Reducing Failed Payments: Why Direct Debit Can Make a Big Difference
For swim schools, reliable payment collection is an important part of maintaining healthy cash flow and reducing administration.
Although both cards and bank-account Direct Debit allow payments to be collected automatically, payments can still fail — and the payment method, amount, timing and customer circumstances can all affect the failure rate.
Recently, several First Class customers asked us a simple question:
What percentage of Direct Debit payments typically fail?
So, we decided to take a deeper look at the data.
Across the Direct Debit payments we analysed, approximately 4.5% failed on their first attempt.
Importantly, this doesn’t mean 4.5% ultimately went unpaid. Many initially failed payments can be successfully collected through a subsequent retry or after the customer resolves the reason for the failure.
So, why do payments fail — and what can swim schools do to reduce them?
Card vs bank account: does payment method matter?
One of the biggest factors affecting recurring payments is whether the payment is being collected from a card or directly from a bank account.
Both methods can fail because a customer doesn’t have sufficient funds available. However, cards introduce some additional potential failure points.
Bank accounts don’t expire. Cards do.
Cards can also be lost, stolen, compromised or replaced. Unless updated card details are automatically provided to the payment provider, a recurring payment that has worked successfully for years can suddenly begin failing.
For a swim school with families who may remain enrolled for many years, removing these additional failure points can be a significant advantage of bank-account Direct Debit.
What is the most common reason for failed Direct Debits?
The most common reason is insufficient funds.
GoCardless reports that insufficient funds account for more than 80% of Direct Debit failures within its transaction data.
Other reasons can include:
- Closed bank accounts
- Cancelled Direct Debit authorities
- Incorrect account information
- Inactive Direct Debit instructions
- Restrictions placed on the account
The good news is that insufficient funds can be temporary.
A payment may fail today simply because there wasn’t enough money in the account at that particular time. A subsequent attempt may therefore be successful without the customer needing to update their payment details.
This is why your retry process can be almost as important as your initial failure rate.
Why do card payments fail?
Cards can fail because of insufficient funds or available credit, but there are additional reasons that don’t generally apply to bank accounts.
- Expired cards
- Lost, stolen or replaced cards
- Fraud or security checks
- Transaction or card limits
- Outdated card information
- Other bank declines
Some payment providers offer card updater services that can automatically update stored payment credentials when a card is replaced or expires. However, this doesn’t eliminate every potential card-related failure.
What else affects your failure rate?
Payment amount
The amount being collected can affect the likelihood of a successful payment.
For example, a family may find it easier to have sufficient funds available for a $100 payment than a $400 payment.
This means a swim school collecting smaller fortnightly payments may experience different results from one collecting larger monthly or term payments.
Payment frequency
When you collect payments can also matter.
If insufficient funds are the primary cause of failed payments, the day on which you process a Direct Debit may influence your results.
Understanding your own customer base and monitoring whether certain collection dates produce higher failure rates can help identify opportunities for improvement.
Your customer base
Failure rates can vary considerably between businesses and industries.
The payment behaviour of families paying for swimming lessons may be different from that of customers paying for another service — which is why your own historical data can be more useful than relying solely on broad payment-industry averages.
Your recovery process
The initial failure rate doesn’t tell the whole story.
Initial payment attempt → failure → retry final outcome →
A swim school with a relatively high first-attempt failure rate but a strong recovery process may ultimately collect more revenue than a school with a lower initial failure rate but no structured follow-up.
How can swim schools reduce failed payments?
1. Send payment reminders
Consider notifying families before scheduled payments, particularly larger payments.
“Your scheduled payment of $XXX will be processed on Thursday.”
A simple reminder gives the customer an opportunity to make sure sufficient funds are available.
2. Use automated retries
If a payment fails because of insufficient funds, it doesn’t necessarily make sense to immediately treat it as an unpaid account.
A subsequent retry may be successful.
Allowing some time before retrying can also give the customer an opportunity for additional funds to become available.
GoCardless reports that its intelligent retry technology can recover up to 70% of eligible failed payments, demonstrating how important the recovery process can be.
3. Monitor expiring cards
If you’re collecting recurring payments from cards, consider notifying customers before their stored card expires.
Where available, card updater services can also help automatically update stored payment credentials when banks issue replacement cards.
4. Make updating payment details easy
If a customer’s bank account or card details need to change, make the process as simple as possible.
A secure self-service option through your customer portal means families can update their details without needing to call your team or complete paperwork.
5. Communicate promptly when payments fail
If a payment does fail, customers should clearly understand what happens next. Your communication should explain:
- That the payment was unsuccessful
- The amount outstanding
- Whether another attempt will be made
- When the next attempt will occur
- How they can update their payment details if required
Clear communication makes it easier for customers to resolve the problem and reduces the amount of manual follow-up required from your team.
Failed payments cost more than the payment itself
The impact of a failed payment isn’t limited to cash flow.
Every failure can create additional administration.
Someone may need to identify the failure, contact the customer, schedule another payment, update payment information and reconcile the account once payment is eventually received.
Across hundreds or thousands of payments, reducing your failure rate by even a small percentage can potentially save your team a significant amount of time.
What should you measure?
Our analysis found an average first-attempt Direct Debit failure rate of approximately 4.5%. But this is only one number.
First-attempt failure rate
What percentage of scheduled payments fail initially?
Failure rate by payment method
Are you seeing a difference between cards and bank accounts?
Failure reason
Are failures predominantly caused by insufficient funds, expired cards or something else?
Retry recovery rate
What percentage of initially failed payments are subsequently collected?
Final failure rate
After retries and customer follow-up, what percentage of payments ultimately remains unpaid?
Monitoring these figures over time can help you understand whether changes to payment timing, frequency, reminders and retry processes are actually working.
The bottom line
Failed payments are an unavoidable part of collecting recurring fees, but they shouldn’t simply be accepted as a cost of doing business.
Our analysis found that approximately 4.5% of Direct Debit payments failed on their first attempt. Understanding why those payments fail is the first step towards reducing that number.
Bank-account Direct Debit can remove some of the common failure points associated with cards, particularly expired, lost and replaced cards.
Payment reminders can help customers prepare for upcoming debits, while an effective retry process can recover payments that initially fail because of temporary insufficient funds.
Combine these strategies with clear communication, easy payment-detail updates and regular monitoring of your failure rates, and even relatively small improvements can mean:
Better cash flow, fewer outstanding accounts and less administration for your team.