There seems to no end to the creative ways that payment providers are finding to allow people to give you their money. Mastercard began verifying selfie transactions using facial scanning technology last year, Samsung Pay has vastly improved on the original system, and Bitcoin is still gaining market penetration as a payment alternative amid calls for stricter regulations and oversight. These entirely new technologies have joined over 200 different electronic payment types that permeate our world. It can be even more daunting for subscription-based businesses, which are far more complicated than single-purchase business models.
New research from Vantiv underpins the rapidly growing demand that for subscription services, especially among millennials. Even though Gen Xers and Baby Boomers haven’t shown significant growth in this area, more than 70% of millennials now have at least one product subscription and 89% have at least one service subscription.
Predictably, most of the subscription growth is for items that everyone buys on a regular basis anyway – groceries, household items, and beauty products. Millennials seem to be voting with their wallets for the convenience provided by these subscription services. Not having to worry if you have milk in the fridge, or enough toilet paper is well worth the extra few dollars that it might cost. The other factor that vendors should not take lightly is that subscription customers tend to be more loyal, providing predictable, recurring income.
"E-commerce merchants must seriously consider subscription strategies to build loyalty," said Bill Cohn, Senior Product Leader, E-commerce at Vantiv. "The business model provides many advantages for merchants. First, customer lifetime value to a merchant typically goes up. A consumer can click 'buy' once and get razors or beauty products, or coffee pods, shipped every month with no further thought or action.
“Second, services that would be costly if billed in one lump sum become more affordable. This is particularly important for millennials, who have the strongest appetite for online services but the tightest cash flow compared with previous generations.
“Third, a growing and recurring revenue stream is a good way to increase the value of your company. So for smaller businesses or startups, a subscription model provides a great opportunity to compete with larger incumbents – think, for example, of groceries and the growing online/subscription meals delivery services."
So, how do you provide these customers with the ability to subscribe to your product or service? Despite the new trending payment systems, three methods remain the kings of the trade: credit cards, bank transfers, and e-wallets.
Credit cards remain the number one to make payments worldwide for two simple reasons. First, because the payments are guaranteed up-front, merchants don’t have to worry about settlement issues.
Second, they are the easiest to set up. If you are in an industry with narrow margins, the cost of fees, fraud, and chargebacks can chip away at your profit, but in most industries, these hassles are relatively minor when compared to the convenience to both merchant and customer.
Even though bank transfers can be a little more difficult to set up, the lower fees and incidence of fraud can be well worth the effort – especially for more regional merchants. This is because there are so many types of payment processing systems that you need to deal with for each financial jurisdiction – each with their own rules and processes. Here are the major bank transfer systems you should know about:
- ACH (Automated Clearing House) in the US
- PAD (Pre-Authorized Debits) in Canada
- SEPA (Single EuroPayments Area) in Europe
- UK Direct Debit in the UK
In dealing with direct transfers, you (as the merchant) need to manage the bank processes, so handle them with care. Some of these can be very tricky, SEPA for example, and in smaller markets, it may be necessary to use local rules and agencies to navigate the subscription setup process.
Maybe these systems shouldn’t be included as a platform of their own since most of them are simply middlemen that manage the complexity and security of the back-end for credit cards or bank transfers. The most popular e-wallet today is PayPal. Established e-wallets generally have a proven track record in each country they operate in. Google Wallet, Amazon Payments, and Samsung Pay that were mentioned earlier are also examples of established and trusted e-wallets.
As subscription services continue to grow, businesses will see the lump which spends the most as regular purchases with suppliers on a recurring basis. These transactions are likely to be subscriptions made by millennials as their purchasing power continues to grow and is expected to reach $1.4 trillion by 2020.
Despite the obvious advantages that recurring payment models offer (predictable cash flow, higher customer retention, and operational efficiency), relying on subscriptions also requires vigilance. Changes in banking information can lead to declined authorizations and frustrated customers, threatening customer satisfaction and affecting the bottom line. A subscription is not a way to lock your clients' money in your vault; traditional business practices to maintain customer loyalty still apply. Re-enrolling people who fall through the cracks will pay dividends in the long run.
The security and predictability of setting up recurring business payments can serve as a boon to any company, in virtually any industry. There are few things that an online company can do to predictably increase its revenue than streamlining its subscription service and promoting it to the existing customer base.