Recurring Payments, Unlocking Indonesia’s Next Big Payments Use Case
I’ve done some time thinking on recurring payments and primarily try to answer these questions specifically for the Indonesian market:
- What makes recurring payments so complex for merchants to manage?
- What are some tactical product features that can improve recurring payments' success rate and experience?
A business model with recurring payments presents various benefits for merchants compared to the one-time business model:
- Revenue predictability: While the one-time payment business model depends on ad-hoc purchases, the recurring payments business model will have a smoother & predictable revenue stream. There might even be a financing opportunity that exclusively applies to the subscription business model merchants, such as Pipe who builds a lending marketplace for businesses with recurring revenue streams.
- Customer Loyalty: Higher growth of loyal customers due to an effect of the “lock-in” effect. Research suggested that a 5% increase in customer retention will translate into 25% additional profit.
Linked direct debit as a pillar for recurring payments in Indonesia
In my opinion, linked direct debit is the most ideal payment instrument for recurring payment use cases. However, direct debit infrastructure in Indonesia is still nascent. To be clear, linked direct debit here is referring to processing transactions directly from a customer’s bank account through a banking payment system (eg. ACH in the US) as opposed to a card-based payment system such as Visa & Mastercard.
Linked direct debit brings 2 benefits for recurring payment use cases:
- Affordability — direct debit’s processing cost will be more affordable compared to the cost incurred by international card processing network (eg. Visa & Mastercard) where the processing cost can be up to 3% of the transaction amount
- Higher success rate — IPSOS’ research shows the average prepaid e-wallet top-up amount is only around Rp. 140,663 (~US$10). This is quite in line with most people I know who tend to maintain just “enough” balance in their prepaid e-wallet to spend on daily use cases (transportation, food delivery). For larger transaction value such as insurance premium payment, loan repayment, and mortgage payment, direct debit deducts from the bank account will be more ideal.
If we take a look at India as an example, UPI AutoPay is the bedrock for India’s direct debit payment infrastructure that enables a smooth recurring payment setup while also balancing security.
I identify 4 big features for UPI AutoPay:
- Direct debit linking flow (secure & standard bank account authorization)
- Subscription & scope management (frequency, amount limit, central view of all subscriptions, subscription cancellation/pause)
- Two-factor authentication (2FA) for bigger transaction amount (>Rs 2,000)
- Real-time notifications
In the context of Indonesia, the fundamental components to build recurring payments products are 3 folds:
- Direct debit payment infrastructure — Covers both faster payment network & API connecting banks & non-bank fintechs
- Risk management & customer protection framework — A balancing act between convenience and frauds. In India for example, Royal Bank of India’s mandate for Additional Factor of Authentication (AFA) & pre-transaction notification and NPCI’s publish guidelines for dispute resolution
- Customer trust
Unlike in Europe & India, direct debit is still not widely provided by most banks largely because there are absents of national faster payments rails and mandates from the government for banks to expose direct debit capability (PSD in Europe & UPI in India)
Most companies are still in the phase of building direct debit payment infrastructure by building “piping” of different payment rails. Few companies that are in the space are payment gateways (OY!, Xendit) and Open Banking platform (eg. Brick, Brankas, Finantier) trying to partner and “convince” banks to expose direct debit capability.
Lastly, there will significant time & efforts required to gain Indonesian customers’ trust before the adoption of the “linked payment method” becomes mainstream and widely acceptable. Otherwise, users would prefer to enter their payment method details for every checkout to give them greater peace of mind.
Linked Direct Debit Use Case — Systematic Investment Plan (SIP)
In a country like Indonesia where purchasing power is relatively low (GDP per capita $4,100) and savings habit is still low (only 13% save >29% of income), “sachetised” investment program like Systematic Investment Plan (SIP) will be extremely helpful as it will help new retail investors to build investing habits by lowering the friction & risk to invest. In order to be successful, SIP requires a direct debit to facilitate money movement from source of fund (bank account) to trading account.
This can even be further improved by implementing rules-based recurring payments like Acorns in the US. For example, when the transaction amount is Rp. 28,000, it will be rounded up to Rp. 30,000 with the “spare change” multiplied by 3 invested automatically into the user’s investment account (eg. Rp. 2,000 x 3 = Rp. 6,000). From a user’s psychological perspective, the “micro saving” components will counteract the guilty feeling caused by spending money and help to build a saving habit with very low friction.
What are some product features that can significantly improve recurring payments success rate and experience?
