Surely you’ve heard the old adage, “don’t judge a book by its cover”. Surprisingly, this rings true for payment gateways, too—you can’t learn much about payment gateway providers at a glance.
From a distance, they can all look very similar, like looking at cars on the highway from the top floor of a skyscraper. It’s perhaps because of this apparent uniformity that some SaaS businesses wind up with a payment processor that doesn’t suit their needs.
While a quick look shows an array of nearly identical options, a more granular investigation reveals key differences, both in terms of cost and features.
Knowing what to look for can go a long way towards ensuring your subscription business finds the right payment processing fit for its needs.
Does the payment gateway offer ACH processing?
Since its start in the 1970s, automated clearing house (ACH) payment processing has proven itself an ever-increasingly popular mode of handling transactions within the B2B sector. Covid-19 made 2020 a year of record growth for ACH processing and the momentum has continued to build, even as many extremities of the pandemic wane.
In the third quarter of 2021 alone, payment volume on the ACH network rose almost 8% with over 7.3 billion payments.
Why such popularity? ACH processing bypasses the need for physical checks or cards by transferring funds from one bank account to another. For subscription businesses, ACH allows for easy automation of payments.
Transactions are then completed for a fraction of the fees that are associated with credit card processing—which is a bigger savings than you may think. Even moderate-sized subscription businesses can easily pay hundreds of dollars in transaction fees for credit card payments every month.
ACH payments, by contrast, can be handled for fees as low as 1% with some rates including fee caps. This can result in thousands of dollars in savings for your business throughout the year.
Because ACH payments transfer funds directly from one account to another, they can also serve to eliminate a major source of headaches associated with dunning management and involuntary churn. Credit card numbers change and expire, which means every subscription business regularly deals with the frustration of handling accidental payment interruptions.
Failed transactions as a result of an expired payment card can be a significant source of revenue leakage (which some experts estimate costs businesses 5% of their annual revenue on average) and distract from your team's ability to perform their other duties.
That’s not to say ACH payment processing is without its drawbacks. This option is only available for transactions taking place within the United States, so if your business is more often processing payments from overseas, it may not be your ideal solution.
Nevertheless, it remains an efficient, low-cost processing feature that many businesses can benefit from if most of their customers are within the U.S.
Hosted vs. integrated gateways
One of the most fundamental decisions any SaaS business has to make about its payment gateway is whether it wants a hosted or integrated solution. Both options come with their own benefits and shortcomings.
Hosted gateways work by directing customers back to the payment service provider website as they finish their online payments. You may have seen this in action if you’ve ever been about to make a transaction online and were redirected to a PayPal page, for example. This solution may be particularly appealing for startups that are looking for an out-of-the-box solution with minimal setup work required.
However, long-term hosted gateway dependency comes at the risk of efficiency bottlenecks. Because this option requires that you work with a website separate from your own, your billing team is left weaving between systems as they input data by hand.
Not only is this process lengthy, and potentially error-prone (the average employee makes 118 mistakes a year), but it will become increasingly unsustainable as your business grows. Manual-heavy billing processes may be up for the challenge of catering to ten customers, but what about twenty? Thirty?
Integrated gateways, on the other hand, communicate seamlessly with the rest of your tech stack, including your billing automation software, reducing the chances of error while also freeing your billing department up to focus on more meaningful tasks. And, because there’s no manual work required, payments are processed faster, meaning your revenue makes its way into your merchant account sooner!
The setup of an integrated gateway can be a little more complicated than hosted solutions, requiring some development work. In the long run, however, any initial setup investments are overshadowed by the operational efficiency that follows.
Is the gateway vendor transparent about the fees it’s charging you?
Virtually every payment gateway provider earns its money via a combination of flat rates and fees. For example, it might be that your provider charges you 2.9% of the transaction, plus 50 cents. There might be other stipulations as well, including a fee ceiling (i.e. the fee total is not to exceed $10).
Gateway fees are normal. However, many merchants—subscription businesses like yours—don’t understand what many line items on their gateway fee statements mean, but blindly pay them anyway. And unfortunately, some gateway providers take advantage of this, adding questionable fees in the hopes they’ll be paid anyway.
Other fees may be harmless but still deserving of a second look. For example:
- The qualified rate: The qualified rate is ostensibly a lowball estimate that denotes a figure the company will charge for some of your transactions. For example, the qualified rate might apply to debit card transactions, while any other method of payment will be subject to a different, higher fee. While gateway vendors featuring qualified rates may still be worth doing business with, it’s important to understand the granular details of the contract before you sign.
- The vague line item: Then there’s a whole host of fees that are too vague to categorize summarily. The customer service fee. The setup fee. The early cancellation fee. The statement fee. Enigmatic charges that denote no clear purpose or service that you have been given. While the dreaded vague line item might ultimately be a legitimate charge, you should always feel comfortable asking questions about it. And if it does turn out to be a rip-off, it may be time to find a new payment processing solution.
Fee transparency is key to having a healthy relationship with your payment gateway company. Your provider should be happy to explain any charge you’re unsure of. When they aren’t, it’s a red flag.
By the way, we recently hosted a webinar on the topic of fee transparency. Check it out for more in-depth information!
The gateway to business growth
For SaaS companies in the modern era, both a payment gateway and a billing automation platform are requisite tools for doing business at scale.
Credit card spending isn't going anywhere; 80% of customers list it as their preferred method of payment. How your business processes these payments can have a major impact on how much revenue you get to keep in your coffers at the end of the month.
It’s true that one gateway payment provider doesn’t look much different from the next at a glance. But by looking long enough to observe the nuance, you may find key differences with significant long-term implications. With the right integrations, processing tools, and fee fluency, you can select a payment gateway that effortlessly enables you to accept payments while enhancing your flexibility and operational agility.