Make and collect payments using Bacs, Faster Payments, Direct Debit and Open Banking. Manage cash flow, invoices, remittances and protect your business from fraud.
The Payments Podcast from Bottomline Technologies.
Jacqueline Powell: Good day. For those of you who don’t know, the subscription economy has grown more than 435% in the last nine years, and UK residents spend on average £2bn on subscription box services every year, which is quite an astounding figure.
I’m Jacqueline Powell, Head of Corporate Marketing for Global Communications and Concepts at Bottomline, and I’m the host of today’s Podcast recording.
Today, I’m joined by Jon Rushton, who is the GM for Bottomline Payment Services. Welcome, John, and thank you for joining us.
Jon Rushton: Thanks, Jacqui. Great to be here.
Jacqueline Powell: It’s always a pleasure to have you on our channel. So, kicking off, could you tell me and our listeners a little bit more about what it is you do?
Jon Rushton: Sure, Jacqui. So, BPS is a part of Bottomline that’s here to help businesses get access to Direct Debit. Direct Debit is a fantastic tool for subscription collections. It’s one of those things that is sometimes challenging for businesses, particularly smaller businesses or owner operated businesses to get access to, and that’s really where we can help.
Jacqueline Powell: That’s great. So, Jon, do you think it’s then time for every business to start considering a subscription model?
Jon Rushton: Partially, I think. The thing I would say is subscription models are fantastic, and certainly as you roll forward across the years, a lot of businesses will have an element of subscription in their business model, but it’s not universal.
I think it’s not actually applicable to every type of business, or every type of transaction; it’s about a blend for me, and it’s something that you’ve got to consider. But there are considerations about how you implement subscription models and integrate those into your business models.
Jacqueline Powell: For sure, I hear what you’re saying. So, what kind of considerations are we talking about here?
Jon Rushton: So, it’s a really interesting one. So, it can be actually quite complex as an inherent balance to get a subscription model right. I think that there are some pitfalls that you need to watch out for, particularly around legislation or regulation and who you deal with as your primary focus of your business.
And that actually reminds me – I’m going to talk a bit about this, but just a quick disclaimer – this Podcast is my opinions, so it’s for general information purposes only. I’m not a lawyer, I’m not a scheme operator and I’m certainly not a regulator.
So, I’ve got lots of experience, 20 plus years in dealing in this space and helping lots of businesses get access, and we’re going to talk a bit about subscription models, but this isn’t legal advice, it’s not a substitute for legal advice, but it is my views.
So, I think the thing that I would say is the basic premise of a subscription model is that your business gets a more constant stream of revenue, and generally that stream of revenue is greater than a one-time purchase, a non-recurring model, so where people just come in and buy things on occasion.
You’ll hear a term if you look in the industry about average customer lifetime value; so this is a lovely acronym that means that the total amount you get from your customer is greater in a subscription model than you would see in other models.
And the customer additional value, well that that could be perceived, that could be them bringing you more custom, that could be them recommending to other people, that could be customer loyalty. It could be a number of things. Or it could be quantified, it could be just hard cash that make you hard cash.
But for me, it’s that balance. What I mean when I say it, is it’s all about that win-win. There’s something in it for you; you get more, and there’s something in for the customer in that they feel like they’re getting more. That’s the secret of these models, that win-win.
Jacqueline Powell: It certainly sounds hugely attractive, and I love the idea of win-win. But do you think you could explain a little on what you mean by win-win in this context?
Jon Rushton: Yes, sure. So, it’s probably best explained with a few examples. I love analogies and examples, and without naming names, there’s a great example in the industry about an aircraft engine manufacturer many years ago, who’d looked at their business.
So, their business was selling jet engines to stick on aeroplanes. When you buy an aeroplane, you typically buy the engine separately because you have a preference for the type of engines that you put on your aeroplane if you’re a commercial airline operator.
And they were doing well; they’re the world leading engine manufacturer, and they were selling lots of these engines in big boxes to these aircraft operators.
But they were selling those engines, and then they were selling the parts, and then they were selling the servicing, and then they were selling the mechanics’ hours, and they were selling everything piecemeal.
So they actually took a huge step, and it was really step change for them, which actually, they moved their model to a subscription model.
So, they actually said to the airlines, because they recognised that managing all of this complexity around their engines is complex; they said, “We’re going to move to a model where we’re going to charge you, based on how many hours of flying you want. So, we’re not going to sell you an engine and we’re not going to sell you lots of parts, we’re not going to sell you mechanics and service plans and everything else, we’re going to sell you hours of flying.”
Now, this is interesting because it’s simpler because to be modelled, they’re selling to firms, and they absolutely understood their costs. But the win-win was, for them, well they’re now going to get a constant stream of revenue, so they getting effectively, a better stream of revenue.