For merchants, their ultimate goal is to increase the success rate of every recurring payment attempt.
At a high level, there are 2 jobs to be done required in order to achieve the above goal:
- Setup & execute granular recurring payments plan
- Automate operational workflows of subscription management
Unlike one-time payments, recurring payments have way more attributes other than just transaction amount, customers, merchants, and payment method. Here are some other additional recurring payments’ attributes:
- Frequency (eg. once a month)
- Subscription Period (eg. 3, 6, 12 months, unlimited plan)
- Subscription status and events (eg. trials, upgrade, downgrade, cancellation)
- Pro-rated & usage-based plan
The majority of these attributes are common for any company operating recurring payments use cases and have a direct impact on the company’s revenue and yet pose a huge burden on the tech team to develop and maintain product capabilities to keep up with the company’s business use cases.
A. Setup & execute a granular recurring payments plan
“Subscription economy”, a term first coined by Zuora’s CEO is increasingly growing bigger in the last decade as the subscription economy index level below suggested.
From digital goods (Netflix, Spotify), e-commerce (Amazon Prime Now), real-estate (WeWork), all the way to D2C retail (Birchbox), subscription-based services slowly creeping into every aspect of our life.
With this strong upward trend of the subscription economy, a plethora of merchants with different services and pricing strategies are popping up with various recurring payment needs to support their businesses.
From customers' point of view, today’s customers expect even higher flexibility in how they want to pay as they want to be in command in dictating their relationship with merchants. In the context of recurring payments, this means every single attribute is expected to be customizable.
In response to these customer demands, merchants have correspondingly need to adapt by providing flexible payment options. Not fulfilling these needs, merchants will increase the risk of losing their customers because of involuntary churn.
With recurring payments, there are additional steps to set up a source of funds for future recurring payments, and depending on the payment network’s rules (eg. ACH), merchants are also required to earn authorization from users to execute deduction
As mentioned above, recurring payments have additional attributes compared with one-time payments. There are few desired granular product features to support various recurring payments use cases:
- Various payment methods support (Pull vs Push recurring payment flow)
- Billing logic (frequency, period, usage-based calculation)
- Trials management (Free vs paid trials)
- Plans management (pricing models, add-ons, upgrade, downgrade)
- Automated invoicing
- Refunds (Full & partial)
B. Automate operational workflows of subscription management
Once the customer successfully subscribed to the merchant’s service and recurring payment is successfully set up, it should be all good, right?
“It’s easy to win but it’s difficult to keep it”, is a more accurate reflection of the whole recurring payment journey as a merchant. Startups are expected to experiment and iterate fast not only in their product offerings but also in their business model and pricing strategy.
Historically most of the workflow processes of recurring payment flow is coded by tech teams inside the backend logic. This process often slows down implementation and roll-out strategy as every pricing changes require code changes and going through the entire deployment regiment.
I believe the future of recurring payment is bringing this workflow process layer upwards, embedding low-code/no-code workflow automation into payments API. Doing this enables non-technical users to control various aspects of recurring payments from an intuitive portal while reducing dependency on tech teams. The other way to think about this is “Zapier for recurring payments”
The benefits for merchants are 2 folds; 1) Increasing velocity of business model and pricing strategy experimentation, 2) Reducing tech debt in constantly updating the recurring payment’s backend logic by decoupling recurring workflow and payments acceptance.
Below I list some of the features for founders & product managers’ reference that I think will be powerful for successful subscription management for:
- Automated dunning process
- Intelligent payment retry
- Subscription plan grandfathering
- Pricing A/B testing
- Analytics (cohort visualization, churn analysis, A/R analysis)
- Accounting & tax software integration
- Payment reconciliation
I’m personally excited to see the future collaboration between traditional financial institutions (banks) & fintech (payment gateways, open banking startup) supported by the development of BI FAST as part of Indonesia’s Payment System Roadmap 2025 to move money instantly & affordably.
Once direct debit payment infrastructure is built and customers’ trust is earned, that’s when more recurring payments use cases can be built on top which becomes the bedrock of the future subscription economy of Indonesia.
Are there any other thoughts, features, perspectives that I miss? Feel free to reach out to me and I would like to understand more and incorporate it into the future thesis.
Shout out to Anand Krishnan, Cheng Zishuang, Utham Reddy, for their thoughts, inputs, and feedback.
Reinaldo Gani is an Associate at Saison Capital, looking at investment trends & opportunities in SEA & India, supports early-stage founders, can be contacted at aldo@creditsaison-ap.com or Linkedin
