The Future Of Open Banking: Our Investment In GoCardless
By Matt Harris, Merritt Hummer, Ashley Paston, Allison Xu and Keri Gohman
Open banking is undergoing a revolution in both capabilities and public perception. The first stage of fintech largely involved banks taking analog processes online, and it took them some time to fully appreciate the potential that data-driven financial processes presented. Individuals, for their part, were understandably concerned by the idea of their data being shared and exploited. Now the value proposition of an entire generation of startups is premised on open banking, but relatively few have gained footholds with enough banks to make them a global player in the open banking landscape.
One remarkable exception is GoCardless. Founded in Britain by Hiroki Takeuchi in 2011, GoCardless started as an elegant solution to a very real problem faced by the country’s businesses who lacked the capability to process direct debits, the preferred form of payment in the UK. GoCardless offered them an easy-to-integrate API that enabled them to do so, with an emphasis on recurring payments. Since then, the company has grown with astonishing speed to become the leading tech-enabled solution for merchants using direct debit in the U.K. and gained significant traction in the EU. Now, GoCardless is poised to strategically take advantage of the possibilities of open banking revolutionizing the financial sector. Today, we are proud to announce our investment in the next stage of its growth as it continues to expand the quality and reach of its core offerings internationally.
GoCardless first impressed us with its solid execution as a direct debit processor. While consumer payment preferences vary country to country, direct debit boasts several advantages. One is its low cost in comparison to cards, which charge transaction fees averaging 1.5% to 2.9% for swiped cards, and 3.5% for keyed-in transactions. They also avoid many of the issues that cause card payments to fail, as they cannot be lost, stolen, or expire; because they are pre-authorized and linked directly to a customer’s bank account, they do not risk rejection by the participating institution. This is particularly important for businesses with recurring payment models (a local gym, for example), which risk revenue loss and labor costs of reconciliation should a customer’s payment lapse. Though missed payments are usually unintentional, they often result in churn, requiring a business to invest in the acquisition of new customers — a significantly more costly endeavor than retention.
Most large banks, however, traditionally service direct debits for very large, established enterprises. GoCardless focused on enabling any merchant to process direct debits through its white label API. Merchants can choose between two pricing models: variable with no upfront commitment or fixed and predictable. With a take rate of about .4% on all payment processing volume, it’s not only more reliable but also significantly cheaper than card processing. For all of these reasons, it’s not surprising that GoCardless has become a popular direct debit processor in the UK.
The company’s early success serves as an incredible example of what open banking can do for businesses, banks, and end consumers. It has also highlighted the large addressable market for direct debit processing — $5bn in the UK alone and ~$90bn in the other geographies where it now operates, including New Zealand, Australia, and the U.S. To serve more of this market, GoCardless has expanded and refined its suite of products to include several add-ons to the core platform: foreign exchange capabilities, Success+, a payment intelligence solution, and Erasmus, a fraud prevention solution.
These products are impressive because they will serve both GoCardless’s existing customer base and a wide array of enterprises and individuals who stand to benefit from more intelligent money movement and management. The value GoCardless places on its existing relationships extends to its go-to-market business partners, such as Xero and Junifer. These partnerships will be key to growing the company’s global presence.
As financial regulations in Europe evolve and consumers become more accustomed to the seamless experience enabled by open banking, fintech companies who can position themselves as the leaders in open banking will be increasingly valuable. GoCardless is one of few established companies that has both the technical infrastructure, established trust, and forward thinking to thrive in this landscape, and we are excited to support it as it does so.