But the win most importantly for the airlines, is that they don’t have to maintain separate mechanics, aircraft plans, parts, systems to manage it, warehouses full of different bits, all of that sort of accompaniment to the actual jet engine, they don’t have to worry about that; the manufacturer takes care of it. So, it's simple for the aircraft operator.
So, actually, the aircraft engine manufacturer was getting more than the slice they were getting before because they’re solving a headache that costs money for the airline to maintain. That’s the win-win; a win for the manufacturer, a win for the airline operator.
And it’s the same in other industries. So, outside the big jet engines, box deliver companies. So, you’ve seen these meal boxes, food boxes, golf boxes, whatever else; particularly things like food boxes, the win-win is time and cost.
So, what you’re saving is actually the delivery box is delivering a pre-packaged meal selection, you’ve taken out that element of planning, the time, not all of the prep, but taken out a lot of the shopping and going to the shops, and everything else. So the win-win is that you’re having to put less into actually preparing those meals.
So the win for the consumer is that they get something that’s simple, and the win for the box delivery company is they’re getting more money, they’re getting more than it would cost somebody to go out to the shops, because it’s saving them time and energy.
It's the same in lots of other. So, a similar path, is now this is a tricky one because there’s a balance of making it profitable for both parties – but movie passes; instead of going to the cinema and paying once, twice, three times a-month when you go to the cinema – now that we’re allowed to go back to the cinema – movie passes subscriptions, pay £30 a-month and see as many movies as you like.
It’s a win-win because in the rounds – and this is a scale model – most people might only go and see a movie once, twice a-month. So, paying £30 a-month to see unlimited movies, well it's great because the perception for the customer, perception – and that’s the most important thing – is they can see unlimited movies. They might actually only go twice a-month.
And so, the win-win balance there is the consumer thinks they’re getting unlimited, but the actual cinema chain is getting slightly more revenue than they would from the one or two visits a-month that most people actually do on average. Does that make sense?
Jacqueline Powell: Absolutely. And I know; I’m one of the box deliveries people for food, and I certainly see the benefit in that, so yes, thanks for outlining that, Jon.
So, it’s really for the businesses then, it’s all about more regular or increased revenue for them, is it not?
Jon Rushton: Well kind of, but I would say it’s only when you get that value equation right, it’s back to this balance. So, done right, it can, yes, increase revenue. It can increase customer retention, so how long the customer stays with you. And it can actually turn them into an attractor, because they feel like they’re getting more for their money, so they’ll tell other people, so actually, it starts to spiral, and you start to get that growth phase.
But it has to be done right, there has to be that balance. It can't be all ticked in your favour because the customer will feel exploited, and it can't be all in their favour because frankly your business model is wrong there and you will go bust, frankly.
So, I think that thing is important, that balance. So, done wrong, I think the thing I will say, it actually almost makes a customer feel like a money shake, like they’re just there to be sipped on by the company.
Now, the best example I can give you is something imaginary. So, imagine I’ve got a new product, so I’ve invented an internet enabled padlock, let me say, for locking up your bike, your van, your garage, they’re important goods to you. It’s brilliant, right?
So you can unlock it from your smartphone if somebody else needs to get access to it. Brilliant, brilliant idea. So, I’ve invented these, but what I’ve decided is I’m going to sell the lock, but I’m going to have a care subscription on top of it.
So, I’m going to charge £2 a-month for lock maintenance, and I’m going to make it so customers almost have to have that lock maintenance because if they don’t pay the £2 a-month, the lock will unlock. Great idea, right?
It guarantees me almost every purchaser of my internet connected smart lock will have a maintenance subscription. Brilliant. Guaranteed income in, ongoing revenue for my company.
Terrible customer experience. The customers will hate it because effectively you are holding their valuables hostage. You’re saying unless you pay me this extra money, I’m going to negate the basic purpose of this product, which is to be a padlock. So, that’s an example where that would be absolutely crazy to have that model.
Now, you could add added value features; so, you could add things like you said, your lock maintenance could be ongoing tracking, GPS tracking of where the lock is, status reported back. That might be as an optional feature, something that you want to do, but don’t force it, don’t paywall features. So, don’t force customers to take things that they could naturally expect to be an inherent part of the product that they’ve bought.
And I think it’s really important, because I talk a lot about consumer space; consumers in the UK, there’s a lot of consumer protection law out there, but actually, consumers generally are becoming pretty savvy.
As the time marches on, they’ve always been well supported by consumer protection law in the UK, but they are actively making choices, they can see through these things that make them feel like they’re being exploited.
