4 essentials to consider when choosing a payment method

- March 19, 2024 4 MIN READ

On the surface, selecting customer payment methods may seem like a simple process for businesses. After all, providing additional payment options positively impacts performance, operations and customer behaviour – right? asks Luke Fossett, GM of GoCardless ANZ.

In some cases, yes, but it’s not always straightforward. Many payment methods are available, and changing your checkout process can impact everything from back-end admin to your customer experience to the bottom line. It’s worthwhile taking the time to consider some key points before making tweaks, including introducing new ways to pay.

Horses for courses

When trying to figure out the right payment system for your business, it’s essential to have a strong understanding of what type of business you run. Important considerations include whether your business primarily collects one-off or recurring payments, or whether you are currently (or planning to) accept payments globally.

These considerations will play into selecting the payment options that are best suited for your business. Don’t be tempted by trends or ‘keeping up with the Joneses’ – a comparable business’ most popular payment method may actually be completely incompatible with your operations. It’s important to understand your customers’ behaviour as well as your place in the market when revisiting your payment methods on offer.

Most importantly, think about what you’re trying to optimise for, now and in the future. For small businesses, this is often; cash flow, gaining more visibility over your payments and reducing costs.

Total cost of payment processing

If the latter is your key area of focus, it’s vital to note that the ‘true costs’ of collecting payments can take a bit of working out. When we say ‘true’, we mean considering the two types of costs: direct and indirect costs.

Examples of direct costs in payments are the transaction fees you pay, or the cost of international currency conversion.

Examples of indirect costs include staffing your finance and admin teams, the costs of recovering failed or fraudulent payments, or the time spent chasing late payments that could be deployed elsewhere.

If we compare two common payment methods, these two types of cost become apparent. While most businesses accept credit cards for payment in Australia, card fees are typically much higher than other payment methods. If you have, for example, a subscription business model or another offering that can be paid off in instalments, methods such as Direct Debit will be a much more cost-effective way to collect payments. The savings from nudging customers away from credit cards towards Direct Debit in these cases can be significant.

Then we get into the indirect costs. Direct Debit saves you money by reducing the admin and resources required by your finance team to reconcile payments with their accounting software.

Direct Debit also drastically cuts down the time spent chasing invoices as it pulls the payment directly from the payee’s bank account. This gives businesses more control over when they get paid. Collecting payments like this also improves cash flow, as funds are typically received sooner, giving businesses the budget to make future-focused investments for growth.

Customer payment preference

A few years ago, recurring payments for individuals were exclusive to utilities, council tax, and everyday household bills. However, the rise of subscription models has led to consumers becoming used to making recurring payments for a wide variety of services they consume. For example, 61.5 per cent of Australian households are subscribed to at least one video streaming service.

These bills are often settled online, and research reveals that 81 per cent of Australians have pet peeves while making these payments. Issues like hidden fees and manually entering card details can detract from the payer experience, reducing conversion and the likelihood of them becoming repeat customers.

67 per cent of customers said they would also abandon an online checkout process if their preferred payment option was not available. Today’s businesses must seriously consider how their payers want to pay, as much as how they want to collect payment.

Involuntary churn and failed payment rates

Businesses also need to consider the risk of failed or overdue payments. Chasing these up eats away precious time, impacts cash flow and can even cost you a customer.

Credit cards are the biggest offenders due to the expiry, loss or theft of cards. Failed payments also create inconvenience for customers as they may have to update their information to honour outstanding payments and long-term subscriptions.

In fact, the average card failure rate is 7.9 per cent, and failed payments also increase the churn rate for businesses by up to 30 per cent. Direct Debit overcomes many of the failure issues associated with cards—after all, bank accounts don’t expire—and provides a frictionless experience for customers, too.

Making significant changes to your business operations can be a headache at the best of times, but it doesn’t have to be complicated. Some payment service providers even allow you to plug into one API and be up and running in a few hours.

Ultimately, changing your payment options should require more consideration than ‘more is more’. Take time to think critically about your broader business structure, the payer experience (both during and after the transition) and their preferences, the cost of ownership and churn risk. These four payment attributes will help you to make an informed, efficient and impactful decision.

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