Written by Iain Hassall - Zuora
This article originally appeared in the Zuora Academy.
We all love how easy it is to accept credit cards for recurring payments. But did you know that there are currently more than 200 — and counting — alternative payment methods for businesses? With more choices than ever before, it’s smart to do some digging into what’s out there, what makes sense for your business and which subscription payment methods your customers will actually be using.
And because subscription economy businesses have more complex payment processes than traditional eCommerce businesses, you also want to do your due diligence to make sure your finance and operations teams can support whatever subscription payment methods you choose from the bounty available. Factor in the global component of cross-border eCommerce, the stakes get even higher.
So let’s find out the best payment strategies for your subscription-based business today that will keep your business humming along into a bright future.
IT’S NO LONGER A “MASTERCARD OR VISA” WORLD
Fifty years ago, most people used cash to buy smaller-ticket products and services and checks for bigger-ticket items. In fact, as late as the 1980s, your dad still had to go to the bank to get “Traveler’s Checks” for your summer vacation (before the advent of the debit card).
Since electronic card payments were introduced, their popularity has continued to grow. In 2012, over 32% of worldwide consumer retail spending was card-based, and by 2023, it’s estimated that global payments revenues will reach $2.1 trillion.
To achieve that type of growth it’s obvious that we’re talking way beyond the industry titans—Visa and MasterCard. But just because there are 200 ways to pay online across the world, it doesn’t mean that all of those methods should be used by your business. However, having a multitude of options does make it easier to find the exact right solution for your own business.
RELATIONSHIPS WORTH WORKING FOR
For subscription-based companies, figuring out which payment strategy fits your business best is even more important than it is for “one and done” online businesses. That’s because your relationship with your customers and their preferred payment methods is an ongoing one that often requires dozens of transactions a year and evolves over time.
For example, if you decide your existing payment method isn’t effective or is too expensive, it may be difficult to migrate existing customers to a new payment method, which can put a kink in the relationship you’ve built with them.
Nailing down the right payment strategy is not only critical to doing business globally, but it is also one of the easiest things you can do to grow your business. That’s because as the world rapidly becomes more comfortable with online commerce, the easier it is to boost your revenues. And if you choose a strategy that fits both your finance and operations models, you’ll also lower your costs, too.
LET’S GET DOWN TO BUSINESS: B2C OR B2B
Now that we’ve seen what an important role your payment strategy is to your business, we should look at how your business model —B2C or B2B — and your relationships with your customers from a payment standpoint will impact your payment strategy decisions.
In a B2C business, your customer might need access to your service immediately and so you need to be able to process recurring payments in real time, giving your customer easy-to-understand billing and payment options. B2C businesses also usually have a much higher transaction frequency, so a user-friendly, self-service portal for customers to manage their ongoing relationship with you is crucial.
For B2B, the layers of complexity grow. Many of your customers will have a procurement process you’ll need to navigate so you have to consider how you engage with the purchasing department and what that means from the payment processing side. Another consideration for B2B is that the person subscribing to the service is generally not the person writing the check, so you’ll need to actually interact with two different parties within the organization. How do you make sure both those parties are aligned, that you are fully engaged with them, and that you’re receiving payments?
Whether you are a B2C or B2B business, the are two main things to think about with payment strategies in the subscription economy:
- offering a seamless customer experience that makes your customer feel like they’re in control of the process and makes it easy for them to pay you; and
- maintaining business effectiveness by making sure that your back-end office is efficient, effective and actually achieving its objectives.
By choosing the right payment method for your subscription business, you’re giving yourself the best chance to take advantage of the benefits inherent in the subscription economy. For example, with the right payment method, you can take a customer’s payment information up front, but then give them immediate access or a free trial for your service and charge them later. It’s this type of flexibility and a “try before you buy” experience that your customers crave, and by offering themthe right payment method strategy, you’re building a customer for life.
RECURRING PAYMENTS AND THE SEAMLESS CUSTOMER EXPERIENCE (OR THE CUSTOMER REALLY IS ALWAYS RIGHT)
All you have to do to put yourself in the shoes of your customer is imagine the last time you moved on from an online shopping experience that took too long or otherwise made it too hard to give a company your money for something you actually wanted to buy.
For instance: you decide to get back into photography and so you go online to find a class to get you up to speed. You find a great teacher, great curriculum and you’re 90% through the registration process.