Jacqueline Powell: Oh absolutely, I agree. I think consumers are certainly more savvy these days.
When you talk about sort of consumer protection, etc., is this going back to the legislation and regulation that you mentioned?
Jon Rushton: Yes, absolutely. So, I think one of the core things when you’re looking at models, is they can be very different depending on who you’re dealing with, so whether you’re dealing with businesses or the general public, or consumers that are often called, in legislation.
I think it’s pretty much accepted in the eyes of the regulators and the law that businesses are considered well informed or experienced by us. Very generally, by a matter of course, you know, businesses extend credit terms to each other, they have invoice payment terms, so you’ll be 30 days credit, 60 day credit between actually delivering goods, and having payment on invoice.
So, consequently the legislation and the regulation is relatively straightforward. There are things you need to look out for, so things like Prompt Payment Code and general day-to-day business dealings.
But dealing with consumers, I think the balance is tipped the other way. So, it’s not assumed that there’s a spectrum of maturity or knowledge there, and consequently it’s very much seen as the job of the government to protect the consumer from misleading, unfair, sharp or unsavoury practices.
And consequently, the UK probably across the world has one of the strongest consumer protection regimes. So, going from trading standards to rules and regulations that you have to follow.
So, quality of goods and services, that’s Trading Standards; regulations on the way goods are bought or sold online, consumer credit and financial credit, these are all considerations that are there for consumer protection.
Jacqueline Powell: Thanks John, that’s a great reminder around consumer protection.
So, in your mind, what are some of the key things for our listeners to be aware of when dealing with the general public, then?
Jon Rushton: Sure, well there’s regulations that don’t just apply to subscriptions. So, there’s general business practices, so things like distance selling.
So, distance selling is extra rules for selling at a distance over the phone or online, or digital services. It’s things that most businesses would consider common sense, that they’re just things you have to do, so things around rights to cancel, making sure you confirm any contract that an individual’s engaging to at a distance. And there are some rules as well for things like accepting returns or refunds.
But there’s also more specifically for subscription models, things that you need to think about. So, particularly I would say, like when you’re designing your subscription model, the key consideration is the Consumer Credit Act.
We can't cover every facet of the Act today, but I just want to touch on a couple of key parts that are really important. So, one of the things I would always call out, is looking at if you’re thinking about implementing a subscription model, it’s important to think about what you’re delivering; if it’s a service, or if it’s goods.
So, delivering goods on subscription, physical goods, it can be tempting to think of - well, let’s take another example – so you’re delivering a car, well okay, that’s easy, so I’m just going to make it easy, I’m just going to have the customer pay for it in instalments, I’ll just slice it up, I’ll just have them pay for it at £1 per month.
That can be quite complex in the eyes of consumer credit because actually, when it comes to physical goods, unlike services, somebody has to own the goods, so there’s always a concept of ownership.
So, if the consumer’s got possession of the goods, but the supplier owns the goods, then it’s not necessarily straightforward. It could be what’s called a bailment or a hire. And actually, if you put it in context, when you go and buy a car, often you’re given a few options, one of them being hire purchase.
If you think about what it is, it’s hire and then purchase; it’s an option to hire the car for a fixed period of time and then a final payment to purchase it. If you look at who you’re buy it from when you buy a car on hire purchase, it’s from, generally, an affiliated financial services company. So you’ll have the car manufacturer, and then you’ll sign an HP agreement with whatever the car manufacturer’s financial services are.
That’s because the financial services aspect, the hire agreement is regulated, so they’ve got a separate company that’s going out and dealing with that aspect of the sale.
The other side of it is equally, you know, if the customer owns the goods from day one but makes regular payments for them and will be chased for any debt, and the goods might be more expensive because there’s interest being applied, then all of a sudden that’s not instalments, that’s actually a credit agreement, you’re extending that consumer a line of credit.
Now, hire and credit are things that are regulated; they’re governed by the Consumer Credit Act. You have to go and get some permission to do that, and you get that from the Financial Conduct Authority.
It is non-trivial to go and get approval to go and do consumer credit. It’s not something that is terrifyingly complex, and if it’s right for your business, it’s something that you should look at, but you should think carefully and not go blindly into those types of models.
There’s a great article online, if you get the chance, anybody listening, from a legal firm called Osborne Clarke, just Google ‘Subscriptions and finance: are you playing by the rules?’
Jacqueline Powell: Thanks, Jon, that’s interesting. And it’s just not as straightforward as we would like to imagine that it is, and lots of considerations to be taken into account, so thank you.
Could you give an example of sort of the subscription models in a little bit more detail?
Jon Rushton: Yes sure. So, yes, bringing it back from these abstracts of like big car manufacturers, I think probably the most interesting one for me is things like clubs.
