What are the best online payment systems? How to choose the right payment system for your business

Why your choice of online payments solution matters

It can be tempting to opt for whichever online payments solution is the simplest and cheapest for your business. However, this can be a false economy. There are two parties involved in any payment – the business and the customer – and it's vital to balance the needs of both.

What's cheaper for your business isn't necessarily cheaper for your customers. In fact, the opposite is likely to be true. In market sectors where competitive margins are thin, choosing an online payment method that shifts cost away from your business and onto your customers money may be superficially appealing but ultimately self-defeating. A similar problem presents itself with online payment methods that are low-maintenance for you, but require your customers to jump through hoops. If not carefully considered, these two elements of friction may drive your customers to your competitors.

It’s important to realise that the online payments solutions you use are more than just an overhead for your business. Leveraging the right solutions for your product, service, or market can drive business results - improving customer engagement and loyalty, boosting conversion, and ultimately increasing your revenue. The solution you choose for accepting online payments is something you should evaluate carefully, and continue to re-evaluate both over time and as your business grows.

The Eight Payment Dimensions: A framework for choosing the best online payments solution for your business

In our efforts to improve the GoCardless product for our customers, we wanted to more deeply understand how payments impact businesses. From numerous conversations with a variety of different businesses, clear trends emerged, and we distilled these into what we call the Eight Payment Dimensions.

What the Eight Payment Dimensions enable us to do goes beyond understanding how payments impact businesses or ensuring our product continues to deliver the best results for our customers. The Eight Payment Dimensions are a framework that allows businesses to holistically assess any method for taking recurring payments and like-for-like compare it with any other, to determine which is best for their circumstances.

While the Eight Payment Dimensions were originally conceived in relation to recurring payments, they are largely relevant to online payments in general.

By considering each of these Payment Dimensions for your business and customers, you can make an informed decision about which online payment solution is most beneficial for you.

1. Coverage

A measure of payers who could choose to use a particular payment method.

To be able to sell to your customers, you need to offer them payment methods they can access. The importance of Coverage depends on your market reach. If you sell locally, you only need to offer a locally-available payment method. But if you sell internationally, then you will either need an internationally-available payment method, or different locally-available payment methods for each market you serve.

Coverage also depends on the market penetration of a payment method. For example, PayPal has reasonably high penetration in the US and UK but lags further behind in New Zealand.

2. Preference

A measure of payers that do choose to use a particular payment method.

To be able to effectively sell to your customers, you need to offer them payment methods that they actively want to use. If you don’t, they may seek out competitors of yours which offer them the payment methods they’re looking to use.

Customers’ online payment method preferences are often subjective, largely influenced by where they live and the culture of that locale. They’re also influenced by the type of product or service they’re paying for, and whether it’s a one-off or recurring payment. It’s also worth keeping in mind that your customers’ payment method preferences may not be shaped by actual experience with the payment method in question. They can also be shaped purely by perceptions of those methods.

Preference can be broken down into four key areas:

• Simplicity - Is the payment method easy for your customer to use?

• Trust - Is the payment method secure and is there compensation for any loss on your customer’s behalf?

• Incentive - Are there incentives to use this particular payment method? (E.g. American Express’ credit card rewards schemes)

• Relevance - Does the customer expect to pay for a particular product or service using this payment method? (E.g. It would be unusual to pay for a software subscription with cash.)

The ideal payment methods for your business are those which your customers most prefer to pay for your product or service with, within the market they reside.

(Want to know what consumers’ payment preferences are in 2019? We recently partnered with YouGov to survey consumers across 10 markets. Register for your FREE copy of the report here.)

3. Conversion

A measure of payers that complete the setup process for a particular payment method.

Some payment methods may be quick and easy for your customers to use; others may be more time-consuming or difficult. Offering your customers payment methods that are simple for them to use reduces friction in their buying process, making them more inclined to complete the purchase.

Other factors that contribute towards customers’ conversion are the trustworthiness of the payment method offered, as well as any incentives present.

Conversion is intrinsically linked with Preference. Offering your customers payment methods they prefer to use - whether that be due to ease of use, trust, or some other factor - can have a significant impact on conversion.

4. Cash flow

A measure of how long it takes to settle a payment, once it becomes a receivable.

In accounting terms, cash flow is a measure of the flow of money into your business in a given time period. (And while it is an ongoing challenge for small businesses, we’ve sourced practical advice from leading accountants on how to take control of it in your business.)

