GoCardless’s Hiroki Takeuchi On How Automated Payments Can Reduce Involuntary Churn

by | Aug 24, 2023 | SaaS Founders, SaaS Growth Hacks

These days, subscriptions mean more than just a pile of dog-eared magazine issues piled on your nightstand. Subscriptions grant you access to instant entertainment or bless you with free shipping on every order. Over 62% of U.S. adults currently subscribe to at least one streaming service and 46% pay between $10 and $20 per month for media streaming services alone. 

Our daily lives, and credit card statements, are riddled with billed subscriptions signaling that as consumers, we are ready and willing to pay for monthly access to goods and services that we otherwise might have difficulty gaining access to. Industries from across all sectors, from retail, health, and fitness to entertainment, have turned to subscriptions to drive revenue. But few industries really nail the subscription-based business model the way that SaaS companies do.

But even the most successful subscription-based SaaS companies face a few unique challenges. Since subscription payments are collected monthly (or yearly), SaaS businesses need to deliver a product that keeps customers returning for the product or service. To retain MRR and avoid churn, SaaS businesses need to pay attention to a host of things: software updates, appropriate pricing, good value proposition, strong customer support, appropriate refund policies, and so on. If a SaaS business can continuously deliver on these fronts, they will continue converting leads and collecting payments for those all-important monthly subscriptions.

So, it would seem that a SaaS business’s churn rate is directly connected to customer satisfaction, and it typically is. But there’s something else that can slowly elevate a Saas company’s churn rate, especially if left unchecked: involuntary churn. Involuntary churn, or passive churn, happens when a customer’s account or subscription ends unintentionally, and it can happen for several reasons:

– Subscribers are not updating their card information or leaving expired cards on file

– Hard declines occur when a card has been lost or stolen

– Soft declines when a card is beyond its maximum credit limit

– An assortment of other reasons that banks can decline the card on file

According to Hiroki Takeuchi, Co-founder and CEO of GoCardless, 30% of your total churn rate can be attributed to involuntary churn. The good news: involuntary churn is avoidable.  So what can SaaS companies do to combat involuntary churn? 

SaaS Mag caught up with Takeuchi to discuss involuntary churn, the power of automated payments, and what SaaS companies can do to reduce involuntary churn. Here’s what he had to say:

GoCardless Dashboard

Let’s talk a bit about the genesis of GoCardless. How did you guys get started?

What we are doing at GoCardless is not something that would necessarily be an idea that would strike you in the middle of the night, especially if you don’t have a background in payments. This entire venture has been a bit more of a journey of discovery that started when we were actually trying to build something a little bit different: a way to help informal groups collect money, like your local sports team or student society. 

These were more of the day-to-day problems that we had faced in starting our company. So, as we were trying to build something to solve that particular problem, we learned more about how payments work and what options were available.  

We realized that the only ways that online payments were happening at the time were through the use of credit and debit cards. For various reasons, these methods were never going to work for what we were trying to build. So we began looking for alternatives. As we learned more about how payments work, we learned that there were other methods that could pull money directly out of people’s bank accounts that were a better fit for what we were trying to do. 

But even these methods had problems, which led us to realize that online payment was a much bigger problem than we had initially suspected. The available platforms were super hard to get access to and really horrible to use. By the time we got far enough into the process of building something we thought might address some of these problems, we realized that the scope of these issues extended well beyond the usage of a few informal groups. 

That was the genesis moment: when we asked ourselves what would happen if we were to make our solution available to anyone who wanted to use it? 

From this point, we started to see lots of different types of businesses trying to negotiate this problem, and they were attracted to what we were building. Over the next 2 or 3 years, we were growing super fast and just trying to keep up with all of these different types of businesses coming to our platform to help them collect payments.

It was only after a few years that we were able to take a step back, reflect, and ask ourselves what all of these different types of businesses had in common. We were working with everything from local coffee bean wholesalers selling to cafes in the local area to newspapers, energy companies, and larger technology companies. What we realized is that these companies all had a few things in common: they had ongoing relationships with their customers, were struggling to get paid regularly, and that struggle was distracting them from focusing on what they had gone into business to do in the first place: create great products and outstanding services. 

At this point, we realized the platform we were building was ideally suited for those kinds of ongoing relationships as recurring-payment-for-use cases.   

Where does GoCardless fit into the SaaS business model?

We work with a lot of SaaS companies and see two models. One is more of a straight subscription that has you offering a plan for $50 per month, which means that you want to charge that amount every month, ideally forever. The other is more of an invoicing model that might be usage-based, with invoicing done every month, quarter, or even every year.  

We saw problems in both use cases. Think about what typically happens in the invoice model: the company sends you an invoice at the end of the month detailing your usage and then waits for you to send a payment, which is done either by bank transfer or by check. In the U.S., over 50% of subscription payments are still being made by paper checks, which is a fact that boggles my mind.

This whole invoice-and-wait process creates a lot of problems. As any company with an accounts receivable department can tell you, the biggest problem is around cash flow due to late payments. For many businesses, this problem can be the difference between survival and not-survival. Alongside those cash flow issues, you also have a big admin problem as you continue to put in the work to collect the payment, reconcile accounts, and that sort of thing. 

What we do in an invoicing situation is to offer you an entirely automated way of collecting those payments. At the start of a subscription relationship, you set up the customer or organization with 30-day payment terms, for example. From that point onward, whenever you send an invoice to that customer, a payment is automatically scheduled to be made from the customer’s bank account in 30 days’ time. Everything is automated and integrated with the accounting platform you use, the billing platform you use, and so on.

