How faster direct debit payments can transform your business

Advances in technology and new ways of doing business have helped change the way we pay for goods and services, making direct debit an integral part of everyday life. But as more subscription services require customers to sign up for direct debits, the direct debit process itself has undergone its own transformation.

The faster direct debit payment cycle

Superfast processing abilities of digital technology and instant payment schemes mean that, within certain limits, a direct debit payment in Europe and the U.K. can now work just like an instant payment – taking no more than two hours, and usually seconds, to cross directly from one account to another.

So, if you get your direct debit processes right, you could accelerate a high proportion of your cash inflows by at least a day or two. Get them wrong and you’ve lost an opportunity to improve working capital and increase competitive advantage.

Why direct debit adds up for your industry

Some firms are more reliant than others on direct debits for cash flow and working capital. For these types of businesses, smooth, highly automated direct debit payments are an important source of revenue, so it’s critical to tightly control the underlying payment process.

Insurance

Traditionally, insurance policyholders pay for their premiums annually. But today, there’s an ever-growing preference to spread the yearly cost over monthly direct debit instalments, which provide a steady revenue stream for insurance providers.

More insurers are moving to a subscription model, too, offering health, auto, home and life plans that are easier to understand, modify and cancel than annual policies. Integrating direct debit with this model further improves not only accessibility, flexibility and convenience, but also retention rates and customer satisfaction.

So, whether customers are spreading premium payments or subscribing to a service, direct debit is now a driving force of cash inflows for insurance companies. And for larger organizations with multiple regional entities, gaining control of these now much faster transactions is more important than ever.

With countless B2C and B2B payouts to make daily, often via instant payment rails, insurers must strike a careful balance to maintain liquidity. When cash outflows outweigh inflows, firms may need to draw down on costly credit lines, which reduces profit margins.

All the more reason, then, for a centralized treasury and finance team to collect premiums and subscriptions as efficiently as possible. With smooth, timely and accurate processing, direct debits look increasingly attractive.

Utilities

Utility providers collect high frequencies of direct debits from customers on a monthly or quarterly basis. In a well-controlled process, a faster direct debit collection cycle can hugely increase the productivity of firms’ accounts receivable teams and reduce daily sales outstanding (DSO) without additional headcount while improving working capital.

Although much of their business is B2C, these firms’ cash outflows go mainly to the B2B suppliers and franchises that help run and maintain their networks. As a result, there are much lower volumes of payments going out than coming in.

But clearly, the same cash flow principles apply to utilities as to insurers. So, they are just as focused on ensuring regular payments and that customers don’t default.

Rises in inflation have increased the cost of servicing debt, so optimal levels of liquidity are a priority. In practice, that means not only avoiding deficits, but also ensuring any surplus cash is invested in overnight funds, as the opportunity to earn interest has increased.

Telecommunications

Telcos not only offer individual B2C packages, but also large B2B contracts that require regular payments in vast amounts from corporate customers.

Over time, there has been an increase in the amount firms can collect by direct debit. In the U.K., the limits can be as high as £1 million per transaction depending on the authorizing bank. This makes direct debit a viable way to collect larger B2B payments, further boosting its appeal.

Now, through direct debit, telcos can take advantage of regular B2B payment inflows, just as they do with their B2C customer base. This in turn helps them reduce DSO, minimize churn and make more accurate cash flow forecasts.

Clearly, telcos must credit check companies before they set up automated direct debts, just as they do with consumers. And they must verify bank details and match them to business entity names, too, a process that modern technology now helps expedite.

By making these checks and balances part of a centrally controlled process, telco treasurers can accelerate their cash inflows and considerably improve liquidity and working capital with direct debits.

Technology, media, retail and beyond

From software-as-a-service providers – like Google, Amazon Web Services and Microsoft – to streaming platforms such as Spotify and Netflix, modern businesses have redefined how we consume technology and media. Their subscription services offer access rather than ownership, with direct debit often holding the key to admission and continued use.

Other sectors are now following, with retailers and even automotive manufacturers offering subscriptions to goods and services. Regular direct debits are a critical success factor in these business models, funding continuous product improvement with stable revenue and cementing long-term customer relationships.

How to get more from direct debit payments

Although designed to make life easier for businesses and their customers, direct debit comes with its own set of payment processing challenges and complexities. Ease these pain points and you can unlock the full potential of direct debit for your business.

Learn more about the challenges and opportunities of direct debit in our white paper, “Debit Where It’s Due.”