The Future of Payments in the Subscription Economy
These days it feels like cash is disappearing by the minute. Just look at fintech giants like Ant, which started as an e-commerce escrow service and now handles over $16 trillion dollars in payments for over a billion users. Rural market purchases in China don’t involve yuan anymore, they’re done with cell phones and QR codes.
Last year, over two-thirds of the world’s 37 billion mobile money transactions happened in Sub-Saharan Africa. In Sweden, where less than ten percent of all payments are made in cash, the government is considering moving completely to a digital currency. Indeed, according to a recent study approximately 70% of central banks around the world are considering issuing their own digital currency.
The idea of a cashless future isn’t new (researchers have been discussing the concept of the “checkless society” since the mid-20th Century), but the COVID crisis has dramatically accelerated the shift towards online payments. The digital economy probably moved forward six years in the last six months.
All this has me thinking. Transactions are never going to go away. Money will always have to move from one place to another. But what happens to payments in the Subscription Economy? I’ve heard arguments on both sides: in a world of subscriptions, payments don’t matter anymore; and when you run a subscription business model, payments are a bigger challenge than ever.
On one side, you could argue that payments don’t really matter anymore because of the intrinsic nature of subscription businesses: they run on relationships, not anonymous transactions. If a client misses a regularly scheduled payment it’s not a big deal, they can always make it up later. In a sense, we can go back to the days when we knew the people we bought from. Remember when people bought stuff from the general store on credit?
If this sounds far-fetched, just look at how subscription companies reacted to the COVID crisis last year. Many of them (including Zuora) gave their struggling customers a break, because they knew they were good for it. Companies helped each other out with deferred payments, usage credits, strategy sessions, you name it. That’s the beauty of subscriptions; they’re about fostering long-term relationships based on mutual trust.
But on the other side, payments are now more important than ever for one simple reason: complexity. Growing enterprise companies with a diverse array of services can see their change orders and transactions balloon exponentially. And for consumer companies, credit cards generally expire after three years, which means if you’re going to have a fixed percentage of declines, or involuntary churn. According to Visa and Mastercard, an average of 15% of recurring credit card payments are declined every month.
Let’s say you’re a highly successful subscription business that starts the year doing $100 million in monthly recurring revenue, with all your subscribers paying you the same amount every month. At that 15% churn rate, your business is down to $44.5 million by June and $25 million by December. Those are serious numbers. After all, it’s not like your clients can just pull out another card while they’re standing at the checkout counter!
All this means that automating your collections process is incredibly important. You need to invest in order to tame complexity. We’ve found that most of our clients use between two and four payment processors depending on the country they’re operating in. These include solutions like GoCardless, Stripe, Alipay, and Paypal as well as bank transfer systems like SEPA and ACH.
So which side is ultimately going to win out? Who knows? Ideally, it’ll be a combination of both: trusted partnerships on one side, and smart collections on the other.
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Disclosure: These opinions expressed are mine, not those of the company. The companies mentioned in this newsletter are not necessarily Zuora customers.