Subscription Payment Processing: Industry Guide
Subscription-based Business models have helped merchants in various industries increase their revenue and market share. The tool that these businesses use to collect subscription payments is provided by merchant account providers. These are specialized payment processing solutions that allow businesses to accept subscription payments from customers. Merchants in industries such as SaaS, content services, membership sites, and subscription box services generally use this type of payment solution.
This extensive guide written by the team at QuadraPay exposes various aspects related to subscription payment processing. By exploring this guide, you will understand the fundamental concepts that work behind the scenes to make the subscription payments possible. You will also be able to explore advanced strategies that can help you to expand your customer base to different countries and also increase the retention rate. This guide is made for the sole purpose of helping you make informed decisions for your business. By the end of this guide, you will be able to make the right selection.
What is subscription payment processing?
Subscription payment processing refers to a specialized credit card processing solution that allows businesses to accept repeat payments on a subscription basis. Customers subscribe on the merchant’s website for a product or service and commit to making payments at regular intervals.
The subscription can be weekly, monthly, or even yearly, depending on the offer from the merchant. Once the customer opts for the subscription, then there is no need to submit the credit card information each month on the merchant’s website.
A comprehensive subscription payment processing solution should handle the entire payment life cycle, such as initial payment authorization and capture, secure storage of payment credentials in the tokenized format, and automated billing on the customer’s credit card as per the predetermined schedule.
It is also important for a subscription payment solution to retry failed transactions to efficiently manage the churn rate. A good subscription payment processor will not only allow you to accept credit card payments at a lower cost but will also ensure that the transactions are performed at the right time without any delay or failure.
By using the right subscription payment processor, you will ensure that your customers do not face any downtime in using your services. The quality of service that you get with your subscription merchant account can have a significant impact on your customer retention rate and overall business generation.
How Subscription Payments Differ from One-Time Transactions
Subscription payments work in a totally different way than regular one-time transactions. Let us explore the key differentiators.
Ongoing Relationship
One-time transactions basically reflect a single monetary exchange with the customer, and in most cases the customer does not come back to the website to purchase another product. However, in the case of subscription payment, the merchant establishes an ongoing financial relationship with the customer, and the transaction happens at regular intervals.
Authorization Persistence
In the case of one-time transactions, none of the customer card data is stored. While in the case of subscription payments, they utilize technology to securely encrypt and store data for recurring billings. This requirement makes it mandatory for payment processors and merchants to implement additional security measures and comply with mandatory card scheme guidelines.
Failure Management
With subscription transactions, it is common to see payment failures because the billing is done for a longer period of time. This creates a need for transaction failure management, where the payment gateway retries the transaction to optimize the turn rate. The factors that play a significant role in failure management include retry logics, dunning management, and proper customer communication strategies.
Lifecycle Complexity
Throughout the time period for which the customer has given the authorization to the merchant, the processor handles complex transactions such as trials, upgrades, downgrades, pauses, proration, prepayment, deferred payments, split payments, and cancellation. Whereas in a one-time transaction, such requirements are not needed.
Key Components of the Subscription Credit Card Processing
To make a truly effective subscription payment ecosystem, financial institutions and merchant acquirers use a combination of services that are necessary to offer an excellent transaction experience to customers as well as merchants.
Subscription Payment Gateway
A subscription payment gateway is a software interface that securely captures, validates, and transmits credit card information between the merchant and the payment processor. The subscription payment gateway captures the credit card information and tokenizes it. Then this information is stored for future subscription charges. The payment gateway also validates the payment information before processing it and sending it to other parties. The movement of the transaction information happens in an encrypted format for data security. The same payment gateway is responsible for notifying the merchant and the customer about the success or failure of the transaction. A good subscription payment gateway must support multiple payment methods and various international currencies.
Subscription Payment Processor
The subscription payment processor is the entity that handles the movement of funds and communication with the card networks and issuing bank to properly move the money from the customer’s card account to the merchant account.
Subscription Merchant Account
A subscription merchant account is a special type of bank account that allows businesses to accept credit card payments from the customers on a regular basis. This specialized merchant account holds the funds for a temporary period and releases them to the merchant’s business bank account after deducting the transaction fees and other charges.
Subscription Management Platform
A subscription management platform can be termed as software that is used to manage the subscription lifecycle. It includes payment plan creation, enrollment of the customer, handling upgrades and downgrades, and timely responding to cancellation requests.
Customer Relationship Management (CRM)
The subscription management platform connects with the customer relationship management software, which allows merchants to keep track of customer interaction. With CRM, merchants can read the notes associated with the customer’s account and handle queries related to subscription easily.