However, when you click “checkout now,” you see that they don’t accept PayPal, and unfortunately, your credit card is in your wallet upstairs where your wife is sleeping. What happens? You close that tab and head to bed yourself. This is probably the most heartbreaking—and avoidable—purchasing fail of all: someone’s ready to hand over their hard-earned money and your payment system (or lack thereof) kills the sale. It doesn’t have to be like that, especially today.
The three kings of seamless customer payment experience
So while there may be more than 200 payment methods in the global marketplace, many of these are targeted for one-time purchases, not for ongoing customer relationships.
For electronic payment methods geared more to subscription economy businesses, there are three dominant options available today: credit card, PayPal, and direct debit. These three options alone will allow you to collect the majority of all recurring payments electronically around the globe.
The allure of credit cards is that they’re guaranteed up-front, very easy to collect and reconcile, and they’re a global solution: customer can use his Visa card on your site whether he’s a student in Nebraska, a business in New Zealand or a government agency in Namibia. If you’re going to accept one payment method, this is the one to start with.
PayPal is the only e-wallet that has a majority stake in the global market, and because using PayPal can allay concerns for some of your more security-minded customers, having that familiar logo can offer peace of mind as well as ease, particularly for B2C companies. Purchases are guaranteed and this option is easy to roll-out globally.
More common than credit cards and PayPal, direct debit is popular in many parts of the world and key for B2B companies to electronically collect recurring payments directly from your customers’ checking or saving accounts. This is also usually the most cost-effective option. Unfortunately, there’s no global standard for direct debit, so some region-specific complexity should be expected.
RECURRING PAYMENTS AND THE EFFECTIVE BUSINESS MODEL (OR: IF FINANCE IS HAPPY, WE’RE ALL HAPPY)
Now that we’ve seen how each of these payment methods can make your customer happy, let’s take a look at the pros and cons of each in terms of how you do business by looking at reconciliation and partners.
The primary thing to realize is that not all of these payment methods are made the same. Credit cards and PayPal actually work fairly similarly in that they’re guaranteed up front and the charge-back rate is fairly low. Since your customers get authorized and validated up front and have a choice up front to pay or not, you run into very few reconciliation challenges on these types of transactions (outside of intentional fraud, but that’s a different article.).
Direct debit, however, is a different story. Since there is no such thing as an authorization or guarantee up front, you’re putting your trust in your customer that they’re giving you the right bank information and that they actually have funds in place. Also, the fact that settlement for direct debit takes a couple of days means that if somebody is not great at balancing their checkbook, so to speak, and other recurring payments are being drawn from that account, you might get the dreaded “insufficient funds” notice by the time your payment settles.
Another potential issue with direct debit is that there are a lot of different standards around the world. You have one direct debit solution in the U.S., which is ACH, but another in the UK, where you’re using the BACS Direct Debit Scheme, which is different again than SEPA in continental Europe. So while direct debit may make your customer happy and the costs are lower than credit cards, it may give your finance team headaches. It’s all a balancing act specific to your particular business.
The bottom line is that the reconciliation process on any of the three payment methods helps you keep tabs on what transactions have actually settled effectively, what customers may have charged back, and what customers have reversed a transaction, sometimes months after the payment has settled. And then if there is a chargeback, how do you manage that and what does it mean for your relationship with your customer? A topic for yet another Academy article.
No matter what payment methods you offer, choosing the right payment processing partner is crucial to your business. Payment processing partners are those folks who will actually take care of getting the money from the customer and putting it into your bank account. One big thing to keep in mind is that you may not necessarily use a single partner; you should look for the right partner for the right payment method for the right region of the world.
And whichever partner you choose, you’ll want to be as close to the processing of your recurring payments as possible so you have full visibility into what state the payment is in, how it’s being processed, what are the reasons for a potential rejection, or its mishandling. In the case of credit cards, you can go with a gateway, preferably a gateway that has a tight relationship with the processor behind the scenes so you can get all the feedback there. For direct debit, you want to be as close to the bank as possible, and with PayPal, you probably want to be working with PayPal directly so they can give you the exact feedback you need.
PAYMENT PROCESSING PARTNER CHECKLIST
There are just shy of 7 billion potential subscribers out there waiting for you on mobile, social, and web. They’re in control and their expectations of how they’re buying from you have changed. Making sure you’re offering them a payment method that makes it easy for them to buy your stuff—again and again—and makes it easy for your finance team to manage your cash flow means you’re giving your business the best possible shot at world domination.
So here’s your final payment processing partner checklist:
- Has a simple and automated process
- Minimizes middle carriers and other parties so you get minimum fees
- Offers you complete visibility around every transaction.
- Has deep local expertise where needed
What payment strategies do you use? Do you have any additional tips to share?
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