Since the pandemic, the number of Europeans using subscription services has increased by more than 30%. And it is expected that the market will grow to nearly $500 billion by 2025.
What are Subscription Payments?
These are automated transactions that occur on a recurring basis. Based on the agreed schedule and other terms and conditions, a customer permits a business to periodically auto-debit money from their account. In return, they get a continuous delivery of the service(s) or goods. This continues until the expiry of the date or till the time the customer stops the subscription. It is important to note that subscription payments are not for all businesses. It works best for items and services a customer uses regularly rather than a one-time purchase.
How do Subscription Payments Work?
You need to first integrate a payment gateway to process recurring payments on your website. When people visit your website and sign up for your subscription services, they must fill in their info, including bank account details. Next, they will authorize your business to debit the required amount. The payment gateway then checks and verifies the customer’s credentials. Once everything is cleared the customer’s subscription account gets activated. Based on the plan they choose, payments will be auto-collected from their account weekly, quarterly, monthly, or yearly.
Working with subscription management software is best because of the affordability and flexibility of services. Different platforms offer different features based on your business needs and are priced differently. Overall, the software lets you auto-manage your subscribers and their preferences and ensures your payments are on time. Find more details here.
Benefits of Subscription Payments
Repeat customers are more likely to make a second purchase than one-time customers. This means subscription businesses aim at customer retention and regular revenue generation. But to do so, you must ensure your payment methods align with your customer’s preferences and meet security standards. Subscriptions allow you to build a personalized experience for the shopper and drive more robust customer engagement. This, in turn, helps increase the customer lifetime value (LTV).
It also makes it easier to predict your business revenue every year. With a predictable recurring flow of income, you can make more confident business decisions. It further allows better cash flow stability. Not only do you have a steady source of revenue, but you can also manage your inventory better, and in turn, scale your business.
3 Best Payment Methods for Subscription Payments
One of the top concerns regarding recurring payments is customer data security. So, the payment methods you offer as a subscription-based business must be fully secure and regulatory compliant. The 3 payment methods mentioned below allow you to cater to your customer needs and help you avoid payment-related issues. Let’s take a look.
1. Direct Debit
Direct Debit is one of the most reliable methods for processing subscription payments across Europe. SEPA Direct Debit (SDD) is a popular and standardized payment method in the EU. It can be used to make recurring payments (for example, monthly electricity bills, rent, subscriptions) in Euro (€) across the SEPA region, which includes 36 member countries from Europe. SDDs allow recurring bill payments to be processed automatically, ensuring the biller can collect the money even if a customer forgets to pay the bill.
There are two SDD schemes – SEPA Direct Debit Core, designed mainly for consumers, and SEPA Direct Debit B2B, which is exclusively for businesses. In both schemes, the biller stores the original mandate and any info related to changes in the same. In a SEPA Direct Debit, the merchant/ biller can directly pull money from a payer’s account, with their prior approval. Before any money transfer happens, the payer has to sign a mandate (paper or electronic) allowing the biller to collect the money from the payer’s account. Once the payee allows the request, the money flows from their account into the biller’s account. SEPA Direct Debit payments take up to 2 business days (for SEPA Core Direct Debit) and 3 business days (for SEPA B2B Direct Debit).
Bacs Direct Debit is one of the best and safest ways to make recurring and one-off payments within the UK. These payments can be used for recurring payments such as bill payments, subscriptions, installment payments, etc. Just as in the case of SEPA Direct Debit, for a Bacs Direct Debit transfer, a customer authorizes a business or merchant to pull money from their bank account. The customer is given an advance notice of the payment due date, amount due, etc. The customer gives their consent by filling up a Direct Debit mandate, either in a paper form or online form. Once authorization is complete, the business or merchant can automatically pull funds from the customer’s account.
Direct Debit is quite popular in the UK, with 90% of UK residents using it to pay their regular bills. As per UK Finance, 4.6 billion payments were made by Direct Debit in 2021, processing over £1,243 billion. This is expected to grow to over 5 billion payments by 2024.
Direct Debit payments are quite safe because they offer a Direct Debit Guarantee to customers to keep them secure from fraud or payments made by mistake. Direct Debit also costs less per transaction than credit and debit cards. Unlike cards which can expire, stolen, or lost, Direct Debit is more future-proof, with lesser chances of failed payments.
For the UK, Direct Debit works through the BACS system for payments within the UK. However, merchants will need to use the SEPA Direct Debit to collect payments from customers in the EU.
2. Account to Account (A2A) Payments
Account-to-Account (A2A) payments are payments where money is moved directly from one account (a customer or payee account) to another (a merchant or service provider account) without any intermediaries or payment instruments, such as cards. A2A payments have been traditionally used by consumers to make regular payments, such as direct debits or bank transfers. But it can also be used with bank and digital wallets.
A2A payments are either “push payments”, where customers can pay businesses directly by pushing money from their account to yours’s. Or, A2A payments can be “pull payments”, where your business requests (or pulls) money from the customer’s account, with their prior consent. A2A payments make subscriptions easier and seamless. It offers lower processing costs, SCA compliance, and immediate funds settlement. These payments are also safer for merchants and consumers.
A2A payments combined with open banking tech are ideal for recurring payments. It lets your business offer a great UX and simpler, faster, and secure payments from consumers. Some examples of A2A payments schemes in Europe include SEPA Credit Transfers (SCT Inst), iDEAL in the Netherlands, and Giropay in Germany.
3. Variable Recurring Payments
Variable Recurring Payments (VRP) are a type of recurring payment instruction that can be set up and used to make a series of future payments. VRPs are similar to recurring payments made via direct debit or card-on-file and work on Open Banking rails. They offer greater security, ease of use, and more flexibility. Non-sweeping VRPs are great for subscription payments as customers set initial parameters like maximum amount and frequency, which can be used for future payments.
Recurring payments made using direct debit or card-on-file requires a customer to authenticate them using Strong Customer Authentication (SCA), as mandated by PSD2 regulations. But in the case of VRPs, the customer delegates SCA authentication to an authorized third-party payments provider, enabling a more seamless and embedded payment experience. However, customers have to give their prior and explicit consent to the third-party payments provider to carry out a VRP.
Currently, these payments use card-on-file to carry out the transaction. But, in the future, VRPs will replace card-on-file with account-on-file, making payments more seamless and secure. With VRPs, customers do not have to update their credit or debit card details or worry about filling in incorrect payment details. VRPs are directly made from a customer’s bank account, offering customers more convenience, control, and security. High security, instant processing, more cost-effectiveness, and other benefits make this payment method an excellent option for recurring payments of variable amounts on an ongoing basis.
How Can Novalnet Help
Deciding on the right payment method is crucial for subscription-based businesses. Since you will be doing multiple transactions over a year you must ensure it fits your business model and helps you deliver a customer-centric experience. Moreover, in a region like the EU, payment habits vary from country to country. Businesses must also consider different aspects like low fees and flexible timing to manage their payments. Novalnet helps you improve your recurring payment processing by considering all these factors. From the triggering of subscriptions to the continuous monitoring of incoming payments – we help you take control over all aspects of your payments right from the start.
Using our tech, you can accept payments globally in 125+ currencies in 150+ automated country-specific payment methods. You can set up your payments within minutes with our instant payment plug-ins. With our AI-based risk management solutions and advanced analytics, you can design the best payment experiences for your customers, and all of these in a PCI DSS-compliant environment. Reach out to us today to know more.
Jose Augustine is the Chief Business Development Officer at Novalnet with extensive experience in European payment industry and a knowledge powerhouse.