Recurring Card Payments Vs. Direct Debits

In many ways, Direct Debits are very similar in to Recurring Card Payments, but ‘the devil is in the detail’. If you examine how each method works, you will find that there are a few crucial differences that tip the balance in favour of Recurring Card Payments for most merchants.direct debit

  • A recurring card payment – often referred to as a “Continuous Payment Authority” (CPA), is an authorisation provided by the customer that permits you, as the merchant, to take payments from them by either debit or credit card. These payments can vary in frequency and amount and will remain in force until the customer cancels the arrangement.
  • A direct debit (DD) is a very similar process to the above, except that in this case the customer authorises the merchant to take money directly from his bank account.
  • Direct debits have been around for many years, whereas recurring card payments have been a relatively recent introduction, and in the past few years there has been a growing demand from the buying public for merchants to offer customers CPA’s rather than the traditional DD’s.
  • If you can respond to this demand from customers to offer recurring card payment arrangements, you will clearly be at advantage over competitors who do not offer such a service, and improve your customer retention rates.

Why Do Many Customers Prefer A CPA To A DD?

There are a number of key reasons for this:

  • In this digital age, younger age groups are far more in tune with the use and flexibility of credit and debit cards – especially where short to medium term payment arrangements are concerned. They use their cards for most things in their lives and they feel more at home with managing such arrangements with their cards. The perception amongst many is that direct debit arrangements are old-fashioned and arduous to set up.
  • Direct debits are often regarded as more appropriate for long-term payments arrangements such as annual subscriptions and the like.
  • In many situations it is easier for customers to tick the box on a CPA form at the checkout, rather than having to fill out a laborious direct debit mandate form.

For some consumers the act of authorising their bank to make payments feels like a more significant financial commitment than simply authorising recurring card payments.

  • Consumers are happier handing over details of debit/credit cards, which expire regularly and can be easily cancelled, than giving out bank account details which may prove more problematic if anything goes wrong.
  • Many cardholders prefer using their cards to pay bills as they benefit from interest free payment terms which can be quite considerable and often become an important feature of personal financial management.
  • Some cardholders earn loyalty points, air miles and other benefits, based on usage, and again prefer to make all payments this way.
  • They trust the card brands like Visa and MasterCard.
  • Bank charges for not having sufficient funds, when a direct debit payment cannot be made, can also be a factor.

‘Good! I’ve got that – but apart from giving my customers what they want, how else will it benefit my business?’

  1.  If you are a small or recent start up merchant, you may not yet be in a position to offer direct debit services (PDD), as you will first have to gain “Automatic Direct Debit Instruction System” (AUDDIS) status from the bankers. This involves a vetting and technical checking process before they will grant you authorisation.
  1. Even once you have a direct debit system set up, variable and often lengthy settlement processing times can create a major reconciliation headache.
  1. On the other hand, CPA is easy to set up and doesn’t require any special training, or dedicated resources. Generally merchants receive payments quicker through a CPA than DD.
  2. Direct Debits are sometimes returned unpaid after you have provided the service. Even though a membership will be immediately activated upon signing the DD authorisation, the bank may reject the payment due to insufficient funds several days later, after the customer has had enjoyed the benefits of membership.
  1. With CPA, you will recieve instant authorisation or rejection of the payment request, this means that the reconciliation process is much more straightforward. CPA is altogether a more contemporary and simple approach to recurring payments.

‘Which categories of merchants will benefit the most by offering a recurring payment service?’

Almost any merchant who is selling goods or services that requires regular or periodic payments – whether they are hard goods that will be paid for over a short to medium period of time – or more likely, are offering a wide range of services such as:

  • Memberships and periodic subscriptions to fitness centres and other clubs/organisations.
  • Magazine, news subscriptions (hard copy and online).
  • Online software and computer security subscriptions and other Internet services.
  • Security contracts.
  • Wine & food clubs.
  • Private health providers.
  • Rent & utilities.
  • Internet service providers.
  • Satellite or cable TV service providers.
  • Mobile and fixed phone contracts.
  • Mobile phone apps, etc.
  • Insurance services – auto, home, holiday health, etc.
  • Digital entertainment providers.

As you can see the list is endless, so if you are serious about offering a first class recurring payment service to your customers, here are the steps you will need to take:

  1. Select a reputable payment gateway provider who can set up an online interface with your customers. You will then be able to effectively manage your customers’ payments and ensure all the transactions are properly processed by the banks in a timely manner.
  1. Explain the process to your customers so that they understand how it works and when they will have the payments charged to their card.
  1. In order to provide the maximum security to your customers, you should seriously consider working with your gateway provider to set up tokenisation solutions. This will mean that no credit card information is kept in your own online or IT environment and the customers’ personal card data is replaced by a token, which has no intrinsic or exploitable meaning or value.

If you wish to discuss any of the issues relating to the setting up a recurring payments system for your company, please contact our team who will be happy to talk you through the process and your options.