What are the trends and issues that will impact your ability to get paid by your members and subscribers in 2020? In this on-demand briefing we:
- Examine trend data to help you understand how your business needs to navigate 2020.
- Discuss other key emerging issues in 2020 to prepare for.
- Walk through tactics and best-practices your business should employ to mitigate any negative impact from these trends.
If you operate a subscription or membership business – regardless of subscription vertical, industry, consumer focus, or transaction volume – your revenue is impacted by payment trends and market dynamics happening right now. And, if your business is still operating with payment best practices from 12 months – or even 5 years ago – you are leaving money on the table. This briefing will help you understand what you need to learn and plan for so you won’t leave money on the table from involuntary churn.
A Bit of History
So as we’ve entered a new decade, I thought we would look back a little bit over the past year to get a brief history lesson. Everyone loves the subscription economy, which is wonderful news for all of us here. Consumers have adopted it in droves. Hard brands have been changing regulations to help support services and improve the experience for merchants and for consumers and tech companies are diving in to solve additional needs. Over the past decade, M commerce has exploded as phones have become multipurpose tools. Earlier phones like this one were very small, often didn’t even have full keyboards and made it very difficult to transact by mobile device. Newer phones obviously are kind of one stop shop devices for consumers to really do everything and manage everything in their lives on enabling transacting on mobile devices wherever they may be much simpler.
In 2007 Netflix added streaming content, which blazed the path for a shift to OTT as an option for TV and movies and then Dollar Shave Club became a major disruptor with its launch in 2011. From here, the subscription model rapidly expanded to include replenishment, access and curation models that are now the norm. Also, digital subscriptions have grown with an increase in gaming with content and particularly as some print publications are switching to either digital only or digital plus print. But the more things change, we are still seeing some similarities and the early 2010s we had massive data breaches. Prepaid cards began to pose a retention problem and American spent to their credit limits causing declines for insufficient funds. Now there are breaches. One was just announced two days ago, I believe Wawa had about 30 million cards breached that are not for sale on the black market. Invasive fraud is also expanding now. Prepaid cards are gaining rapidly in usage, but there are better detection tools for them and a booming economy means higher limits, but Americans are still spending to those limits.
When we look at approval rates from 2010 and 2011 versus 2019 this was across the subsection of PLC clients. We see a lot of it is very similar. Amex and Discovers still remain higher approval rates. Overall, not a lot of influxion in 2019 but we do see in general the approval rates are slightly lower now than they were back then. Although that is largely due to an increase in retry attempts and adding in additional decline responses that we traditionally were not retrying. Now we are and we’re seeing great success with some of those decline responses.
TREND 1: The Age of the Customer
So our first trend is this is the age of the customer. Competition has been fierce and is only increasing, [inaudible] subscribe and save on Amazon and pretty much everywhere else. Auto replenishment on just about every usable product on most retailers, box subscriptions for everything under the sun. It means you’re likely not the only one in your category.
There are more than 3,500 subscription box companies in the US not even accounting all of the other continuity services such as streaming media, gaming content and more. All of this can be overwhelming for a consumer and they have multiple options to get what they need, wherever they wish. If you’re playing to win in the space, the best way to thrive is by offering stellar customer service, meeting the subscriber where they need you and allowing the ultimate flexibility in your subscriptions. This means many of the traditional models and even technology platforms made no longer contribute to your success. The customer is always right. That old [inaudible] rings true still. Allow customers to pay when and how they want. Installment billing is on the rise. It’s been very popular around the world and it’s now becoming more popular in the US, alternative payment methods and wallets are all options to consider to help increase conversion.
Also, it’s becoming increasingly important to allow your customer to self-service, allow them to upgrade, to downgrade, to pause, to change frequency. If you have a food company, for example, someone’s on vacation for a week, they might not want to receive it. Allow them to shift even with print publications. If you’re going to be on vacation or if you’re feeling overwhelmed with things in your mailbox, you might want to pause, allow consumers to do that and allow them to do it themselves. Also, becoming very important is allowing customers to cancel by text or email or online. Financial institutions agree with this and they have actually enacted some different regulations now, more coming in April where they’re requiring more disclosures in the conversion path, more communications before billing and restrictions on free and low intro trials. So you’ll have to inform the customer more beforehand as well as make sure you communicate with them before you bill them after the free or low intro trial and allow them to cancel simply through an email or through a text.
