The online billing space can be a bit complicated. This post hopes to explain how all the players work together and the advantages and disadvantages of adding and removing layers.
What are the layers?
There are 2–3 layers in the recurring billing space. The first layer is the software layer. Companies like Chargify, Chargebee, Zuora, and Recurly calculate when and how much to charge your customers. They take these amounts and send them to whatever gateway you have plugged into their product. The next layer is the Payment Gateway. Some common gateway solutions are Stripe, Braintree, and Authorize.net. These companies have direct relationships with a bank(s) and process cards on your behalf. Then, of course, there are the card processors like Visa and Mastercard but this blog post won’t be covering those since you don’t deal with them directly.
The Software Layer (0.5–1.5% and $50-$299/mo)
A common question we get asked by our clients is why to use a software layer if some of the gateways like Stripe and Braintree provide some basic recurring billing functionality.
Pros
More functionality and pricing flexibility. Many of the software solutions allow you to handle whatever crazy pricing scheme you can imagine.
You aren’t stuck on one gateway. Chargify is great for this. You can have several gateways connected to your account and start taking new subscribers through a new gateway quickly.
Quickly get up and running with out of the box functionality. Most of these solutions provide sign up pages and a customer portal for subscriber self management. However, if this is the only reason for using a software layer, consider using an addon at the gateway level instead.
Fantastic support. Because you’re not an expert in this space, it’s great to be able to talk to people who are. Most of these companies have great phone and chat support. Stripe recently released 24/7 phone and chat support, but we have yet to see if they actually know their stuff. For years it was email only. This wasn’t ideal for merchants who had their account shut down for too many chargebacks etc.
Cons
Expensive. Most competitors in the space will take at least $100/mo and 1.2% of your revenue on top of your gateway fees. That means this can quickly grow to 4% of your revenue overall just to bill your customers.
It’s difficult to move back down to the gateway level if you grow to a point which it’s cheaper to build some of the nice functionality the solutions above provide. Because these solutions all have their own APIs and custom database structuring if you want to move you have to completely rewrite any code related to your subscriptions. Granted if you are using a very simple model this can be relatively easy to do. Keep in mind you’ll also lose some historical data once you move.
The Gateway Level: (2–3% and 20–30¢/ transaction)
There are a ton of gateways out there and it can be difficult to decide which gateway is best for your business. While we recommend Stripe to MOST of our clients. It’s not always the best fit if you have a high-risk business like adult entertainment, medical marijuana related, supplements etc. Read the whole list here https://stripe.com/us/prohibited-businesses. This level will typically charge you anywhere from 2–3% and 20–30 cents per transaction. Don’t be fooled by gateways offering super low pricing. Here are some things to watch out for:
Make sure they have “Open Data Portability.” This basically means they’ll transfer your stored cards if you want to move to another gateway. For example, moving Braintree cards to Stripe and vice versa will do this free of charge without too much hassle. Auth.net charges a minimum of $1000 and it takes a while. Some gateways simply won’t do it. This may change with some GDPR requirements.
Make sure they have a great API. Stripe and Braintree have great APIs. This is important if you ever want to go down a level to save on billing costs. This also means you’ll get new and exciting features. If the gateway is using modern technology, more software layers will build ontop of the new features. A great example of this is Stripe added an easy and efficient way to do ACH. Most of the software layers added it very quickly. While some of Stripe’s competitors have had ACH for years, but it was difficult to work with.
Flat transaction fees for all cards. Some gateways will try to lure you in with transaction fees of 2% and 10¢/ transaction. Make sure you read the fine print. Those rates may apply to debit cards but not to say and AMEX card which will probably be around 4–5% to offset the cheaper rates. Depending on your business this may be good or bad. More often than not it’s bad.
Why should I care about this?
You can save a bunch of money if you use your gateway directly and don’t need the fancy features added by the software layer. It also helps to understand the space so you aren’t sold into something on misinformation.
If you have a question or felt like we are missing something from our post. Feel free to reach out to info@instapayments.io.