Member Exclusive, Payments

Payments Briefing: How a company’s payment acceptance methods affect its customer retention

  • For subscription-based businesses, up to 40% of customer churn happens because of payment failure.
  • Companies could reduce churn by encouraging more customers to switch to ACH debit, according to a GoCardless report.

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Payments Briefing: How a company’s payment acceptance methods affect its customer retention

In the subscription economy, a company’s payment acceptance strategy plays a key role in its ability to improve customer retention, according to a new report by payments firm GoCardless and subscription management platform Zuora.

The report finds that the annual customer churn rate for subscribers who pay via bank debit – also known as ACH debit – is 4%. In contrast, the annual churn rate for customers who pay via credit card is over three times higher at 14%, and the rate for those who use PayPal or a digital wallet is the highest at 16%.

Source: Zuora

When looking at the revenue lost to churn, the numbers are similar. The percentage of average annual revenue lost to churn is 4% for ACH, and doubles to 8% for credit cards. For PayPal, the annual revenue lost to churn is again the highest at 11%.

Interestingly, the report finds that 20-40% of customers don’t leave a merchant because they’re unhappy with the product or service itself, but simply because their payment didn’t go through. Since this is an unintended outcome for the customer, it’s referred to as involuntary churn.

Every quarter, subscription businesses lose up to 6% of their customers to involuntary churn. For a business with 100,000 transactions a month with an average transaction value of $15, that could mean a loss of over $7 million in cumulative revenue each year. 

Issues related to payment methods are the primary cause of involuntary churn. Credit card payments, in particular, are prone to failure for a variety of reasons. Credit cards expire, can be lost or stolen, and their issuing banks can block transactions. They are also more likely to fail at the initial sign-up, since credit card sign-up processes increasingly employ multi-factor authentication measures.

There is also a correlation between the number of payment options offered by a subscription business and its churn rate. Specifically, businesses that accept four or more different payment methods have 5% less churn than those that accept between one and three payment methods.

Source: Zuora

Companies that accept more payment methods grow their revenues faster, too. Those that accept five or more payment methods saw revenues rise on average 4% faster than those that had less than four payment methods.

When businesses select a payment acceptance method, they typically look at factors like cost, customer demand, and market coverage. However, it might also be beneficial for them to look at how different payment methods impact customer retention.

The report finds that customers who use ACH debit have considerably lower churn rates than those who pay by credit card, while PayPal users seem to have the highest overall churn. Moreover, companies that offer more payment options have higher average revenues and lower churn.

By offering a variety of payment options and encouraging more customers to pay with ACH debit, businesses could cut down the percentage of customers who leave involuntarily and retain the revenue they bring.

Duncan Barrigan, chief product and growth officer at GoCardless, says many subscription businesses are currently suffering from preventable churn, resulting in losses that can run into millions of dollars over time.

“We’ve found that 20-40% of churn is a result of payment failure. A lot of that stems from a fundamental mismatch at the checkout: we’re using payment tools that were developed in the ‘60s for payment flows that are designed for the present,” Barrigan told Tearsheet. “Instead of moving with the times, cards have retained their expiry dates and long numbers that are prone to human error, making them riddled with features that could lead to payment failure.”

Barrigan believes that, in addition to reducing churn, moving from card to bank payments would also help companies meet the changing preferences of consumers, such as the desire to decrease their reliance on credit cards and debt.

“The sooner merchants leave behind these payment relics of the past and embrace new, digital-first methods, the faster they can chip away churn,” he added.

Chart of the week

Inflation in the US hit a four-decade high of 7.5% over the past year. This is causing bank customers to feel stressed about their financial health, according to a new report by J.D. Power. 62% of customers say the prices of goods they buy are increasing faster than their income.

In order to weather the storm, customers are looking for a lifeline, from new ways of being compensated to financial help from their banks. The report finds that one important way to alleviate these customers’ financial stress is for their employers to pay them more frequently.

Source: J.D. Power

The majority of US workers get paid on a biweekly basis (59%), according to the research. However, more than a third (35%) say they would prefer to get paid once a week, while less than a fifth (19%) actually do.

This desire to get paid every week is even higher among hourly workers (50%), yet only 26% of them get compensated on a weekly basis.

Overall, more than half (51%) of US workers would switch jobs for an employer that offers them real-time access to their paycheck, including 76% of hotel/food service workers.

Highlights from our recent coverage

What’s Happening in Payments Ep. 3: Veem’s Marwan Forzley on the role of blockchain in B2B payments

Veem is a San Francisco-based global payments platform built for businesses. It uses blockchain as a payment rail to eliminate the need for intermediary banks and reduce payment costs for SMBs. The firm’s co-founder and CEO Marwan Forzley joins the podcast to discuss the potential role of blockchain technology in B2B payments.

How sibling-led Stax became fintech’s latest unicorn

Payments platform Stax was co-founded by siblings Suneera Madhani and Sal Rehmetullah. It’s one of the few fintechs led by a minority woman, Madhani, who serves as the CEO, while Rehmetullah is the company’s president. Stax achieved this feat against a backdrop where less than 3% of venture capital goes to minorities, and less than 1% of investment goes to businesses with women of color as CEOs.  

The Acquire Podcast Ep. 2: Buying coffee with Ether — Marqeta’s bringing crypto to point of sale

Marqeta’s VP of marketing Jeff Otto joins the Acquire Podcast to talk about powering crypto in everyday transactions. The key to a successful go-to-market, he says, is securing early buy-in, building a compelling case, and staying consistently focused.

What we're reading

  • US Bank and Driveway collaborate on real-time payments (PYMNTS)
  • Google will allow Spotify to offer its own billing on Android (CNBC)
  • Expense management firm Jeeves quadruples valuation to $2.1 billion in half a year (TechCrunch)
  • Amex files metaverse-related trademark applications (Finextra)
  • DailyPay secures $300 million credit facility from Barclays (Fintech Finance)
  • Mastercard beefs up BNPL partner network (Finextra)
  • Nium launches SWIFT brokerage payment alternative (PYMNTS)
  • FTX turns to Stripe for payments and ID verification (Finextra)

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