A colleague of mine sent me a fascinating article from The New York Times recently. On the surface, it was a piece on the changing nature of urban business districts in this age of hybrid work. But give that article to a data scientist like me, and I see some below-the-radar important key performance indicators (KPIs) in action, and a lesson for the payments industry in the process. I’m not in the business of predictions. But my assessment of 2023 says that data – especially data that goes beyond the obvious – will be the star of the show.
The fundamental tenet of the Times story is this: The corporate headquarters that fed business districts have been decentralized. In the process a city’s economy and tax base are struggling to find pre-pandemic levels. In San Francisco, for example, the Silicon Valley tech companies that once sent thousands of employees out to local businesses have seen a drastic reduction in occupancy rates. The obvious data point here is that the office space in downtown SF is about 60% empty on any given day. But here’s the less obvious one: Mixt, the purveyor of $17 salads dished from 14 dining spaces in California that range up to 3,000 square feet, is changing its business model.
Why? Because it sees more data and acts on it differently. During the pandemic, it shut down its locations and laid off hundreds of employees. Instead of filing for bankruptcy Mixt looked at its current business data and found that Wednesdays were its most popular post-pandemic day. And it found through customer surveys that its best customers were actually ordering salads to bring back home and eat that night or the next day. Looking at the most relevant data it’s an easy jump to longer Wednesday hours, home delivery and a “bring a salad home for dinner” menu.
Mixt looked beyond the standard KPIs. I’ve been working on a data science project in the UK that has also shown that looking beyond the obvious KPIs can produce a positive business impact. Bottomline operates a digital business payments platform in the UK called PTX. We literally see millions of transactions a year, aggregated of course and without any personally identifiable information attached to it. So, if a gym franchise, for example, uses PTX to pay staff and suppliers and get paid from its consumers, we see only the transaction, the amount and the rails used to make the payment. . It struck me that all this data might help companies in a downturn. Because if that that gym franchise shows a consecutive monthly drop in revenue for the entire company, it’s an actionable KPI. It could affect decisions like ad budgets or equipment upgrades. But if the franchise can quantify that drop by payment type or customer segment, it can take more specific, customer-centric decisions.
The KPI that jumped out at us in 2022 was the sharp spikes in direct debit (DD) cancellations and failures aligned with the cost-of-living crisis. Every geography has a version of direct debits, although they are measured differently depending on the market. Quite simply, they are the recurring payments that can be set up for everything from essential services (think utility) to entertainment (think streaming services). Around mid-summer, we found that direct debit fails rose substantially every month. Over the last year alone, failed and cancelled UK direct debits have increased at an alarming rate, hitting 7 million transactions – a total value of £1 billion (and that’s just the DD data held by Bottomline). First-time failure rates for direct debits have also surged over the last year, up 20% from 2021, both in terms of volume and value. When it comes to specific industries, we’re seeing more failures within the insurance versus the utilities industry, demonstrating that consumers may be cancelling direct debits for luxury items (i.e. gym memberships or flower subscriptions) compared with credit/loan or utility payments.
Nice to know, but not essential data, right? Think again. Direct debit fails can cost businesses up to £50 per incident to square up. That means reduced cash flow and increased operating costs for companies. Put them together – DD fails, cash flow and operating costs – and you have a powerful equation that arguably tells more about a business than a macro number like gross revenue. It’s certainly gets to the right questions: What is the profile of the customers that are failing? How many fails are happening for the first time? What does my failure rate look like over time?
As the New Year kicks off, businesses should actively measure and report on this KPI. Drill into your data. If you can’t understand why direct debits are failing and can’t understand the cost to your business, don’t abandon the project. You can do something about it. Companies can be more flexible in providing customers with different payment channels once they understand their lifestyle and behaviour and can match it to the failure rate - that’s a unique insight. Those insights can then lead to strategies that will increase the likelihood that customers will be able to pay in ways that will suit them. Maybe the aforementioned gym franchise could offer a “pause” on their monthly payment.
Every KPI has an underlying customer or client behavior. To return to San Francisco and Mixt, it could have shut half its stores and cut hours to reduce operating costs. Instead, the data showed them an opportunity. The opportunity is there if you look for it. Just don’t depend on your top line to connect to your customers. You may better find that connection in the details between profit and loss.