Wading Through Payments

Analyzing 3 Payment Methods for a Swim School

A few months ago, a friend was sharing a few issues she’s facing with her small business. She is a swimming instructor and runs a swim school which is steadily growing. Her biggest frustration is collecting payments on time and in full. As she grows her client base and hires trainers, the harder it becomes for her to monitor payments for the services rendered.

Over several Friday nights and glasses of wine, I gathered she is considering debit collections and Buy Now, Pay Later (BNPL) to solve the problem. I sense a few eyebrows are raised at this point but, before we dive in, let's take a step back and understand the school a little more. 

More about the school

The business has a website but it doesn't have an e-commerce/online shopping function, all payments are made via bank transfers to their account. 

She offers once-off courses and weekly maintenance classes as part of the business: 

In addition to these services, the school has started selling ‘floaties’ for kids to practice kicking at home. Currently these are paid in cash and cost R250 (~$13). 

I think debit collections and BNPL are too complicated for their business, so I’ve added recurring payments/billing as a third option. First, we will compare how easy it is to implement the payment method (both for the school and it’s clients), then how flexible they are and lastly, how much they cost (roughly).

Will this be quick and easy?

Debit Collections

First, fraud is not uncommon to debit collections so it does make people uneasy. Second, the business of collecting from 3rd party accounts can get messy: 

• You need to collect and maintain mandates/authorisation to debit the account

• You need to keep track of unsuccessful transactions

• You need to be prepared to give the money back if there is a dispute

• You need to submit the instructions to the bank in a specified file format

Although reaching out to a banker for product setup may seem straightforward, it's unlikely that the process will be completed within a day, two, or even a week. Additionally, as the school grows, the burden of managing mandates, tracking disputes and handling unsuccessful transactions increases, diminishing the appeal of this payment method.

BNPL

I haven't come across any service providers utilizing BNPL as a payment method. If there are use cases elsewhere, please let me know, as it could be specific to the market I'm in. If there aren’t any regulatory hurdles in her way, she could move on without any challenges. 

To use BNPL ,the business needs to integrate to a payment gateway and set up a checkout function on her website. This is made easy through e-commerce platforms such as Shopify and WooCommerce, which have integrations to payment gateways that support BNPL. 

For her clients to access the service, they need to undergo an application process with the BNPL provider. Ideally, they already have an active BNPL account, and the payment gateway aligns with the same BNPL provider.

Recurring Payments

Payment gateways offer recurring payment methods that would enable a client to subscribe to the weekly maintenance classes. Just like BNPL, this requires integration to a payment gateway directly or via an e-commerce platform.

Clients enter their card details at checkout and agree to the terms of the recurring payment, authorising the business to collect from their accounts on a regular or once off basis.

Winner: Recurring payments 

It's the easiest for the client.  In addition, integrating to a payment gateway opens up additional payment methods for the business - including BNPL.

What can we do with it?

Assessing the flexibility of each payment method

Winner: Recurring Payments

The payment gateway can cater to both service types. Settlements can be faster than banking providers and it is easier to self-service and apply changes on the gateway. 

How much will it cost?

BNPL is the most expensive per transaction followed by recurring payments and debit collections. It makes sense. BNPL guarantees she gets paid without the issues that come up after the act. However, it is probably too expensive for a swim school that at best will use it for up to 80 transactions a year. 
While debit collections are the cheapest, the cost of unsuccessful transactions is generally higher and can add up if the business is prone to risker clients. Returns, disputes and unpaids through the banking system are clunky and painful. I think the cost of chasing payments in this aspect defeats the purpose of what they are trying to solve.  
Recurring payments on the other hand also comes with chargebacks that mirror the debit collection dispute process. Instead of dealing with the banks directly, the payment gateway manages the request with their client, the swim school. It remains unclear to me whether this makes the situation better. 

Transaction fee costs across South African service providers

Winner: Debit collections

The free-style of the three options and has the same dispute process and challenges experienced with recurring payments. 

A recommendation that holds water

Recurring payments are the most appropriate for the swim school as they streamline the payment process for both the business and its clients, whilst opening up opportunities to accept multiple payment methods. For those well-versed in Payments and E-commerce, the decision is straightforward.

However, if you have alternative approaches you'd like to share to make me sound smarter at dinner, feel free to drop them in the comments!