So, a particular example that’s close to my heart, I play a bit of golf. So, golf clubs, golf clubs are great as a potted example of some of the considerations you have to make, because they are relatively expensive in terms of memberships that you generally play annually, so there’s something that lends itself towards potentially being spread across a year.
So it may be simple in concept. So, you know, you think that you have a golf club membership, let’s say it’s £1,200 a-year, that you will split it into monthly payments. So, monthly payments could be £100 a-month. So that is absolutely allowed under the FCA, right; that’s what’s called instalments.
So, there’s actually an FCA exemption for these types of agreements, where if you take a £1,200 subscription and split it into £100 a-month, and have it monthly across 12 months, then you’re doing what’s called paying by instalment.
And there’s an exemption for instalment agreements from the FCA that’s been in place since 2015, which means you don’t have to go and get regulated. But these agreements can only be 12 months, they can only be a fixed amount and they can offer no interest or other charges on top of them. If you go outside of those parameters, then you’re into a different rule where it might need to be a credit agreement.
And that’s the temptation for a lot of these clubs, in that they may see that they may need to apply extra fees to cover the cost of the administration and the charges that are involved in collecting 12 instalments in terms of governing it. If you apply those fees, that’s where it could tip you into offering credit, and that does need to be regulated.
An alternative for clubs might be to offer a true subscription membership. So, this is a monthly payment where you pay for that month. So, you pay £100 per month for access to the club and greens, and everything else for that £100 in that month.
The difference there, is actually whether it’s actually the totality. So, in a model where you’re splitting a £1,200 membership across a year, if you stopped paying, then from the club’s eyes, you still owe the rest of that membership. So that’s why it comes back to that extending credit.
If it was actually a monthly golf subscription, if you stopped paying your £100 in that month, well you just don’t have access to the golf club anymore. So, it’s literally a monthly golf subscription.
So, it also comes back into where if you want to do things like a monthly golf subscription, they themselves are not without other considerations. So particularly things like payment surcharges.
So, you’ve got the Consumer Credit Act, which you have to think about in terms of credit, and you've also got surcharges. There’s lots of guides to payment surcharge regulations, so The Trading Standards Institute have lots of advice if you go and have a look at payment surcharges, but this is to stop penalising people for using one method of payment over another.
So, the thing I would say of note, is that restrictions on payment charges, restrictions only apply to a certain method of payment. So, if you prefer, or if you penalise, sorry, one method of payment over another, so you if you say you can pay over the counter, but if you pay via Direct Debit, we’re going to charge you an extra £2, £3 a-month. That’s the bit where it’s seen as a punitive penalty on one payment method, and that’s what’s not allowed.
So what you can do, is you can also – as long as you have administrative or booking or other fees that apply across all methods of payment, so, whether it was cash, card, Direct Debit, over the counter – those types of fees that are not punitive in favour of one type of payment are still allowed; they fall outside of the regulation.
So it’s just a couple of examples of if you’re a golf club, you can absolutely stay within the rules; there are exemptions in place to do that. Or you can actually apply a different type of model, that true monthly golf membership model, but you have to think, and you have to plan ahead of time.
Ignorance is not an excuse in the eyes of the FCA.
Jacqueline Powell: For sure, and quite understandable. So, certainly there’s lots to think about where subscriptions, the rules and consumers are concerned, Jon. Thank you.
Before we close out, is there any parting advice you would like to share with us?
Jon Rushton: Yes sure. I mean, hopefully I’ve given you a general introduction today into the considerations that you have to think about. There is lots to consider, and especially where you’re dealing with consumer models, so dealing with the general public, but don’t shy away from it, it’s too hard.
Subscription models can absolutely transform your business, give you great customer advocacy, affinity, and a real step forward in your ability to grow.
Companies like ourselves can help with the Direct Debit, and Direct Debit and subscriptions go hand-in-hand within the UK, they’re really made for each other, because it’s a brilliant way to collect that regular payment.
The thing I would always recommend, is talk to people. Talk to us, or talk to other people, like your bank that can help advise on things. Always, if you are unsure, go and seek specialist advice.
But my final request would actually be to keep listening to this series; it’s here to be informative and educational on the topic. We’re going to talk about a lot of other aspects in the coming weeks.
Jacqueline Powell: Thanks, Jon. Your insight’s been hugely helpful for both me and our listeners. Thank you for joining us today.
Jon Rushton: Thank you Jacqui. Thank you for having us.
Jacqueline Powell: Unfortunately, that’s all we have time for today, but if you need any advice or guidance, as John says, please get in touch with us, or visit our website.
For now, it’s goodbye, and we’ll see you next time.
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