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Understanding The SaaS Payment Landscape

The unabridged post originally appeared on CourseMaker

Trying to figure out how to collect and manage subscription payments for your SaaS? The array of options, each with subtle variations in available features, can be confusing is very confusing.

Understanding the SaaS Payment Landscape

To start, we need to look at a few definitions.

Payment Gateway

According to Investopedia:

A payment gateway is a technology used by merchants to accept debit or credit card purchases from customers

This isn't that clear, so let's get into more terminology and then look at a diagram

Merchant

"The Merchant" is a fancy way of saying you, i.e. an online business selling stuff.

The issuing bank aka issuer

The bank that a customer's credit/debit card is from - usually a major commercial bank.

The acquirer aka the acquiring bank

The acquiring bank processes payments on your behalf, and offers you what is known as a merchant account

Here's a diagram of the whole sequence:

payment gateway diagram

Role of the payment gateway

There is an important distinction between a payment gateway and an acquiring bank (and the merchant account it provides you with), but for a lot of SaaS companies starting out this is obscured.

For example, Stripe is both a payment gateway and a merchant account. Fundamentally, the payment gateway and the merchant account work together to conduct end-to-end payment processing.

This means that you do not need to have a relationship with merchant banks yourself, nor with credit card companies like American Express.

A crucial service that payment gateways offer is taking care of compliance requirements around payments, notably PCI compliance, which is notoriously difficult to roll yourself.

If you're running a SaaS company, you still have three key issues to consider beyond a payment gateway:

  • Subscription Management
  • Recurring Billing
  • Sales Tax & Value Added Tax

Subscription Management & Recurring Billing

Subscriptions

Subscriptions are the lifeblood of SaaS companies, producing the coveted Monthly Recurring Revenue (MRR).
Whilst on the surface they can appear simple, there is a lot of logic involved in managing subscriptions such as:

  • Managing trials
  • Issuing refunds
  • Dunning (a fancy name for retrying failed payments)
  • Making changes to ongoing subscriptions
  • Canceling

Many of these areas are crucial to get right for SaaS companies - slick free trials, elegant upgrades, monitoring churn, and gathering feedback during a cancellation to name a few.

Recurring Billing

Slightly different from subscription management is recurring billing. This is the process that allows a business to invoice customers on a regular basis.

To make things more confusing, many payment gateways offer elements of subscription management and recurring invoicing. For example, the Stripe Billing product works hand-in-hand with Stripe Payments to offer a robust subscription management solution and a basic recurring billing capability. However recurring billing can get extremely complex, and as a result there are a vast array of dedicated SaaS "Subscription Billing & Revenue Operations" companies that aim to assist with this complexity.

In case it wasn't clear, not all billing systems can handle subscription payments - instead just covering the basics of a billing system such as managing billing cycles and invoicing.

Sales Tax & Value Added Tax

Many of the big payment providers provide no assistance when it comes to calculating requirements such as EU Value Added Tax (EU VAT), US sales tax, and more exotic offerings such as Japan's "consumption tax", or India's GST. This in turn has resulted in many dedicated companies that provide services such as verifying that a customer's IP address and credit card billing details are from the same country (required for EU VAT calculations).

References

The merits of different payment platforms have been debated in key developer watering holes on a number of occasions. Here are some of the most illuminating discussions:

All the platforms and tools referenced in the original (longer) post can now be found on the awesome-saas-payments GitHub repo.

  1. 2

    I would also add PayPro Global (https://payproglobal.com/) to the SaaS Payment stack landscape. Our robust all-in-one solution provides software, SaaS and digital goods developers with the necessary tools to grow their business worldwide. Our platform provides users with access to all the functionalities mentioned in the article, alongside other innovative tools, such as powerful reporting, coupon management or a smart routing system, all meant to increase revenue and secure businesses with fast market exposure. Plus, our dedicated support and fast assistance make PayPro Global a trusted growth partner.

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