In the area of online payments, however, we’re more concerned with answering one simple question: how quickly will you receive the money from your customer after a sale?

This depends on four factors:

• Customer action - How long it takes a customer to action the payment

• Approval - How long it takes for the customer payment set-up to be approved

• Processing - The time taken to process the payment once it's been approved

• Settlement - The time it takes the funds to be paid out to your business

As a business, you want to offer your customers payment methods that enable you to receive the funds quickly. This allows you to more accurately project your cash flow, and grow your business according to your strategy.

5. Success

A measure of payments that are successfully collected and retained.

There are many reasons why a payment may fail, including:

• Invalid or expired payment details (e.g. expired credit card)

• Insufficient funds in the customer’s account

• System error within the payment network

Payments may also being successfully processed initially, then be reversed later. A typical example of this would be your customer not recognising a transaction on their bank statement, and requesting a chargeback.

Being able to mitigate the risk of payment failure is key to optimising your business’ revenue stream. The ideal payment methods for your business are those with low payment failure likelihood.

6. Churn

A measure of payers that a merchant is incapable of collecting from, after a given time period.

Churn is a metric that is specifically relevant to recurring payments or subscription payments. High churn indicates a business has poor customer retention. And with the cost of acquiring new customers often vastly outweighing the cost of retaining customers, businesses with high churn are effectively throwing money away.

Broadly speaking, there are two types of churn - voluntary and involuntary. Whereas voluntary churn represents your customer deciding to stop paying for your product or service, involuntary churn represents that decision being made for them. And as such, it is avoidable.

Involuntary churn, which can make up as much as 40% of all churn, typically happens when payment methods fail. For example, when a customer’s credit or debit card expires.

Payment methods which empower businesses to reduce involuntary churn are those with longevity and security at their core. A simple way to conceptualise this is to look at a bank account versus a debit card:

• Longevity - Your customer’s bank account details are unlikely to change even over a number of years, whereas the typical debit card expires in three

• Security - A bank account cannot be lost or stolen, whereas debit cards can be

(For more information on churn, including how to calculate it, industry benchmarks, and methods to reduce it - read our guide for subscription businesses.)

7. Cost

A measure of how much a payment method costs to build, operate, and process.

As noted earlier, cost can often be the first and last consideration for some businesses when choosing a payment method. While it shouldn’t be the only factor to consider, it is still important.

To understand the total cost of operating a payment method, you must look at three key areas:

• Set up - The monetary, time, and resource costs to integrate and configure the payment method for your business

• Management - The monetary, time, and resource costs of managing the ongoing operation of the payment method (including compliance, administration, legal, and localisation costs)

• Fees - The monetary cost associated with processing transactions (this can include both recurring service fees, per-transaction fees, and potentially other hidden costs which could be overlooked)

There’s also the consideration of DIY versus outsourcing. With some payment methods, payment handling can be set up in-house or it can be outsourced to a third-party. For example, setting up your own merchant account and payment gateway versus using a payment service provider.

When it comes to recurring payments, larger businesses have the option of setting up their own Direct Debit processes - something that smaller businesses can be unable to meet the requirements of. Even so, it's often better to outsource the work to a dedicated payment processor, as it's likely to be cheaper and simpler for your business.

While the ideal payment methods for your business would seem to be those with the lowest cost to your business, you have to take into consideration if a cost is pushed on to your customer (financial or otherwise). If so, they may choose to instead purchase from a competitor of yours.

8. Visibility

A measure of how long it takes to receive actionable information about a payment.

Within a business, it's important to have up-to-date information about the status of payments owed to you. Without visibility over this information, the reality of your business’ financial situation may be very different to what you perceive it to be.

For recurring payments (or subscription payments) in particular, knowing whether a payment has been cancelled is critical - because such cancellations indicate lost customers, and therefore lost future revenue. But if you act quickly, you might be able to win them back. So any delay on receiving actionable payment information is a risk.

Compared to other payment methods, Direct Debit payments are highly visible. Payment notification is detailed and you'll find out quickly if a customer cancels a mandate. Recurring payments (or subscription payments) from credit cards and debit cards tend to be more opaque. You may only find out about these cancellations or missed payments during a monthly audit.

The ideal payment methods for your business are those which provide you information which is both actionable and timely.

There is no universal "best" payment method

Remember, there is no one “best” payment method for every single business, every product/service, every customer, or every market. To find the ideal payment method(s) for your business, these Eight Payment Dimensions are the best framework to assess the options available to you.