This solution means that you have much more visibility on your cash flow and reduces your admin costs. From our side, we see transformational impacts on how long it takes to convert an invoice into payment. We can take the average wait time down from 60 days to around 3 days by automating the process.

On the subscription side, it’s slightly different given that you are dealing with a larger customer base and processes that have already been largely automated. The challenge in this use case is to figure out how to keep your customers subscribed for as long as possible. This problem is one of the biggest challenges when using cards for recurring payments, which is still the predominant way that subscriptions are paid online. On average, 10 to 15% of recurring payments fail. This failure can be caused by everything from cards that have expired to the complexity of the card network. In any network, you have to submit the transaction with specific kinds of authorization codes, proper labeling for recurring transactions, and so on. There are companies built around optimizing precisely this set of card data. 

These payment failures tend to be one of the biggest causes of churn for subscription businesses. We offer a much more reliable way of collecting payment. On average, you will see failures go from around 15% down to about 3%, which is the average across our network. It might fall even lower depending on the industry. This ability to reduce failed payments has a significant impact on a company’s ability to keep customers for the long term.         

How do payments impact key subscription payment metrics?

The way we think about the impact on metrics is through the lifecycle of the customer. You have the metrics that make a difference when winning a customer in the first place. These metrics tend to be about conversion rates, and a big factor here is keeping in mind the customer’s preference. What we see, especially in the U.S., is that consumers are still very credit card focused. But as you move internationally and even look at the B2B landscape in the U.S., those preferences are not the same everywhere. Understanding customer preference and reacting to it appropriately can be a big driver of conversion.

The other key metric that we highlight is around churn, and specifically, how we can help you reduce churn by minimizing the failure rate and exceptions that you see with your payments. Typically, for subscription businesses, the biggest cause of churn will be payment failure, so dealing with that more effectively can deliver a massive impact.

Beyond churn, why is it important for SaaS companies to automate payments?

Automating the payment process is key to SaaS companies. If you think about the general trends of SaaS and B2B over the past few years, it is becoming more consumerized, in a way. How you are doing business today is not how you were doing business 5 years ago. We are seeing a lot more interest around automating the entire payment process from both the accounts payable and accounts receivable sides of a transaction. These changes are the big wake-up call for the industry. 

Besides the significant benefit of improved cash flow, saving time is a huge advantage of automation. For small businesses, it’s often the business owner taking a lot of time just chasing payment. For a larger business, it’s generally a big accounts receivable team that keeps scaling as your customer base grows. In either case, automation can dramatically decrease the amount of time people spend in triggering, collecting, and monitoring payments. 

The third benefit, which is very important to keep in mind, is how automation can create a better experience for your customer. They no longer have to manually pay a company every time or sit down to write a check. Automation takes the burden off the customer and takes you away from a relationship that is too often about money and payments to one in which you can focus on the service and the products that your customers enjoy.

What are you doing differently at GoCardless? What sets you apart? How do you fill this gap in the market?

The main difference is that GoCardless is focused entirely on recurring-payment use cases, which also means that we only focus on businesses that have an ongoing relationship with their customers. We don’t do any e-commerce or one-off transactions. We just do recurring payments.

This narrow focus means that as we continue to build the best way to collect payments in these use cases, we often come to very different solutions than other companies do. We have built a network on top of the various bank-payment mechanisms that exist around the world, which are, at their core, still the cheapest and most reliable way to collect recurring payments. We also recognized that in many countries, bank payments are also how consumers and companies prefer to make these types of recurring transactions. So our job is well defined: make each of these systems really, really easy to use. That’s how we’re different from everyone else.   

Hiroki Takeuchi, GoCardless Co-founder and CEO

Talk about the process that led GoCardless to focus only on recurring payments. How did you reach that decision point?

As we went through the process of watching lots of different companies using our platform and digesting the information we were gathering, we saw a market and economy moving more and more toward this type of recurring, subscription-based consumption. But while we saw the subscription economy growing and SaaS markets growing, we did not see anyone offering the focused solution that GoCardless delivers. 

This realization is why we are so focused: we want to take away the pain out of being paid. We want these businesses to be able to focus on creating great products and services, and making their customers really happy. At the end of the day, payment isn’t usually what makes you the happiest; it’s everything else around creating the product or service that generates the payment. So, we want to make the payment process as seamless and easy as possible to allow you to spend more time doing what you enjoy the most.

What does the future look like? What is GoCardless currently working on to optimize this seamless experience?

We have been on this journey to get into new markets. One of the things we have been focusing on over the past couple of years has been the fact that banking systems all over the world are very different. Every country’s banking system has a unique flavor, so we have built a global network that connects these systems through a single API, providing a system that can seamlessly collect payment from anywhere in the world and in any currency. This goal is important to us.

As part of this international focus, we have started hiring people into offices in Australia and across Europe. We opened an office in the U.S. at the backend of last year and have been seeing a lot of traction in the U.S. with technology and SaaS businesses. We think the U.S. is a really great market for us.

How has your journey to the U.S. been so far?

It’s been great. We’ve been fortunate to work with some great companies, and we already had some strong partnerships in place that we have been able to leverage effectively. We have built some momentum and are establishing our reputation in the market. So, we are really pleased with how things are going.

At the end of the day, we don’t want our customers, wherever they are in the world, worrying about anything related to recurring payments. We just want to make the entire process safe and simple. That’s our job.

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