Benefits of Subscription Merchant Account
Businesses operating in various industries have started adopting subscription payment models. There are many reasons why this is happening. Let’s explore some of these important factors that make the subscription model a preferred choice for merchants globally.
Predictable Revenue
By accepting subscription payments, merchants can maximize revenue generation. This is because these transactions happen regularly, and the residual income keeps on increasing. Because of the subscription model, merchants can effectively forecast future earnings. Overall, it increases the cash flow and makes the organization stable by reducing the feast-or-famine cycles, which are common to the one-time purchase model.
Enhanced Customer Lifetime Value
The lifetime earnings from merchants that opt for subscription are significantly high when compared to one-time transactions. Merchants have more touchpoints with customers, that creates exponential chances of upselling and cross-selling. This also helps in enhancing customer loyalty and building stronger relationships.
Data-Driven Insights
With a merchant-centric subscription payment gateway, businesses can get access to enhanced transaction data, which can help merchants identify long-term and short-term consumer behavior. It also highlights the preferences and the usage patterns associated with customers of different demographics. Businesses can analyze the rich data and make informed decisions to optimize the product and pricing for better sales.
As per CR research, the average monthly spend of a consumer increases 2.5 times when they switch to subscription payments. It’s quite common for customers to ignore the additional amount that they pay on a monthly basis, and that is why the overall lifetime value of subscription customers is significantly higher than that of one-time customers.
Challenges Associated With Subscription Credit Card Processing
Previously in this guide we have discussed various benefits that are associated with subscription payment processing; however, to give a clear picture, it is important to discuss the challenges and drawbacks associated with it. Let us explore a few challenges that you may face when you use a subscription payment solution, and we will also discuss how to overcome these situations.
Payment Failures
One of the biggest challenges faced by merchants is payment failures. It is quite common for you to see a customer subscribing for the services and the transaction going through absolutely fine for the first month, but in the second month the same transaction declined. This can be because of multiple reasons, such as expired cards, insufficient funds, or technical issues. Whatever the case, it becomes important for you to ensure that you implement the tools that can reduce these instances, such as utilizing efficient subscription management software that uses intelligent retry logic, account updater, and customer notification.
Customer Churn
All subscription-based businesses, including those that sell streaming media, CRM subscriptions, and other products, all face voluntary and involuntary churn. It is important for merchants to take steps to reduce the attrition of customers.
Compliance Requirements
As discussed above, one of the key differentiators between one-time payment and subscription payment is the storing of customer data. These requirements put additional responsibilities on the merchant and the payment processor. They must comply with the PCI DSS standards. By working with a fully compliant subscription payment processor, you can easily comply with these requirements.
Complex Billing Scenarios
Another challenge associated with subscription businesses is the complex billing scenarios. Customers may have their own preferences, and this may force merchants to offer customized payment options. This may require the merchant to handle the usage-based billing. Keep in mind that industries like digital marketing, VoIP, and internet service providers all require usage-based billing. By working with a flexible subscription payment software provider, merchants can fulfill complex billing model requirements.
Global Payment Complexities
Most of the companies that offer subscriptions to the customers accept international transactions. This can be challenging if not handled properly. International transactions include complex currency conversion, coordination with regional payment methods, and compliance with cross-border regulations. However, when you work with a payment service provider that has excellent international capabilities and localization features, then you can easily manage such complexities.
Customer Service Demands
Customers that purchase subscriptions expect responsive support related to their billing issues and account adjustments as well as service delivery. By investing in customer service training and using advanced tools to handle subscription-related queries, merchants can handle such instances.
Technical Integration Challenges
The integration of the subscription payment gateway can sometimes be complex. It is not as easy as adding a plugin. This is because subscription merchants may require utilizing additional functionalities offered by the payment gateway. For this, the merchant must have a technical team that can handle integration.
Key Features Of Subscription Payment Gateway
When applying for a subscription payment processor, you must evaluate them based on some important features. Basically, these features can have a significant impact on your day-to-day sales operations. Let us explore these in detail.
Tokenization
The payment service provider must offer tokenization, which is mandatory to process subscription payments. By using tokenization, credit card processors substitute the sensitive data element, such as the primary account number, with a non-sensitive equivalent data token. It is important to know that this token has no exploitable value, which ensures the security of card information. When the customer inputs the card details on the subscription website, then the organization system replaces it with a randomly generated token, which is generally a string of alphanumeric characters. That value is stored in a token vault, and only the vault can reverse the token back to the original data.
Example
Original PAN: 4111 1111 1111 1111
Token: XTZ9-G6PQ-91LM-3KD2
Fraud Prevention Tools
No matter what type of payment the merchant makes, whether it’s a one-time or subscription, the payment gateway must have important security features such as an address verification system(AVS) to validate the address on the checkout page with the one that is on the card account. It should also have the feature to validate the CVV number. Most subscription payment gateways come with machine learning-based fraud detection tools that can significantly increase the defense against fraud.
