When deploying payment methods for customers, it’s important to consider how they will affect your efficiency and customer experience. A payment method should:
Be flexible - so you can collect recurring, adhoc and variable payments
Be automated and integrated into your workflow, saving you time and reducing error
Help you to convert and retain customers (by meeting their payment preferences and providing a seamless payment experience)
Be safe and secure, protecting client data and preventing fraud (providers should be authorised by the Financial Conduct Authority, ISO27001 certified and GDPR compliant)
Here is an overview of the most popular payment methods used by investment platforms today, how they work and the benefits and downsides of each.
Automated payment methods
Automated payment methods are popular with customers since they don’t have to remember to pay manually. For the business, automated payments can increase conversion and usage of a platform.
Direct Debit is an automated, flexible payment method that can be used to take payments (of fixed or variable amounts), from a customer’s bank account to their investment account, on a regular basis.
It is set up by the business, with the customer’s authorisation (through a Direct Debit mandate). Once a mandate is set up, it can also be used for adoc or one-off payments.
In the past, businesses could only access Direct Debit through their bank and had to sign up customers through paper mandates. Now, you can set up and manage Direct Debit payments online and integrate them with your billing system, through third party providers like GoCardless.
Since launching with GoCardless, three out of five of Nutmeg’s customers opt to pay through online Direct Debit. Nutmeg says they have benefitted from the automated nature of Direct Debit with GoCardless, meaning they haven't had to employ extra staff to oversee laborious payment processes. “Because of their easy to use APIs, backed up by a customer portal and excellent customer service, we’d highly recommend GoCardless,” Nutmeg says.
Plum, a British money management chatbot founded in 2016, says its main consideration when deploying a payment method “is the convenience for the user. For example, the ability to do repeat payments without the user having to do anything." Direct Debit ticks those boxes, says Plum, and it is also "a low-cost solution”.
Recurring card payments
A recurring card payment, often referred to as a Continuous Payment Authority, is an authorisation provided by the customer that permits the merchant to take payments from them by either debit or credit card. These payments will remain in force until the customer cancels the arrangement.
To give a business a Continuous Payment Authority on a card account, the customer provides their debit or credit card details, rather than their bank details, which would normally be used to set up a Direct Debit.
For businesses who take recurring payments, card processing fees can be expensive, with costs per payment (typically 2-3%), plus monthly charges. Payment failure rates are typically greater than 5%, due to cards expiring, being cancelled (when lost or stolen), or being declined if a customer goes over their spending limit.
A standing order is an automated payment method set up between a customer and their bank to send payments to other people or organisations.
The cost of setting up and using a standing order for regular payments is free or very low and payments are cleared on the day of payment (unless it’s a non-working day). The main drawback to using standing orders is that they're inflexible and cause significant manual admin.
How do automated payment methods compare?
|Direct Debit||Recurring card payments||Standing orders|
|Control and flexibility||High. The business can initiate regular payments, with one-time authorisation from a customer. Payment amounts and frequency can be varied easily.||High. The business can initiate regular payments, with one-time authorisation from a customer. Payment amounts and frequency can be varied easily.||Low. Customer initiates payments. Can only be used for fixed amounts at regular frequencies. Can't be changed without setting up a new standing order.|
|Customer preference||High. According to Finance UK, 73% of all regular investment payments and 83% of regular savings deposits were made by Direct Debit or standing order in 2017.||Low-medium. Consumers accustomed to paying by card in most areas of their life but according to Finance UK, in 2017, only 2% of regular investment payments and less than 1% of regular savings deposits were made by credit/debit card in 2017.||High. According to Finance UK, 73% of all regular investment payments and 83% of regular savings deposits were made by Direct Debit or standing order in 2017.|
|Automation and integration||High. Providers like GoCardless allow for full integration with your workflow through an API - enabling better reporting, automatic reconciliation and the creation of tailored online payment pages.||High. Depending on the provider, can be fully integrated into your workflow using APIs.||Low. Not integrated. While payments are automatic, you would need to manually check bank statements to see if payments had been made.|
|Speed||Medium. Initial payments through Direct Debit can take six working days while the funds clear. Subsequent payments clear completely on the fifth working day. Find out more about Direct Debit timings||Fast. Varies by provider, but providers like PayPal offer 24-hour turnaround - even for initial payments. Best used if you require next-day payment.||Fast. With Faster Payments, standing orders are usually processed and received on the same day they're sent.|
|Cost||Low. Varies by provider. GoCardless charges 1% per transaction (capped at £2), with no hidden costs for its standard package; or get volume-based transaction pricing and customisation options for a monthly fee.||High. Around 2-3% and monthly fee for merchant account. Likely to be admin costs involved in chasing customers to update expired card details (at least every three years per customer) or additional costs for account updater services.||Low. Possibility of a small fee taken by your bank, but otherwise free. Likely to be admin overheads associated with managing standing orders.|
|Payment failures||Low. Since Direct Debit avoids card networks, payment failure rates are typically low, at less than 0.5%. Providers like GoCardless only charge you for successful transactions. Fewer payment failures reduces involuntary churn, increasing monthly revenue and customer lifetime value.||High. Payment failure rates vary, but tend to be greater than 5%, due to cancelled and expired cards or customers hitting spending limits.||Medium. Avoids card networks, so payment failure rates of less than 1%. But you won’t be notified if a payment fails (e.g. if there are insufficient funds).|
|Customer protection||High. Because of the Direct Debit guarantee, payments may be ‘charged back’, making this payment method unsuitable for payments of over £5000. Chargebacks are uncommon, typically affecting less than 1% of transactions.||Medium. Recurring card payments enable customers to apply for a refund when using credit cards, but there are greater limitations for customers than when using Direct Debit.||Low. No customer protection once payments are made which gives businesses greater protection.|
One-time/manual payment methods
The following payment methods can be used for one-off and adhoc payments, but they rely on the customer remembering to pay each time, which may affect usage of the platform. They may also require a more manual or time-consuming accounting process.
A one-time transfer of funds from a customer's bank account to their investment account, using a debit card.
Debit and credit cards are in everyone’s wallets, so they are an easy way to take one-off and spontaneous payments - and funds arrive in the business’s account very quickly.
Cards can expire and most debit cards have limits on them per day (often £5 or £10k), which may cause payment failure.
A one-time transfer of funds from a customer's bank account to their investment account, which is done by logging into your online banking. Depending on the amount transferred, there can be no charge involved and it can often be done from a customer’s computer with just their bank account details.
Customers need to have payment details to hand and log into their own banking account to complete the payment. Bank transfers can be used for higher amounts (which surpass the recommended limit of £5000 for a Direct Debit).
Cheques are free to use, but can take a few days to arrive and require the business receiving them to put in place manual processes to deal with, process and reconcile payments.
While cheques are now seen as old fashioned, some companies still offer this option.
AJ Bell is one of the UK’s leading online investment platforms with £39 billion assets under management. One of its products is a Lifetime ISA, with its website stating that, ‘single payments can only be made by debit card or cheque. Regular payments must be made monthly or annually by Direct Debit.’
“We provide these payment methods as they are straightforward and convenient for customers to use,” a company spokesperson tells GoCardless.