The card brands are now implementing these regulations which are more stringent and similar to laws that have been rolled out in multiple States like Vermont and California, and we can expect that trend to increase. There are almost as many apps to help manage and cancel subscriptions as there are subscription companies these days. So when you’re offering your consumers complete flexibility and self-service, they’re going to be less likely to resort to using these types of tools more comfortable coming to you, and then you’ll have an opportunity to actually keep them in there without letting them go and cancel the whole subscription. So if you allow them to change their frequency, or changing their next scheduled billing date, then they’re going to be more likely to stay with you.
It’s important to understand your volume by issuer as well. Capital One for example, offers a tool for their card members to cancel subscriptions and manage their subscriptions online. As a second leading issuer in the US they likely make up a large proportion of your subscriber volume. So by making the subscription, tailoring experience as simple as possible for your customers on your site, you’re allowing yourself the opportunity to retain them in some capacity.
TREND 2: How People Are Paying
People are paying differently now. We can see this is a through 2000 to 2015 debit cards have gone up, credit cards have gone up, ACH is increasing slightly, paper cheques have obviously decreased. Consumers are getting away from that and prepaid debit cards have increased quite a bit. That has actually grown quite a bit more since 2015. The reasons for the increase in prepaid card usage are primarily related to un-banked and to debt-averse consumers.
About 8% of US households have no bank at all, which equates to about 17 million adults. Another 20% are under-banked. Recently New York City has joined Philadelphia and San Francisco in banning cashless stores in order to ensure that the 25% of the city’s population who are unbanked can still transact. Other cities, including Chicago and DC are going to follow suit. Your card not present eCommerce store is essentially a cashless place, so you need to also ensure that you have an opportunity to allow these consumers to transact if you want to have them as customers. But the fact that these laws are coming about really highlights how pervasive the unbaked population is. In some cases you might want to prevent prepaid cards from coming in. Some acquirers or gateways offer prepaid cards screening. That’s one size fits all.
But with these types of consumers and the growth in prepaid, there are different types of prepaid cards being used now. Your business may be one that appeals to an under-banked demographic or to people using government benefits card or payroll cards. So if you’re blocking all prepaid cards, it might not be an effective strategy any longer and it might be causing you to lose out on revenue and customers. There’s also a different type of consumer who’s using prepaid cards while they’re embracing subscriptions for convenience and things that they know they want and need. There’s still is a reluctance for some consumers to commit to a longterm relationship. So oftentimes prepaid cards are used to enable dabbling with your service. Your initial offer can make you more or less susceptible to these gamers.
These may be the scenarios where you wish to block the prepaid card usage, so it’s important to understand whether cards are reloadable or non-reloadable or what type of prepaid card the consumer is using, whether it is a payroll card or a social security card or something in that nature. When we look across PLC’s clients at auth rates by issuer, we can see some of the key prepaid issuers here having very low response rates, very low approval rates. And so if you look for example at Comerica bank, the overall approval rate for the quarter was around 15%, 20% that includes social security cards because they are the issuer for social security benefits. If you have an older demographic, you don’t want to block all of those. If your acquirer or your system is only blocking by all of prepaid, you might be missing out on a demographic that could be doing well while there are others within that brand that you do wish to block.
TREND 3: FinTech
FinTech is the buzz word of tech and finance merging. What we see with FinTech is a few things. The pervasive pays. FinTech is enabling new ways to pay and making payments easier. Tech companies are expanding into banking services and banking companies are focusing on growth in tech, so banks saw that growth with peer to peer payments via Venmo and they quickly banded together to create their own solution called Zelle. This crossover between tech and finance has been contributing to ramp an M & A in the space and the developments in tech have also enabled new ways of commerce including voice and even incur commerce to gain ground. If we focus on the pays first, you can see the payment methods used in 2018 the stored card is still the highest, PayPal at 22% has actually grown a bit in 2019 and the other pays combined averaged about 10% of overall transaction volume in 2018.
The question on which pay to take varies based on your demographic, but Apple pay has about 400 million users globally continuing to grow as acceptance in contact those payments increase. However, Apple pay historically was more of an in person contactless transaction, so using it at Starbucks, using it for your mass transit. PayPal just announced yesterday that they now have 300 million active accounts. They do have nearly two times the conversion and checkout versus any other wallet. All of the pays have global reach and can make cross border shopping easier for your customers. While let’s behave similarly to credit or debit cards because they’re funded by credit cards and make accounts. Historically, merchants have been reluctant to accept these payment methods because consumers could cancel directly in the wallet, but now with sophisticated consumers canceling without contacting you anyway, you may as well go ahead and accept them.
