How competition and technology are shaping the future of recurring payments

By Siamac Rezaiezadeh, Head of Product Marketing, GoCardless

Online payments have soared. E-commerce during lockdown has gone from strength to strength and continues to grow even as the restrictions begin to ease. More than ever before, businesses are investing in digital technology to support the changing habits of customers and to move their operations online. Digital payments form a key part of this story, and the marketplace has been heating up and changing rapidly.

In a world of digital transformation, the subscription economy is the cornerstone. The pandemic has been largely responsible for driving the rise of subscriptions recently, with 22.5% of companies seeing their subscription growth rate accelerate, as found in Zuora’s Subscription Impact Report: Covid Edition. As we look towards technology to support this model, businesses are beginning to rely more on automated systems that help save admin time and lead to higher productivity.

The world of payments is evolving fast to catch up with these recurring revenue business models. According to recent GoCardless research, Direct Debit is the preferred payment method in 3 of 4 use cases surveyed – 57% were likely to choose direct debit to pay for regular business bills, 47% likely to choose installments and 33% likely to choose it for digital subscriptions.

Competition and technology are playing a big role in both meeting this new demand and shaping the future of recurring payments, so let’s take a deep dive into how the two can go hand in hand.

Healthy competition

In recent years, there has been significant and rapid change in the recurring payments marketplace. In the US alone, recurring transactions processed on debit and credit cards are expected to reach $473 billion by 2021 (Mercator Advisory Group). As merchants and payment providers constantly seek new and innovative ways to support how we pay for things, increasing the demand for frictionless payments, more players will continue to enter the marketplace.

Over the last five years, there has been an increase in new solutions aimed at different customer segments, such as online, mobile and ATM all demonstrating the fast-pace of the payments space. But Direct Debit in particular has seen enormous growth. As one of the more well-established methods of payment, growth in payment volumes tend to reflect growth in population figures and household numbers. Any new subscription services, or major billers expanding the range of payment options that they accept, can also help to increase volumes.

There are a number of different players around the world that are helping businesses to streamline their recurring bills and payments – which is extremely positive. For businesses, having greater options means they may be more inclined to switch to a recurring payments model that works for them, particularly to suit a new generation of customers. For example, the beauty industry has recently seen new players enter the market that operate on a subscription basis only. These companies have thrived thanks to the convenience of their business model.

While payments businesses will continue to expand their offering, each one is likely to maintain some sort of specialism – so no two businesses will be offering customers the exact same service. Additionally, more businesses in the payments marketplace means that we can all meet this growing demand and improve access to better services. Heightened competition can drive companies to leverage the latest technologies to improve their offering – such as to reduce the impact of late payments.

The technology paving the way

The digitisation of businesses means payments are rapidly evolving to keep up. Having the right technology in place is critical to ensuring businesses do not see an increase in friction and customer churn. Technology has played a key background role in the evolution of the banking and financial sector, but it is now taking centre stage as the payments industry looks to innovate and adapt.

There are a number of solutions that are helping to shape the recurring payments marketplace. One example is payments technology that tackles late payments. GoCardless’ Payment Success Index shows that enterprise businesses can lose almost £1m, mid-market £200k and small businesses £6k annually. By adopting technology that analyses payments trends data, businesses can reduce costly failed payments by two thirds and streamline their cash flow.

Machine learning is also becoming increasingly important to the payments landscape. It is often associated with credit card transaction monitoring, where learning algorithms play an important role in near real-time authorisation of transactions. Recently though, the technology is making headway in other areas of payments. For example, GoCardless’ payment intelligence tool, Success+, has trained machine learning algorithms to analyse payment trends and help businesses automate the optimum retry strategy for each customer.

Another payments innovation that is helping to support the rapid digitisation of businesses, is the sophistication of APIs. Whereas once they were used primarily to deliver PSD2 compliance, APIs are becoming far more advanced. For example, they can be used to open up access to surface-level customer data, making it easier to schedule payments for any time frame or interval, as well as helping to optimise the best payment date for that customer.

Recurring payments in the future

Historically, the future has focused on front-end innovation in one-time payments. However, this has changed in the last few years, largely driven by business demand. For example, Microsoft used to sell its Microsoft Office package on a one-time payment model, whereas nowadays its software is available for a monthly fee. Other big tech companies, like Google and Adobe, have also adopted SaaS models for some of their most valued products. This paved the way for more innovation in the recurring payments market, with the likes of open banking and machine learning helping to support this shift.

It isn’t clear which came first; increased competition or innovation in the recurring payments marketplace. But we do know that, as businesses try to adapt to this ‘new normal’, digitising your operations is not a nice-to-have – it is critical for survival.  Recurring payment solutions that are seamless, agile and insightful, play an important role within that process. This is especially true for businesses that are struggling with healthy cash flow, as we continue to feel the impact of Covid-19 and potentially enter our deepest recession yet.

The good news for businesses looking to streamline their payments, is that the landscape is rapidly evolving. As more players continue to enter the space with new ideas, we can only expect to see more technology and innovation to come. Increased technology and competition are not only shaping the recurring payments marketplace; but both are also massively improving the customer service and experience. Ultimately, that is the most important outcome.