“It takes 20 years to build a reputation and five minutes to ruin it.” Warren Buffett
Building good relationships, whether personally or professionally, the foundation must be in trust. Trust comes from people committing to something and delivering upon that thing. When it comes to money, that trust can quickly be destroyed with late payments, defaults and evasion.
Every discussion becomes charged with emotion because every individual, business and corporation cannot get beyond “my precious”.
So why leave it to chance? Automate every payment
Seven years ago, I was bicycling into the office down a busy London road. I needed to turn right across traffic, I checked my shoulder was clear, extended my arm to change lanes and was promptly hit from behind by a motorcycle undertaking traffic.
I went over the handlebars and landed on my jaw, breaking it in four places, knocking out four teeth, chipping several others, breaking a toe and scraping the skin off various other areas of my body. I was swiftly carted off to hospital for numerous x-rays (they were worried I’d swallowed one of my teeth as nobody could find any sign of one). I was admitted and scheduled for surgery to fix my jaw in place and fix my teeth.
So what’s this got to do with automation? well I went down to surgery, the team was knocked me out and woke up several hours later in the recovery room screaming. When I’d calmed down, I told the man next to me (who turned out to be my surgeon) “we have to find a way to drive SEPA direct debit faster”.
I was that obsessed with automating payments and even after the trauma of a major road accident and surgery, my brain was still focused on Direct Debit. This is because I knew that unless I could get tens of thousands of customers to move to Direct Debit, I’d have to run an enormous global team of people who hated their job. Direct Debit lets you scale fast and focus on where you can add value to the financial chain.
Why is direct debit important to scale?
When you need to collect payments from hundreds of thousands of customers (or more) every month with a high degree of certainty, there is no more scalable way than direct debit. It is cheap for your customers (usually free), it is cheap for you especially if you have the size to direct connect, and it eliminated 99% of uncertainty.
The real magic though is not in the predictability of cash flows (which is critical for many businesses) but the elimination of conflict with your customers. I’ve mentioned before, the key to smooth collections is finding a way to never make a collections call, and never a late payment call.
Direct Debit means in most cases, you never have to face that conversation unless there is a real financial problem. They don’t expire, they typically don’t need any trigger other than an invoice, you notify a specific date to pull funds and tell your customer on their invoice. It’s transparent and failure rates are low (my teams typically exceed 98% payment success rates).
This means whenever you ring up about a new opportunity, or want to upsell something, or simply have a chat, there is never a conversation about finance, it’s understood to be dealt with, and you can focus your customer on revenue and growth, not their late payments.
Nothing derails a salesperson’s pitch like hearing your client just got a call saying they haven’t paid their bill and are about to be cut off.
Key problems with Direct Debit operation
The primary source of failures is bad setup, not having the right bank account information, or the customer putting a block on their account from new direct debits (they can resolve with a single phone call to their bank to whitelist). Once you pass this hurdle, you can mostly sit back and watch payments come in.
Any failures onward are a potential red flag as a partner may be short of funds, but this is where you have the opportunity to work with a customer and show your human side, let your collectors exercise their emotional intelligence, over brute force. This is likely to be a better use of people’s brains than constant reminder calls and courtesy chases.
Barriers to sign up – why doesn’t everyone use it
First up, it can be cumbersome to setup, culturally I’ve seen it work faster in Western Europe than anywhere else and there can be a lot of paperwork upfront. However, making the investment upfront will save you so much grief further down the line. I’d have a team 2x it’s current size if we hadn’t focussed early on automating payments and getting a pitch to customers up front.
Why don’t customers sign up?
Many people are leery of letting a company take their personal bank account details, which ties us back to my opening statement. You must earn trust from customers, and be known for trustworthiness to deliver an automated payments platform. Nothing makes someone cancel a direct debit like an erroneous charge.
For me, the key is to be clear about the protections granted by the direct debit scheme (disputes and chargebacks are typically resolved in less than 24 hours) and building a good operational relationship with your banking/payments provider is key to this.
You MUST have accurate invoicing, nothing complicates payments like credit and debit memos, direct debit is most powerful when it is a simple monthly payment with no work. If you do mess up, stop the DD run for a week and sort out the issues first, don’t take money unless you are 100% and if anyone disputes, authorise a refund immediately and then let your collectors sort out the issues post event.
DD alternative – Autopay credit card
In some countries, the alternative is to offer autopay credit card. People will typically be more willing to let you charge their cards than their bank account (particularly in United States) where they can earn rewards from their card company and stretch their own working capital.
Typically, you don’t need to have a local bank account to collect via credit card whereas for DD you normally need local bank accounts to process (why I love SEPA is you just need a EUR account in the EU to collect euros from any EU country).
Credit card fees as a merchant are a minefield, but you’re looking at somewhere between 2-3% processing fees depending on scale, but I’ve always said I prefer to collect 98% of something than 0%.
Downsides of autopay credit card
- merchant fees processing card significantly higher than direct debit
- higher payment failures by 10x even in credit card economies
- card expiry dates requiring continual update
- Higher requirements emerging in Europe for variable charges on credit card automated payments from SCA (coming September 2019)
Even for large corporates, setting up DD and autopay credit card can be big undertakings and you need to build a lot of repeatable infrastructure and manage a lot of paperwork to be effective. I’d actually recommend not building unless you are a major corporation and using one of the many fintech companies to support your automation through an API rather than building yourself.
For Europe Go Cardless has a great offering at reasonable prices (1% capped at GBP2) and is the major disruptor in the market at present.
If you’re domestic only, you can usually add on the option to your merchant account with relatively little pain so long as you follow the upload templates for the bank in question. Look for a domestic provider online as they are growing globally to support the demand, but make sure you’re getting a price you’re happy with. Go Cardless rates above are a good benchmark.
The traditional payment processors play in this area, you can get automated payments through Paypal but can be pricey, Stripe similarly can be costly and is more around credit card payments but again would you rather get 97% or nothing?
Automated payments are secure, predictable and scalable cash flow which eliminate many of the points of conflict with customers and allow your finance function to focus on genuine problem areas and adding value for a small outlay.