September 10, 2019 | Authored by: Kevin Cancilla
5 Considerations when Selecting a Payment Processor
As a subscription-based business, one of the most important decisions that your company must make is the selection of a payment processor. The payment processor literally controls your pipeline for subscription billing revenue. Selecting the wrong processor or the wrong pricing model can have an enormous cumulative impact on profitability. So how do you select the best payment processor for your business?
1. Select a partner, not a vendor
Do not make the mistake of assuming that all payment processors are the same and all their offers are equal. And do not select a payment processor based solely on the lowest offer you receive. Finding the right processor for your business requires a meticulous vetting process. You're not searching just for a payment processor, after all; you're looking for a business partner that will protect your most valuable asset: revenue. The fundamental of your relationship needs to be trust.
Even with a trusting, respectful relationship, you must negotiate a good Service Level Agreement (SLA), ensure the scalability you may need (to support international expansion, for example), and get a good deal to reduce costs.
2. Check integration options
Ease of integration is a major consideration for digital businesses when vetting payment processors. The more streamlined this workflow is, the quicker your business can start operating. Better integration also means fewer payment processing issues that delay payment and create points of friction with your customers.
Generally speaking, payment processors offer two integration options to choose from: an application processing interface (API) integration and a hosted solution. However, how those integrations are executed differs from processor to processor. One option is not better than the other. You will need to examine your own systems, resources and so on, and see which processor and which integration method best suits your subscription business. The integration method also has an impact on how you achieve PCI compliance.
Integration via API
Integrating to the processor through an API may be an attractive option since in some cases it can be quick and easy to get it up and running. With just a few lines of code, your business can begin accepting subscription payments over digital channels. Another positive is that customers do not need to leave your platform to complete a subscription billing payment, reducing potential customer friction.
With an API integration, customers can typically pay via a wide variety of connected devices, which can boost sales. All in all, APIs offer a very direct way for your business to control your transaction experience.
Check how much work is required to integrate via API to your candidate payment processors and what the benefits of this integration are.
API-based integration - increased PCI burden
A downside of the API-based integration approach is that it increases the PCI burden placed on your business. PCI is a set of security controls that businesses are required to implement to protect credit card data and comply with the Payment Card Industry Data Security Standards (PCI DSS). PCI requirements involve security measures like use of passwords, encrypted transmissions, anti-virus software, secure applications, limiting access to sensitive data, and more. PCI requirements differ based on business type and volume, so it is important to understand what requirements you must meet before assuming this responsibility.
Hosted solutions can offer your business a more hands-off approach to processor integration that does not require in-house coding to launch and maintain. With this approach, your subscription payment page is hosted directly through the payment processor, who is also responsible for ensuring platform security and availability.
Arguably the most enticing benefit of the hosted model is its simplicity: The payment processor shoulders the responsibility of managing transactions as well as the lion's share of PCI compliance, while your burden is reduced. For example, instead of undergoing a full audit every year, your business just needs to fill out an annual self-assessment questionnaire. The tradeoff is that hosted pages can be jarring to the customer experience if they're not customizable, since users could be redirected to a third-party page to make purchases.
Carefully weigh the pros and cons of each integration method, taking into account what will be the best fit for your organization.
3. Check pricing
Cost is often a primary consideration for merchants when they review the commercial aspects of their payment processor relationship. However, comparing pricing is not always simple. There are different pricing models and associated fees to consider.
Choosing the right pricing model
The two most common pricing models are called Flat Rate and Interchange-Plus. Analyze these carefully to arrive at the arrangement that provides the best service at the lowest cost for your business.
Flat rate pricing model
Payment processors may offer a flat fee on all transactions – a set percentage on each one, for instance. It's a simple approach that allows your business to start accepting payments without delay and provides full predictability of processing costs. This approach could be ideal for small businesses that lack the time, resources, influence, volumes and know-how to negotiate other terms.
However, other options could offer lower rates on certain types of transactions, and in those scenarios, you could be leaving money on the table by sticking with a flat fee setup. Even a seemingly minor change in transaction fees – we're talking about pennies here – could have a significant effect on your business's profit margins. As your company grows and processes more transactions, those fees could grow exponentially from what seems at first like pennies to very substantial sums of money.
Interchange-plus pricing model
The interchange-plus model gives your business the opportunity to select and negotiate fees with payment processors, while also providing a clearer view of where those costs are going. The challenge is unraveling what exactly you are being charged for and which options you should choose. Read here for an explanation of the main types of fees you may be charged.
While cost is a very visible consideration to the vetting process, less so is exclusivity. Some payment processors will build in contract terms that lock businesses into a relationship and fee structure for a set number of years. If your business expands and your transaction volume increases, you should be able to negotiate lower rates. But if you already agreed to a multi-year exclusivity deal, your bargaining power could be significantly hampered.
Bank reserves are another factor to account for. Processors may require you to deposit a reserve amount to guarantee them and cover risk. If the deposit is large – as may be the case with, for example, higher-risk businesses – it could have a major impact on your profit or cash flow.
Additional monthly or one-time fees
There are many more types of fees that payment processors may charge in addition to processing fees. These include fees for set up, account cancellation, monthly statements, PCI compliance assistance and more. It takes time and effort to understand what exactly you are being charged for. But your business should invest the effort to fully understand the payment processing fees you may be subjected to in order to understand your best options and account for them when weighing up the pros and cons of each offer you receive.
4. Check which payment methods are supported
The specific market that your company operates in will likely dictate which payment methods you need to support. Different regions use various payment methods, and even different demographics in the same international markets may prioritize one platform or method over another. For instance, older customers may feel more secure relying on traditional means of payment like bank transfers, while younger demographics opt for the convenience and immediacy of mobile payment apps.
As a subscription company, you must choose a payment processor that can support the variety of payment methods that your customers may want to use, including mobile payments, bank transfers, digital wallets, online banking and cash. The general rule of thumb with subscription businesses is the more options, the better.
If you have an international footprint, you have many more considerations to think about. You will need to research every country and market you plan to sell to and identify the preferred payment methods in each one. Not only will your payment processor need to be able to support those platforms and services, but it must be able to deliver payment pages in those countries' primary languages.
5. Get Recommendations
If you need to choose anything in the world today, from a washing machine to a payment processor, the best input is personal recommendation. Speak with other merchants whose business is similar to yours in scope and learn from their experiences with different processors.
Some important questions to ask during the vetting process include:
- How reliable are their services? Many processors offer uptime and availability guarantees – for instance, 99.99% uptime. Even then, scrutinize those claims and check that there are service-level agreements in place to offset any unforeseen costs you might incur as a result of downtime.
- What are their fraud protection measures? Check the processors' fraud protection measures. Different processors may have very different types of fraud protection. Or they may offer more advanced fraud protection at a premium. You may already have fraud protection tools in your organization. You need to build the full picture of which anti-fraud capabilities should be located where to ensure the protection you need at the best price.
- Is their customer service up to par? Read customer reviews to get a sense of how responsive payment processors are. Also, be sure to speak directly with former and current customers to see if the level of service met their needs. Bear in mind that larger merchants will probably receive better service, so consult with merchants whose transaction volumes are similar to your own.
While not every business owner is an expert, they will certainly be able to offer valuable insights into how the relationship with the processor works, where they receive assistance, problems that arose, reliability, responsiveness and so on. However, personal recommendations do not exempt you from conducting your own due diligence and thoroughly researching each vendor to see how they stack up.
For additional information on selecting a payment processor, read our comprehensive white paper "How to Choose a Payment Processor for Your Subscription-based Business." And for information on our subscription billing solutions, contact Vindicia today.
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