If you are a small independent software provider, a web app developer offering a SaaS product or you are developing a digital product, before you start marketing to attract your new customers you need to decide how to accept online payments. A couple options to explore are direct merchant accounts and Internet Payment Service Providers, each have there unique advantages, disadvantages and costs.
Our estimated costs below are for a small business such as a startup SaaS or ecommerce merchant selling subscription plans or memberships with an average transaction amount of around $25 and with $3000 total sales volume per month:
Direct Merchant Accounts
These are typical fees for ecommerce or SaaS businesses primarily selling recurring subscriptions, with a direct merchant account and a gateway.
Merchant Account
Processing/ discount rate (combined qualified & non qual & international): 2.75%
Transaction fee (per transaction): $0.30
Monthly fee (monthly): $30
Statement fee (monthly): $10
Chargeback fee: $25
Yearly fee (annually): $80
Setup fee (one time): $200
- $280 to get started, including setup and annual fees.
- Processing discount rate is $82.50 + $36/ month or $1422 annually
- Monthly fees are $40/ month or $480 annually
- The total cost of chargebacks is around $360 per year.
- The cost of chargebacks, for a typical merchant that is successfully managing their fraud risks resulting in a low chargeback ratio of 0.5%
- (1440 annual number of transactions) x 0.005= 7.2 chargebacks per year
- The fee of $25/ chargeback is $180 annually
- Loss of charged back sales is about $25 each, $180 annually
Merchant account total annual fees add up to $2542, or about 7.06% of total sales.
Payments Gateway
Once you have a merchant account you will need a payments gateway to process online transactions. authorize.net is one of the most popular:
Transaction fee (per transaction): $0.10
Batch fee (daily): $0.25
Per month fee (monthly): $20
Fraud detection (monthly): $10
Recurring Billing (monthly): $10
Customer relationship/ Vault (monthly): $20
Setup fee (one time): $100
- $100 to get started, including setup and annual fees
- Transaction fees are $12/ month, or $144 annually
- Batch fees are $7.50/ month, or $90 annually
- Fraud, recurring billing and vault fees are $60/ month, or $720 annually
All gateway costs added up for the full year is $1054. Including merchant account costs of $2542. With annual sales of $36,000, fees calculate to about 9.99 % fees.
Subscriptions software
For our example business with monthly 120 transactions of $25 each equaling $3000 of sales per month, the fees for a recurring software provider like Chargify, Recurly or Spreedly are as follows:
- Chargify= $99/ month, or $1200 annually
- Recurly= $29/ month + $24= $53/ month, or $636 annually
- Spreedly=$20/ month + $24= $44/ month, or $528 annually
The average yearly cost of processing recurring payments with a direct merchant account, payments gateway and subscriptions software is 11.5%- 13.3% of total sales.
The Pros and Cons
Some advantages of a using a direct merchant account, gateway and recurring billing software provider:
- Having control and ownership of customer data being stored in the payment gateway
- As a business grows, the overall cost of payment processing decreases
- Flexible subscription billing models
- Hosted payment pages reduce PCI compliance requirements
Some of the disadvantages:
- Several complex integrations and multiple back-ends for administration is required
- Programming and development needed for subscription management, consumer cancelations etc.
- Merchant account application and approval processes usually take several weeks
- Personal guarantees are generally required
- Changing products, plans or business models usually requires re-qualifying for a new merchant account
Internet Payment Service Providers
Ecommerce and SaaS startups can leverage some of the advanced functionality of IPSPs (often called resellers as they are the “merchant of record”) for their recurring subscription payment processing. IPSPs typically include some additional features such as affiliate networks and software delivery fulfillment.
Popular IPSP businesses that offer recurring payments for subscriptions are Clickbank, 2Checkout, Plimus and Fastspring:
- Clickbank= $50 per product and 9.9% for items under $40, or $3614 annually for one product
- 2Checkout = $50 Startup fee and 5.5% +$0.50/ transaction, or $2750 annually
- Plimus= 10% or $3600 annually
- Fastspring= 5.9%+ $0.95 (or flat 8.9%), or $3204 annually
The cost of chargebacks is going to be around the same amount: $360 per year. The total average yearly cost of processing recurring payments with an IPSP ranges between 8.6% and 11% of annual sales.
The Pros and Cons
Some advantages of a using an IPSP/ Reseller:
- Quick application and approvals
- Transparent, predictable pricing
- Easy integrations, usually “copy/ paste” HTML code with no programming required
- Low startup costs
- Flexibility to quickly test new products and subscription plans
Some of the disadvantages:
- High per transaction cost compared to a merchant account
- Unfamiliar branding on payment pages and shown on consumer paper statements (example: CLKBANK )
- No control or ownership of consumer data, the startup is locked in as it grows
- Slow cash flow, settlement frequency of once or twice a month, with 30 day delays
- Lost sales due to unsuccessful fraud screening (some IPSPs call consumers to verify sales)
Another Option
Recurring Subscriptions for SaaS, Web Apps and Digital Products
Simplified Ecommerce allows you to manage all your billing and subscription plans for your SaaS web apps and digital products. Recurring billing with no programming and integrations as simple as copy/ pasting a link. Everything is included to make it easy to start accepting online credit cards and echecks:
- Payment gateway, onetime and recurring billing, chargeback protection and affiliate marketing built in.
- Easy, friendly interfaces for customizing all elements of your payment pages, with no CSS or programing knowledge needed.
- Your customers can easily view their purchases and subscriptions, cancel their subscription, or submit an inquiry about their charges. It’s built in, with no programming, integration or development needed.
- All payment data is stored securely in our gateway vault. You can transition seamlessly change merchant accounts any time without worrying about payment data being locked in or losing your customers. Keep all your affiliate relationships, fraud and risk management, integrations, custom payment pages and configurations.