The upside to taking the pays is that these wallets have multiple funding sources available, so if one payment method fails, they can go to another. They can look at the different cards or bank accounts that are attached to that wallet and try different options. Additionally, consumers are motivated to keep their payment methods current within their wallets because they’re using them in more than one place. As we look at the leading peer-to-peer facilitators, both companies are showing the same growth trend, but Venmo as the first in the space is definitely leading in volume. In Q3 of 2019 Zelle had 196 million transactions. Venmo had 27 billion transactions in that same time period.
For a few of the companies that are really tech first, and we’re looking at Venmo and Apple, they’ve actually both launched their own cards. Venmo actually just announced today that they’re just going to be by visa, so this graphic will change, I assume, but both will be accepted wherever Visa and MasterCard are accepted. Venmo’s card is tricky. It’s funded by peer to peer payments, so when you’re a recurring business, they will only have funds on it when they’ve been paid by a peer. Unlike a regular debit card where you can assume it’s funded once payroll hits every other Friday or the 15th and 30th of the month, for example, a peer to peer type of payment, the Venmo card will only be funded if someone goes out to dinner with her friend, for example, and they split the check and their friend pays them by Venmo. There’s not a regular schedule to the replenishment of funds.
However, the Venmo card does allow for automatic reloads from an associated bank in increments of $10 assuming the cardholder has agreed to those terms in advance. So it could be possible to have funding come in, but it’s going to be a trickier one to tackle. Apple card is just a MasterCard issued by Goldman Sachs and it’s a credit card just like a regular credit card. They are offering cashback rewards that they’ll be delivering daily and can be transferred to an Apple pay account or it can be used in iTunes or the Apple store. And because it’s a credit card, there really aren’t any special considerations that need to be taken into account. But what could be useful information is if you see a lot of your users coming in using an Apple card and you’re not taking Apple pay, perhaps you would want to add that payment method as well.
Recent M&A demonstrates the fluidity of the tech companies and financial institutions coming together. As acquirer to a consolidating, they’re working to pull the best functionality from each of the companies. So if you’re able to benefit from one of these acquisitions, make sure that whoever you’re working with is bringing those synergies to your solution as well. V-commerce is a new opportunity and there are about 53 million people who have access to a voice-enabled device. About 40% of those are shoppers, currently, that’s primarily single sale, not recurring, but there are opportunities for the future to consider how you can translate those into subscriptions and how you can also add those to replenishment. The risks and the unknowns here are how will you get them to truly opt-in, what will be the requirements for voice opt-ins and the biggest unknown remains the fraud risk. There’s definitely additional exposure potential, but we don’t know what that will look like yet.
TREND 4: Card Brands Embracing Subs
Car brands are embracing subscriptions. They have been for a while, but they’re definitely making more strides. Visa announced actually in November at subscription show 2019 that they’ve changed their retry restrictions, which were previously up to four times over 16 days, now up to 15 times over 30 days. So they’re seeing the value in continuing and extending the retry process and extending the amount of times you can see if the card is good. They’ve also launched realtime account updater, which could bring updates to the forefront sooner so you don’t have to retry as long or you’ll get more update information. There’s also the new fairly new card on file indicator. A lot of merchants and acquirers are not ready for this yet, but those who have been using it have seen a slight uptake in approval rates for the card on file indicator, which really just shows that issuers do value the recurring transaction and they’re likely are to prioritize an approval on a recurring transaction than on a non-recurring.
What we’ve seen at PLC over the past three years, this is showing issue or participation. In 2017 74% of issuers participated in account updater, in 2019 that rose to 98% of issuers. We are expecting that to at some point reach as close to 100% as possible. So that is excellent news for everyone who relies on account updater.
TREND 5: Global Expansion
Digital content has fewer barriers to global entry than physical, obviously. So if you’re a digital company, you should consider expanding going globally. So an example from Netflix. Half of their revenues come from the US which means that half of them don’t. Growth in the U S has matured as they’ve reached a saturation point. Much of this growth can be attributed to price increases rather than incremental subscribers in the US but there’s much room for growth and rapid growth in global markets. The digital media growth in the world is expected to grow by 3.6% by 2024 but when we look at the growth in the US it’s only expected to be 2.4% increase and in Europe 3.2% so that means the rest of the world is responsible for most of this growth.
And that’s 3.8% growth for China was actually predicted before the trade deal with China was announced. The first phase of this trade deal has opened the opportunity for US card brands to obtain licenses in China, which they’ve never had before. So this will make it much easier for US-based merchants to easily accept payments in the sought after market. PayPal also just announced a deal with China UnionPay, which will enable PayPal merchants to accept payments from Chinese consumers who are using China UnionPay and it will also accept Chinese merchants to enact with American consumers. When you’re expanding globally, the challenge is knowing when to go local with presentiment and settlement. You should begin by testing regions and testing presentiment currencies. If your volume warrants it, you may decide to establish a facility in that region and then eliminate the cross border fees.
