B2B Subscriptions Reckon With The Risk Of Failed Payments

With Software-as-a-Service now a foundational technology for many organizations, the subscription payment model has proven valuable for both payer and payee.

On the payer side, accounts payable (AP) departments can take a “set it and forget it” approach to paying their subscriptions, providing service providers with a credit or debit card number that is automatically charged on a regular basis. While it can run the risk of unmonitored spend, this automated model typically leads to a reduction in administrative workloads while allowing for predictable expense cycles.

On the service provider side, the value, comes in similarly predictable and reliable capital inflows. It’s one of the biggest factors behind the ongoing rise in subscription and usage-based billing models getting picked up in verticals ranging from food delivery to talent acquisition and everything in between.

Yet as more businesses rely on subscription payment revenues, the risk of failed payments grows larger, too. And according to Gravy CEO Casey Graham, the usual methods of automated email alerts to end users simply don’t cut it. It’s a lesson he learned with his previous company, he told PYMNTS. Indeed, failed payments at the firm led to a multimillion-dollar loss in valuation at the negotiation table with a potential buyer.

“The reality is, automation only recovers about 15 to 20 percent of failed payments,” he said. “Yet that’s what most companies depend on to win back their most important asset, which is a paying customer.”

The Human Touch

In the wake of that realization, Graham said he had to rethink the strategy of recovering lost payments. Rather than relying on dunning software — the automated software to alert customers that their card payment has failed — he established a new department within the organization dedicated to metrics-based approaches to addressing the issue.

Failed payments can occur in a variety of ways, but there are three common culprits. These include administrative issues, like an expired card; insufficient funds; or a bank hold on a card that prevents it from being processed, itself caused by a variety of factors like suspected fraud. Automated emails can alert an end customer to these scenarios, but with limited success. The key, said Graham, is to overlay a more personalized approach to connecting with those customers to address and rectify the situation.

“Automation doesn’t get everything, but if you have a personalized outreach on top of it, when someone emails you back, you can negotiate with them or sell them back a product,” he explained, noting that Gravy — which recently announced $4.5 million in funding — has been able to increase the percentage of recovered payments from about 15 percent to 80 percent for its clients.

B2B’s Subscription Surge

While it may be straightforward to reach out to an individual consumer whose card payment failed, addressing payment failure in the B2B landscape can be a bit more challenging. That’s because it’s not always a single administrator at the receiving end of a bill. Still, Graham said, technology makes it possible to automatically identify the individual within an organization in charge of that particular transaction by integrating into a service provider’s payment platform.

The tactic highlights the potential value in more personalized communication with business end users as subscription and usage-based billing models expand within the B2B landscape. Graham said that Gravy has witnessed this increase, especially since the start of the pandemic. “Everything shifted to even more subscription bases,” he noted. “More subscriptions are flooding the market — this is true for B2C, but it’s also very true to B2B.”

In addition to enterprise SaaS, Gravy has seen an increase in clients like tech education firms that corporate clients use for annual certifications, as well as those in the micro-businesses arena, like individuals with personal brands. The shutdown of in-person events has also led to a shift in other professions, as writers, authors, B2B consultants and event speakers turn to the subscription model to provide their services digitally.

With the subscription model booming, the potential for failed payments — and the value of recovered payments — grows exponentially. But there is no silver bullet to address this issue. While Gravy focuses on card transactions, the B2B space can also face plenty of payment failures related to ACH and check transactions — areas that demand more manual intervention to remedy any disputes or disruptions.

Still, with commercial card adoption on the rise, B2B subscription providers will need a twofold strategy of automated technology and human interaction to recapture revenues lost to card payment failures. According to Graham, tackling this pain point holds even bigger implications for organizations’ success and customer retention efforts. “Everybody looks at churn,” he said. “But if you look under the rock of churn, there are different reasons why people leave — and one of those big reasons is a failed payment.”