Why Direct Debit is better than cards for your subscription business

Why Direct Debit is better than cards for your subscription business

The shift to a subscription model is built on the promise of predictable, recurring revenue. Yet, many businesses unintentionally compromise this predictability by relying heavily on card payments. While credit and debit cards are convenient for one-off purchases, Direct Debit—an automated pull of funds directly from a customer's bank account—offers a significantly more stable, cost-effective, and customer-friendly foundation for your recurring business model.

This isn't just about choosing one payment type over another; it’s about choosing the payment infrastructure that best supports your long-term revenue growth.

Beyond just cost, Direct Debit is better than cards for your subscription business because of its unparalleled reliability. With success rates from 97.3% to 99.5%, you'll experience far fewer payment failures than with typical card payments (7.9% failure rate), reducing churn caused by expiring cards or unexpected declines. This translates to more stable recurring revenue and less time spent on costly failed payment recovery.

Source: IDC, The Business Value of The GoCardless Platform for Recurring Payments, 2020

The silent killer: The flaws of cards in subscriptions

In a subscription business, the greatest threat to revenue isn't customers voluntarily cancelling; it's involuntary churn. This occurs when a payment fails due to operational issues, even when the customer intends to stay subscribed. Card payments are the primary culprit, creating friction and risk at a high rate.

The involuntary churn trap: A significant portion of total churn (estimates suggest up to 20%) is involuntary. The main cause? Card payments failing due to expired cards, lost/stolen card replacements, or insufficient funds.

The expiration headache: Credit and debit cards typically expire every three years. For a growing subscription business, this means one-third of your customer base will require a payment update annually. Chasing these updates is a continuous, resource-heavy, and often frustrating administrative task.

High failure rates: Card payments, particularly recurring ones, typically see failure rates of 5% to 15% or higher. These failed transactions force businesses into expensive and time-consuming "dunning" processes (retrying payments and sending reminder emails) just to recover already-acquired revenue.

Core advantages of Direct Debit for recurring revenue

Direct Debit addresses the fundamental flaws of card payments for subscription billing, providing certainty and superior margins.

1. Payment stability and near-zero expiry

Unlike cards, which expire and can be cancelled, Direct Debits are linked directly to a customer's bank account details, which rarely change. This makes the payment method inherently stable, virtually eliminating involuntary churn related to expired credentials and drastically cutting down on the administrative burden of chasing updates.

2. Superior payment success rates

Because Direct Debit bypasses the card networks and is a bank-to-bank transfer, it enjoys a much higher success rate. While failures due to insufficient funds can still occur, modern Direct Debit providers often achieve success rates of over

97% on the first attempt and even higher with intelligent retry systems. This means more stable cash flow and less time spent on payment recovery.

3. Significant cost savings

In the low-margin world of subscriptions, transaction fees are critical.

• Card networks typically charge a percentage of the transaction value (often 2.5% to 5% plus a flat fee), making them costly for high-volume transactions.

• Direct Debit fees are generally much lower, often structured as a small, capped flat fee or a significantly smaller percentage (e.g., around one%). For any high-volume or high-value subscription, switching to Direct Debit can lead to substantial savings, directly boosting your profit margins.

4. Flexibility for variable billing

Direct Debit is perfectly suited for modern, flexible billing models. It allows a merchant to collect variable amounts (such as usage-based billing, utility charges, or scaled SaaS plans) on a set schedule without needing fresh customer authorization every time the amount changes. This is far more cumbersome to manage using fixed recurring card mandates.

Addressing the set-up concern

Historically, Direct Debit has been criticised for its slower set-up and processing time. However, modern payment solutions have largely mitigated these disadvantages:

• Set-up friction: The old process of paper forms is gone. Today, customers can authorise a mandate instantly and securely online using secure bank login methods, making the sign-up experience nearly as fast as card entry.

• Initial payment delay: While the standard Direct Debit cycle takes a few days to clear, businesses can use integrated solutions like Instant Bank Pay to collect an initial payment (such as a sign-up fee or first month's subscription) instantly, bridging the gap until the automated recurring payments take over.

Case study: A SaaS provider's revenue recovery

A B2B SaaS company that provided a monthly enterprise software subscription faced an escalating problem: high transaction costs and constant payment churn. Their £450 monthly fee was costing them over £12 per transaction in card fees, and their 8% card failure rate was eating into customer lifetime value.

The card challenge: With a significant portion of customers using corporate credit cards, they were consistently hit by high premium card fees and constant changes to card details due to company policies, leading to an average churn rate of two% purely from payment failure.

The Direct Debit solution: By integrating Direct Debit alongside their existing card options, the company actively migrated high-value, recurring customers to the bank-to-bank payment method.

The results:

• Cost saved: They reduced their average payment fee from over three% to a flat, low-cost fee, saving them £90,000+ per year in processing costs alone.

• Churn reduced: Involuntary churn for their high-value tier dropped to below 0.5%, stabilising their most critical revenue stream.

• Admin eliminated: Their finance team reallocated hours previously spent on dunning and card update chasing to focus on more strategic growth tasks.

The verdict

For a subscription business, the payment method you choose is an essential element of your customer retention strategy. While cards are convenient for the moment, Direct Debit is the better strategic choice for recurring revenue. It delivers the stability, cost savings, and certainty necessary to build a predictable, scalable, and profitable subscription model.