TREND 6: Evolving Fraud
Fraud has been evolving over the years. Bot attacks was still on cards and card testing are continuing. We saw a huge growth in that about two years ago and that hasn’t subsided too much, but new forms of fraud are coming on the horizon. These types, which first began as account takeover are now morphing into cell phone takeover. Account takeover was really predominant when Uber and Lyft began. You could buy credit cards on the black market for a couple of pennies and you could buy an Uber account for many dollars. It gives more information about that account holder. It gives personal information including passwords, usernames, email addresses and payment information. These types of attacks are actually making it much harder for fraud to be detected.
The new SIM card swapping is growing quite a bit. Jack Dorsey’s SIM card was stolen in August and Jeff Bay’s cell phone was actually just hacked into this month. So everyone is susceptible to this type of fraud and it’s very difficult to be detected. The biggest risk now is also what’s next. So what is on the horizon? What will the fraudsters come up with as fraud tools evolve? What will they come up with to counter those? Again, voice purchasing opens up an entirely new opportunity for fraud and we can expect this to continue. The good news is that fraud losses in terms of dollars have decreased in the past few years and they are expected to continue decreasing. This decrease is largely expected as a result of sophistication with broad tools, machine learning, being employed, and just general knowledge about what’s happening in the environment.
But we are still seeing bot attacks. So this is an example, a case study of one of our clients who was suddenly hit by car testers. The problem progressed, it was identified early, but it continued for a couple of months because the fraud prevention was being developed. They did not have a fraud strategy in place beforehand other than CVV potential AVS screening. So building this in took time while the car testers were still running wild with testing accounts and getting quite a number of them through. So as fraud continues to evolve, it’s really important to have that tech tool in place to prevent an attack. Despite efforts of issuers and card brands to reduce dispute volume, there was an upward trend in disputes over the past year. The primary reason is fraud, but this does also include friendly fraud. So again, communicate with your customers, offer them easy ways to cancel before they’re billed and check your billing descriptors.
So we recommend testing your billing descriptors personally across multiple issuers and even testing them in different media. For example, I recently looked at my charges via my bank’s app and then at my bank’s website and the same charges displayed different information. On the app there was no phone number or website on the website there was. So just test and see what’s out there. See what your consumers are seeing to help prevent any sort of friendly fraud.
TREND 7: Tech Stack
Making sure your tech stack meets your needs is also critical. Do you have a flexible billing system? Can your billing system allow you to have your customers self-serve? Are they able to change the frequency? Can they schedule their billing date? Make sure that your processor is a recurring focus processor, so you want to be sure that they understand recurring billing, that they are experts in recurring billing. Not all processors are created equal. Certain information, as we’ve mentioned before with the card type, different types of prepaid cards, funding available, the demographics of the cardholder, having flexibility in payment methods, having flexibility in presentiment, currencies and settlement currencies are all important.
The other thing you want to do is make sure that your billing system and your processor or your gateway have the tightest integration possible. So a billing system may have all the bells and whistles you need, but they might not be accessible with the processor you’re using integrated with them and vice versa. Your processor may do everything under the sun, but the billing system you’re using might not be able to access all of those rich features. The other thing you need nowadays in your tech stack is a purpose-built fraud solution. So there are a lot of solutions built into billing systems and built into acquirers, but a lot of those don’t cover what we’re seeing now. They’re limited, they’re more of IP testing or velocity checking. So having a machine learning purpose-built fraud solution, particularly for certain demographics or certain merchants that are most at risk is becoming increasingly important.
So what does all of that mean for 2020 and beyond? Delight your customers offering flexibility and subscription terms. That’s a deep dive analysis into your card type and your payment method success. Determine your rules around prepaid and whether you should actually be blocking any or none or some. And then can you identify those which ones you need to be blocking? Add alternative payment methods if you don’t already add wallets, consider adding different currencies in different payment methods globally. Always you should adhere to issuer and state regulations on notifications and on terms throughout the shopping cart. Test the global waters or go deeper if you’re already there. Add tools purpose built for fraud detection and prevention and evaluate your vendor’s capabilities to ensure they can meet current and future demands. In the end it is still all about maximizing capture by minimizing churn while also mitigating fraud. So with that, any questions?