What you should know about subscription payment processing
Anyone who remembers the traditional payment processing forms can appreciate how things have evolved. Online payment processing builds on the traditional model, with different functionalities that make payment processes easier, faster, and more straightforward.
Payment technology advancements have taken credit and debit card transactions to a whole new level—making it possible for a business to accept secure payments remotely using a physical card or mobile device, online on a website, or a mobile app.
New state-of-the-art payment processing models are replacing old point-of-sale merchant PCI systems with more versatility and features, as well as accommodations for new payment processes, recurring revenue, and alternative payment methods such as PayPal, ApplePay, and Venmo.
Do you ever wonder how money from a debit card gets into the hands of your subscription service? Let’s review the parties involved, the payment processing model, and some of the best subscription payment processing solutions.
The three parties in payment processing
In global online credit card payment processing and similar systems, there are essentially three parties.
There is a merchant who is selling something, the customer who is paying for it, and the third party is the technology itself.
Some people look at this type of three-party system as the “devil’s triangle,” especially if it leads to excessive latency and one party keeps the other parties waiting for any length of time, as every millisecond counts when it comes to processing online payments.
Source: Jan van Bon, LinkedIn
Modern point-of-sale technology is different, though, in that it happens very close to real-time. Those payment transactions only take a few seconds—if that—so we tend to forget that there is actually an elaborate process behind getting merchants paid by customers. In reality, payment processing has to navigate a complex financial network and get a myriad of things done quickly.
Explaining the online payment processing model
Subscription payment processing plays a pivotal role in subscription-based services and products. These payment models handle the monthly payment and billing cycles, ensuring that subscribers are charged accurately for the services they receive.
Let's look inside this process a bit.
First, there are the payment gateways and the payment processors.
An online payment gateway sends the request to the processor.
The processor does the transaction with the issuers' and customers' banks. Conceptually, some of this work involves tying the monetary amount to a particular good or service being sold. Then, the processor has to get the transaction approved, debit the customer's bank (or make sure that that amount is debited), and then add funds to the merchant’s bank.
That’s it in a nutshell—but other intermediate steps often apply, too, and systems have to be set up differently to handle different types of accounts, payers, and payees.
In order to do that in a PCI-compliant way, the system has to be set up with certain standards, including encryption, point-of-sale security, verification tools, and much more.
The efficiency and reliability of online payment systems are essential to deliver seamless customer experiences. Subscription businesses must prioritize a well-designed and secure payment processing infrastructure to foster trust, enhance customer satisfaction, and sustain a steady revenue stream.
Modern changes in online payment processing
The payments space is constantly evolving–let's explore how companies use alternative payment methods in ways that weren't possible before the last couple of decades.
Bank verification automation is becoming the norm. Platforms like PayPal and others help users to achieve quick and easy transaction processes.
Instead of merchant services that have to use PCI card data systems for every single transaction, digital payment facilitators basically set up a pre-authorized account for a user that claims are made against, eliminating the redundant process of doing checks on every single transaction at the point of sale.
Online payment processing: big providers and special uses
When you're looking at these types of online payment processing systems, it's a good idea to understand the most common providers in the industry, what they do, and why it's important.
One well-known player in the space is PayPal. PayPal handily addresses many of the pain points in the traditional process and makes the surrounding processes extremely easy. A merchant has the ability to embed PayPal in their own site or send customers to PayPal to facilitate a transaction. On the customer’s side, the process is so simple that they can do it with a couple of clicks over a mobile phone.
Another online payment processor with an excellent interface is Stripe, which is quickly becoming a challenger to PayPal with its suite of payment processing tools.
So if PayPal is great for beginners and Stripe is user-friendly, what are some other special-use online payment processing companies?
One is Square, a software version of an online payment processor that's great for brick-and-mortar retailers at the point of sale. Square fits into a model where the cashier can use a device to ring up the customer in person. That might seem basic, but essentially, the architecture behind the plug-in is the most impressive part of what Square does. The back-end verification, again, does away with the need to fully vet transactions the old way, with PCI checks.
Subscription models used to be relatively rare, but with the cloud revolution and other changes, everything is going the way of subscriptions, from music to cars to household goods. Companies are realizing that instead of trying to authenticate single transactions, they can charge customers by the month and get a flat fee every month.
This monthly recurring revenue and the ability to accurately forecast growth and scale based on that recurring revenue have made the subscription model so attractive. You could say that subscription pricing is an excellent predictive transaction model, where individual transactions are the old-fashioned way of doing business.
How Recurly makes subscription payments easier
The Recurly platform, specialized in subscription management and billing, involves setting up a model for recurrent billing, where subscriptions are charged based on the cadence set in the subscription plan.
Recurly does a lot of the work behind the scenes with gateways, processors, and other parties like associations, issuer banks, and customer banks. That money has a particular trajectory that it needs to take to make the transaction happen. When you have a third-party online payment processing provider in play, all of this can happen quickly and conveniently for those first two players—the seller and the buyer.
To think about this more granularly, Recurly is integrated into a company’s payments ecosystem, combining subscription management and billing elements in a solution that supercharges the ability to grow your business.
Through pursuing ease of use in taking on new customers, signing them up for subscriptions, and billing predictably (as we discussed), this online payment processing provider does two things: first, modernizing the process, and second, changing the metrics of the average transaction, for measurable ROI and success over time.