As subscription business models are built on recurring revenue and repeat customers, retention is critical. And if you are a successful subscription business, you likely already implement a range of initiatives to reduce voluntary customer churn, where a customer makes an active decision to stop or downgrade their use of a product or service. 

However, voluntary churn is only half your battle. Involuntary churn — where a customer’s access or service is interrupted due to reasons not of their own doing — accounts for up to 48% of all customer churn for subscription businesses. So if you aren’t focused on lowering involuntary churn, you’re leaving money on the table. 

Key causes of involuntary churn

Some common reasons of involuntary churn are: 

• Expired cards. A customer forgets to update their payment information when their credit or debit card expires (at least every three years per customer)

• Soft declines after credit limit maxes. This is an easy mistake for anyone to make, but an expensive problem for a subscription business to deal with.

• Hard declines for lost and stolen cards. Once that card is canceled the subscription is gone, and getting it back is not a given. 

• False positives. Credit card issuers and banks often take a “better safe than sorry” approach to legitimate automated card payments, and block transactions that look like fraud but are not. 

• Charges not flagged as recurring. If you don't flag a payment as recurring in your billing system, an issuer will believe that there's an error causing constant billing every month.

There are two critical takeaways from this long but incomplete list of causes of involuntary churn. 

1. There are many, many reasons why involuntary churn can occur, BUT, 

2. They are almost all related to payments, and specifically, card payments. 

The good news: there’s a range of best practices to fight involuntary churn 

Many larger and/or more sophisticated subscription merchants have advanced strategies in place to plan for and mitigate payment failure. A few of these include: 

Dunning: this is the process of asking customers for money that they owe your company. Subscription merchants can do this in a range of ways, including via email or in-app notifications, prior to a payment being due, or after a payment failure.  

Card/account updater: These are programs offered by credit card companies that automatically update subscription customer card data. These automatic updates take place when a cardholder's personal information changes or becomes out of date.

Tokenization: Tokenization is the process of exchanging sensitive data for nonsensitive data called “tokens”. In payments, a number of card networks and payment service providers offer tokenization solutions that are more secure and therefore have higher approval rates than regular card payments, and in some cases can also be updated if a card is lost or stolen. 

Besides these, other ways to fight against involuntary churn include having the right Merchant Classification Code (MCC) to reduce the likelihood of a payment being blocked, blocking high-risk BINs such as those from prepaid and gift cards, and flagging recurring payments in your payment gateway to ensure that the issuer knows that this charge will take place each month, among others. 

The bad news: these approaches are incremental, complex, and expensive

All of these can shave precious basis points off involuntary churn, which can make a big difference to retention and revenue, particularly at scale. And since most of your subscription and recurring payments are probably card-based, investing in some or all of these solutions probably makes a lot of sense. 

But they also have some serious issues. 

First, they are complex. To really implement all these things, and implement them well, you need dedicated expertise, a budget, and careful planning. This is an expensive undertaking for large organizations, and for smaller subscription merchants may be impossible. 

Second, they are all incremental solutions. At scale, each of these tactics can show ROI, but none of them is a fundamental game-changer alone. Rather, they are all small pieces of a much bigger puzzle. 

And it’s also important to note a third related point. Your payment service provider is more than happy to sell you these ancillary services and products to help you reduce involuntary churn, in fact, they are incentivized to do it. But what they aren’t so incentivized to do is reimagine your approach and your customers’ needs, and come up with a serious alternative.

So here’s the billion dollar question for subscription merchants: What if there was a way to drastically and sustainably reduce involuntary churn, at a fraction of the cost of expensive extra services?

Leveraging open banking to reduce involuntary churn

Open banking helps facilitate a new payment method called pay by bank which lets customers pay for goods and services using their bank account. A typical payment flow looks like this: 

1. When a customer completes their shopping and starts to check out, they will see the pay by bank option. 

2. Once this is selected, the customer will be prompted to choose their bank from a list, and be redirected to their bank app or website. 

3. The customer authenticates the payment the same way they normally log in to their bank account — with a password, face ID, fingerprint scan, or however they have it secured.

A key thing to notice — there is no credit or debit card involved. 

Pay by bank will help you drastically and permanently reduce involuntary churn — here are the figures to prove it

Americans keep their primary checking account for almost 18 years. In that same period of time, they go through six credit cards. This is important because — as can be seen in the payment flow above — a defining feature of pay by bank is that the customer does not need a card (either credit or debit) to pay. This means that a lot of the causes of involuntary churn — expired, lost, or stolen cards, hard declines, suddenly vanish. 

So how much, exactly, could a subscription merchant reduce involuntary churn by?

First, the usual caveats: no two businesses are the same, and no two businesses will see the same impact from pay by bank. Having said that, research conducted by Recurly showed an overall industry involuntary monthly churn rate of 1.4%, from an overall average churn rate of 5.6% — keep in mind that other figures such as the PYMNTS link above would suggest a higher rate than this.  

The closest proxy to pay by bank in the US market is ACH Direct Debit — in fact, pay by bank uses ACH rails to transfer funds. According to Chargebee, direct debit payments have a subscription failure rate of only 0.5% — orders of magnitude lower than cards. And unlike direct debit, which has a cumbersome user experience and complex set up for merchants, pay by bank offers an easy and intuitive checkout experience, while startups such as Link Money provide SDKs and APIs so merchants can get setup quickly with a few lines of code.

But along with this key advantage, there are several more. First, pay by bank has much lower payment processing fees than card payments. This is a critical extra advantage for US merchants, who pay the highest payment processing fees in the world, and translates into processing costs of up to 70% lower than card payments.

Second, since you are not dealing with card networks, the need to pay extra for ancillary services such as account updaters or tokenization solutions is removed. 

And third, because bank authentication tends to be stronger than cards, the risk of fraud is also lower. 

The upshot of adopting pay by bank as a subscription merchant is that your involuntary churn rates plummet, but at the same time, you benefit from much lower payment processing costs, and lower fraud, while also offering your subscribers a seamless and intuitive checkout experience. 

The types of subscription merchants pay by bank is suited for

Pay by bank is a powerful solution for any subscription or recurring merchant. However, it is particularly ideal for businesses that are in a position to direct their customers how they want to be paid — think insurance, lenders, membership-based organizations, and so on. 

For other types of subscription merchants, such as digital services or retailers, customers tend to expect to have a range of payment options including cards and wallets available to them. Pay by bank is also very powerful in these kinds of verticals, and should be a go-to payment method alongside other expected options. It is also an easy way to benchmark — merchants can compare involuntary churn rates and payment processing costs between different payment methods, and based on the results can objectively say whether there is a strong business case to prioritize pay by bank. 

Two smart ways to fight involuntary churn, but only one way is a leap forward

Merchants should take steps to reduce involuntary churn with card payments. But as long as the fundamental infrastructure on which these payments are built remains the same, all the solutions to reducing involuntary churn are going to be incremental and — while the ROI can may be justified — will cost money. 

By contrast, pay by bank is a secure and intuitive payment method for customers, and cost-effective, reliable payment method for subscription merchants. In markets such as the UK and EU, it is already starting to grow rapidly. 

And one other thing for subscription merchants to keep in mind is that lowering involuntary churn is a revenue accelerator. The faster you start offering pay by bank to your customers, the faster your revenue growth will stabilize or accelerate, and you will save money on expensive processing fees. So not only are there multiple advantages to incorporating pay by bank into your payments strategy, but there is also a cost to not doing it quickly. 

In the US, Link Money is already collaborating with subscription merchants to offer Link Money - Pay by Bank. To find out more, contact us.