flow and forecast (if the system has been built this way of course) 

3 - it prepares the banking suite for the ‘next thing’ (in Australia) which is the NPPA’s  (New Payment Platform) Mandate Payment Services (MPS). 

The MPS is the one we have all been waiting for - the direct debit replacement- and banks will be required to participate - at least to receive the MPS messages. The real ‘diamond’ though is the ability to be able to send MPS messages (essentially this is the bit that will allow businesses to send payment request via the NPPA) - this is where banks can really step up to the plate commercially and competitively. 

Underlying all of this though is the question - will subscriptions/recurring payments be finished off by COVID? 

No. 

They will still be (and still are) very much in demand. I believe they will continue to grow and here’s why- 

• Before COVID, the subscription-based business model was booming for many solid reasons. Those reasons (monthly recurring revenue, better cash flow management, captive audience etc) all still exist and will continue to exist and become even more relevant.
• Services such as legal advice, accountants and professional services will still need to be consumed by business and individuals… but fewer will be able to pay large invoices - so instalment payments will be called for with an appropriate management system to support them. 
• Our growing propensity to ‘access not own’ will continue to grow - meaning that if we want to subscribe to a car, dress, mower or donkey access plan (ie rentals), we need to be able to manage that... Not to mention our newfound desire to ensure our toilet paper is securely subscribed to for delivery. 
• The last piece of the puzzle for recurring payments are loans repayments… this situation has certainly shown us that manually handling loan payment changes is a massive burden to loan providers. This needs to be handled with better technology because those payments are not going away anytime soon.

The current problems facing payers, businesses banks, and payment service providers are not the fault of the payment mechanism, rather the outdated systems that have been running them.

All in all, we need recurring payments for many reasons but we need to get better at managing them - I mean we all need to get better - banks, aggregators, businesses and payers. The flaws of dated operating systems clashing with the changing expectations of payers and businesses involved in those payment arrangements has been a rumble brewing for some time now-  the pandemic has simply highlighted and thrown fuel on that smouldering fire. 

We need better systems that allow for dynamic changes, flexibility, transparency between parties and more complex data collection (and usage). This isn’t a problem that can be fixed by making things better just for the payer - that just creates more hardships for businesses. It is a problem that must be solved with an ecosystem view - to serve all parties to ensure that all needs are met which means we need systems that actually cater to all parties. Only then will we be able to evolve our payment systems to create happier, sustainable and economically stable businesses, payers and payment service providers (banks or otherwise).

Notes:

• This new ‘system’ is real - it’s been operating for 18mths now. Its called Paypa Plane and we are really keen on elevating payment systems to support banks, payment providers, businesses and payers.
• I do not know if donkey rentals are real but I would very much like them to be