GoCardless: How a London startup is transforming payments

As GoCardless announces an integration with Sage accounting software, Tech City News catches up with co-founder Tom Blomfield to find out how the company is disrupting payments

GoCardless was set up in London by Tom Blomfield, Matt Robinson and Hiroki Takeuchi in 2011 with the aim to make it simpler for small businesses to collect direct debits online. Today, backed by $4.8m of investment from major UK and US venture capital firms including Accel Partners, Passion Capital and Y-Combinator, the business serves around 3,500 UK firms helping them to collect millions of pounds every month.

The idea behind the direct debit scheme is to allow individuals to give access to other organisations to collect varying amounts from their account. Once an individual has been given advanced notice of the amount due and the date of collection, the organisation can deduct the money automatically.

In the UK, the direct debit scheme is run by BACS. Thanks to its partnership with RBS, which guarantees GoCardless’s liabilities, the plugs directly into BACS’ direct debit framework, allowing the company to democratise direct debits to smaller businesses.

Battling late payment

With late payments plaguing SMEs – the average small business has to wait 43.4 days beyond payment terms for their invoices to be paid – the option of taking money directly out of a customer’s account, as GoCardless’s payments system offers, is appealing to small business owners.

“Late payment is, by far, the biggest cause of cash flow difficulties for businesses. Thirty-day payment times are often not adhered to, so you can end up with a lot of money outstanding from customers,” Blomfield explains.

“We allow business owners to set up a direct debit at the start of the relationship, so money owed gets pulled directly from customers’ bank accounts when the payment is due. It solves the late payment cycle.”

Bringing down the cost

For businesses, GoCardless tackles late payments; for consumers, it removes the headache of having to manually pay bills on a regular basis. The company charges businesses a standard transaction fee of 1 per cent, capped at £2.

GoCardless’s strength is that it taps into an established payment practice. Direct debits are already used by 75 per cent of adults to pay bills – only, historically, the direct debit scheme has been reserved for larger organisations.

“Until recently, they have only been available to the largest corporations, but we’ve come along to make it available to everyone,” says Blomfield. “There is huge potential here – we’ve already seen huge interest in one-off B2C payments – such as Stripe, Square and iZettle – but that revolution hasn’t happened in the direct debit space. People are still using payment systems that are 20 years’ old.”

The reason that direct debits have historically been reserved for larger businesses is cost. Banks – which act as the gatekeepers of the direct debit scheme – were not capable or willing to risk-assess small companies that request small volumes of payments.

“Some banks would require at least £10m of revenue before they would talk to you about direct debits,” says Blomfield. “Because of the cost of risk assessing businesses, they wouldn’t be able to recoup their costs.”

GoCardless’s approach is the polar opposite: the company is constantly trying to find new ways to make it easier for smaller business owners to use their direct debit product. The latest innovation is integrating GoCardless with the Sage 50 Accounts system, the largest desktop accounting software for SMEs in the UK, to enable businesses to take and manage automated direct debit payments from directly within their Sage accounting software.

Managing risk

GoCardless is able to risk assess small businesses through using up-to-date algorithms and by plugging into a range of databases – a very different approach to the old-school way the banks risk assess large businesses, which involves hard-copy documents and manual checks.

“We use a variety of different methods to risk assess our customers,” Blomfield explains. “We take a graduated approach to it, based on your outstanding liability or exposure. There are lots and lots of very, very simple things we can do using algorithms.”

Ultimately, there is a lot of information available on the internet to assess if you’re a legitimate business, he says, ranging from IP matching to blacklists of hijacked computers and other behavioural patterns, such as how users interact with the service.

Next stop: Europe

Blomfield says GoCardless has big plans for making it easier for businesses to take payments through direct debits. In the next year, the company will roll out into Europe through the pan-European SEPA direct debit scheme.

“We’re conducting trial payments right now, but we have to be quite prudent with it. We don’t want a huge bang; we want the product to be rock solid,” he explains.

GoCardless is already working with UK-headquartered companies that collect from customers across Europe, in countries such as Germany and Poland. “First we’ll target UK firms that are struggling to take payments from across geographies, and then we’ll move to localised sales,” Blomfield adds.

It is clear that the company has a promising future. The banks just aren’t interested in GoCardless’s SME market, says Blomfield, which allows the company to serve more businesses than any other UK direct debit provider. Only time will tell whether this claim will be extended to the rest of Europe.