Subscription payments have become the backbone for new and established businesses seeking constant revenue growth. As a result, subscription payment processors (a subset of merchant service providers) have become essential to business success.
So what is a subscription payment processor? A subscription payment processor enables businesses to collect recurring payments from their customers. Subscription payment processors are critical to businesses looking to set up subscription plans for their customers.
Here’s how subscription payment processing can help you scale your business.
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How subscription payment plans affect payment processing
As your business grows, customer payment needs become complex. Your subscription pricing strategy will affect the way your payment processor operates. Here are a few different subscription pricing models and the business impact you will experience from a payment processing perspective.
1. Volume-Based Pricing
In a volume-based pricing strategy, you will charge customers based on how much of your product or service they consume. You can create tiers to incentivize more usage, boosting product adoption. Cash flow is predictable in this model, a huge advantage from a payment processor’s perspective.
However, note that any sudden deviation from the norm (caused by increased subscription tier prices) might cause your processor to freeze payouts and withhold funds. This scenario is quite common with popular payment processors like Stripe and Square. Choosing an experienced payment facilitator is a good way of avoiding this situation.
2. Usage-Based Pricing
In this model, you’ll charge customers prices based on the number of product features they use. While this pricing strategy offers great value to the customer, it creates up-and-down cash flow. As a result, a processor might have a tough time validating your transaction patterns if they don’t understand the intricacies of your business.
Typically, merchants operating in high-risk businesses will face rejection when applying for accounts with popular payment processors. If you’re considering a switch to this model, it’s best to establish a relationship with your processor before switching to this model.
3. Hybrid Pricing
A hybrid pricing model combines subscription-based and usage-based pricing elements. Thanks to its complexity, this pricing model poses the most hurdles from a payment processor’s perspective. The high frequency and transaction volume may trigger anti-fraud measures on legitimate transactions unless the processor understands your business intricately.
It might be best to implement simpler pricing strategies before switching to a hybrid model.
The three kinds of subscription payment processors
Choosing the right payment processor partner is critical to growing your business’ revenue.
1. Payment Facilitation-as-a-Service
Payment facilitation or PayFac-as-a-Service is your best bet if your business operates in a high-risk industry. The average PayFac is highly experienced and aids both individual merchants and integrated software vendors (ISVs.)
PayFacs give you more control over your payments workflow and help you avoid common payment processing hurdles like arbitrary payout freezes and fund holds. When combined with features such as automated fraud protection and payment analytics, PayFacs become a no-brainer for most ISVs and merchants.
2. Payment Processors
Payment processors are useful for businesses with steady volumes of payments. A few well-known examples of payment processors are Square, Stripe, and Recurly. These payment processors offer a range of features and integrations to help businesses manage transactions effectively.
Choose a payment processor that aligns with your needs and existing systems. For instance, if you operate in a low-risk industry and experience steady payment volumes, a payment processor is a good choice.
3. ISOs and Resellers
ISOs (Independent Sales Organizations) and resellers are intermediaries between software vendors and customers. While they offer a convenient way for businesses to access payment processing services, there are some disadvantages.
ISOs and resellers do not own their infrastructure and cannot provide direct customer service or processing support for transactions. Customers depending on their services may receive delayed responses to their queries.
You can find out on Visa Service Provider Listing to verify whether a company is a listed payment services provider. Another way to verify whether a payment services provider owns their technology is by looking at their website. All ISO/MSPs must disclose registration information at the bottom of their websites.
3 steps to setting up subscription payment processing
Ready to implement subscription payment processing? Here are a few steps to do it the right way.
1: Decide the payment types you need
When setting up subscription payments, decide which payment types should be on your list. Some popular options are credit cards, the automated clearing house network (ACH), and debit cards. Most customers stick with their preferred billing method after registration.
Keep track of your customers’ preferred payment methods to initiate quick recurring payments and boost CX.
2: Choose a subscription payment processor
Consider the following factors when deciding on a subscription payment processor:
- Experience: Experience is critical in the payments industry. The longer your processor has been around, the more likely they are to proactively address issues and conduct effective compliance.
- Fully owned technology: If a payment processor operates on its proprietary technology, your payments are processed in-house, providing total control over the transactions and security capabilities.
- Transparency: Payment processors must be open about their fees, terms, and policies guiding your decision.
- Pricing: Every processor has unique fee structures for their operation. A processor with lower fees can save costs for your business in the long term. Pricing is a huge priority when evaluating a payment processor. Look out for terms that work best for your business without sacrificing quality.