Developer-Friendly APIs
The API must be comprehensive. A well-documented RESTful API can help merchants complete the integration by utilizing advanced features, which may be mandatory for subscription payments. The payment gateway should offer webhooks, such as event notifications for real-time updates on successful and failed transactions as well as disputes. The processor should also have mobile APIs and SDKs because many companies offer their services through mobile applications. This feature is significantly important for those businesses that have the mobile application on the Google Play Store and Apple Store. The payment service provider must support easy integration to popular content management systems such as Shopify, WordPress, and WooCommerce.
Fee For Subscription Credit Card Processing
Before you choose a payment processor for your business, it is important for you to understand the pricing structure. The rates and the fees associated can vary based on factors such as the merchant’s risk profile, target market, and type of card being accepted. Let us explore some popular pricing models used by subscription merchant accounts.
The interchange-plus pricing model is one of the most transparent structures that you can get. In this model you pay the actual interchange fee, which is set by card brands, plus a small markup percentage. This model is highly transparent but can sometimes be complex to understand. Merchants processing a high volume of transactions usually prefer the interchange-plus pricing model.
Next is the flat rate pricing, where you pay a fixed percentage on all transactions irrespective of the card type. Payment processors like Stripe and PayPal generally offer fixed rates to subscription merchants. This pricing structure is simple to understand, and usually startups and small-volume merchants prefer that.
The tiered pricing model groups the transaction into three categories: qualified, mid-qualified, and non-qualified, and all these transactions have different rates. In the industry, merchants generally consider this pricing structure as less transparent, and many merchants claim that it can lead to unexpected costs.
In the subscription payment industry, the payment processor may also offer you a subscription-based pricing structure where they charge you a fixed monthly amount plus the direct interchange cost. This can be the most cost-effective model for your business; however, it is generally offered only to high-transaction-volume merchants.
On your merchant account statement, you can also see some additional fees such as monthly fees, platform fees, transaction fees, chargeback costs, currency conversion fees, termination charges, and setup fees.
KYC for Subscription Merchant Account
To get the approval of the merchant account, you will have to submit some business and personal documents to the processor. These documents are carefully evaluated and validated by the underwriting team to ensure that only genuine merchants are given access to the payment system.
For business documents, you will be providing the business incorporation document, such as EIN, previous processing history, bank statement, bank account confirmation, and personal ID proof of the directors.
The website should have clear product information as well as a detailed refund and privacy policy. The contact information of the company should be visible in the footer section of the website.
Application Process For Subscription Payment Processors
The process of obtaining a subscription merchant account starts with the initial consultation, where you discuss your needs with the payment service provider. We encourage you to at least have a discussion with five payment processors to find the most suitable one for your business.
You will start with sending the application form and the KYC document to the payment processor. They will review it and ask for additional documents if required. The underwriting team will validate all the documents that you have sent and check for errors. The team will identify your risk profile and match it with the current offering of the processor. The underwriters evaluate your business model’s financial stability and risk factors associated. The evaluation also includes checking the industry, processing volume, average transaction size, and chargeback history. Your details will also be checked with the match list database.
If approved, you will receive the confirmation email from the processor, and then you can start the integration.
The underwriters specifically look for associated risk and business stability. This is done by checking your personal and business credit score as well as checking your processing history and bank statement. The underwriters carefully analyze your subscription pricing model and the billing frequency.
You should have clear terms and conditions and customer service policies to convince the processor that yours is a professional organization. We encourage you to carefully prepare the documents beforehand to avoid unnecessary rejections.
High-Risk Subscription Merchant Account vs. Standard Subscription Merchant Accounts
Subscription payments are generally classified as high risk by payment service providers because of multiple reasons; however, sometimes merchants also use services from low-risk merchant service providers. It is important for you to understand the key difference between a high-risk subscription payment processor and a lower-risk alternative.
A standard merchant account, also known as a low-risk merchant account, is generally offered to businesses that operate a traditional business model. These merchants generally have established processing histories that display low charges.
A high-risk subscription merchant account is suitable for those businesses that offer future delivery products and may have the potential for chargebacks and dissatisfied customers. Any business that opts for a high-risk subscription merchant account must be ready for higher processing fees. longer contract terms, acceptance of rolling reserve, as well as more stringent underwriting requirements
Final words.
Subscription payment processing can be the most critical component for any subscription-based business. As a merchant, it is important for you to understand the critical components associated with subscription payments. These fundamentals can help you make better decisions and grow your business. You should take time to carefully evaluate the options and consider current and future requirements before making a decision. If you have any further questions, you can email us at [email protected].