Check that a payment processor is registered and follows all industry rules when evaluating them. This will safeguard the security of your transactions and protect your business from a lawsuit.
3: Select a pricing model
These questions will guide you in the right direction when choosing a pricing model:
- Do you plan to offer discounts to long-term customers?
- What is your revenue goal (e.g., monthly, quarterly)?
- Are your service offerings flexible for customers?
Answering these questions will provide insight into the best pricing model to maximize customer retention with subscriptions. Your choice of pricing model will also help you narrow down the list of potential payment processors you can implement subscriptions with.
The five best subscription payment processing services
Here are the five best subscription payment processing services.
1. GETTRX
GETTRX is a registered payment facilitator, a merchant account provider, and a PSP (payment service provider). We own proprietary technology that enables us provide payment acceptance to businesses of all sizes, including high-risk merchants and ISVs.
We have over 30 years of payment industry experience and $15 billion in processed transactions. In addition, we work with high-risk industries like gambling, paycheck loans, and adult entertainment that struggle to find processors to alleviate their high compliance needs.
We are committed to meeting our client’s business needs, from white-labeling for ISVs to partnering with merchants seeking revenue boosts.
2. Stripe
Stripe is the most popular payment processor in the world. They offer a range of payment services to businesses of all sizes, including a payment gateway online and in-person.
However, Stripe has a reputation for being heavy-handed in its compliance policies and is notorious for freezing accounts based on unusual payment patterns. Updates in recent months presents unsettling news for dropshippers as Shopify and Stripe create payment instability. The fee for each transaction is 2.9% plus a $0.30 card charge in most countries.
These fees may change over time, so it is a good idea to contact them for the most up-to-date information.
3. Square
Square offers payment solutions for merchants. It is known for having an excellent user-friendly interface and low transaction fees. Despite the ease of integration for businesses, merchants are increasingly concerned about severe compliance issues.
Square charges 2.9% plus $0.30 for every card charge. In general, it’s a well-liked choice among small businesses and individuals seeking a simple way to integrate a payment processor. There are better options for larger enterprises with diverse business lines.
4. FastSpring
FastSpring is a payment processor that lets merchants accept payments from customers made online in several ways. They offer payment options like credit cards, debit cards, and ACH.
The major letdown with FastSpring is its limitations in handling large payments. Merchants who process large transactions may need to consider a different payment processor. FastSpring charges an 8.9% fee of the total transaction value, which may be considered expensive for the competition. In addition, businesses cannot set up complex payment structures with this processor.
5. Recurly
Recurly is a payment processing platform that gives businesses control over their subscription billing and payments. Recurly efficiently manages recurring billing or subscription-based billing for smaller amounts.
It charges a monthly fee for its service and a per-transaction fee. The exact costs depend on a business’ specific plan and customization options. Recurly routinely flags transactions when the payment pattern changes.
Ultimately, merchants must do ample research to find a service that fits their company’s billing requirements.
Curious about how a PayFac service provider simplifies payment acceptance and helps high-risk sellers grow their businesses? Get in touch with us.
Frequently asked questions
1. What is the difference between a subscription and a recurring payment?
A subscription refers to a payment made for a service or product at a fixed interval. A recurring payment can include subscriptions and other payments such as a mortgage, rent, or utility bills.
2. What are the five best subscription payment processing services?
The five best subscription payment processing services are:
- GETTRX
- Stripe
- Square
- Recurly
- FastSpring
3. Why should merchants and ISVs choose PayFac-as-a-Service for subscription payments?
These are a few reasons why merchants and ISVs (independent software vendors) might choose to use a PayFac-as-a-Service for subscription payments:
- Ease of setup: With a PayFac service, merchants can set up and start accepting payments quickly and easily.
- Risk management: PayFac services provide risk management services, such as fraud detection and prevention. This protects merchants and ISVs from chargebacks and other issues with online payments.
- Cost: PayFac services offer lower transaction fees than traditional merchant accounts, making them a more cost-effective solution for merchants and ISVs.
- Simplicity: PayFac services provide a single integration point for merchants and ISVs, allowing them to accept a wide range of payment types and currencies rather than integrating with multiple payment providers.
For more information on Payment Processing, check out these resources: Payment Processing Security, Challenges in Online Payment Processing, Credit Card Processing: A Guide for Merchants
