Subscription Merchants: Payments Best Practices

What are Subscription Companies?

Subscription merchants are companies with a business model that involves customers paying a recurring fee to access products or services, often for a set period of time. The subscription is often set up as recurring monthly, quarterly, annually, or even dependent on usage. 

Subscription merchants come in many different business formats with a recurring payment business model, including:

• Product subscriptions - beauty boxes, razor refills, etc.
• Service subscription - including SaaS products like Salesforce
• Digital content - streaming services, online book clubs, etc.
• Membership subscriptions - gym memberships, warehouse clubs, etc.
• Subscription boxes - curated snack or clothing boxes, for example

Unique Payments Needs for Subscription Merchants

While the general business model is relatively straightforward, accepting and managing payments is complex for subscription merchants. 

A primary complexity is the nuance around recurring payments. For starters, the entire business model relies on the assumption that a bill will continue to be paid for the entirety of a subscription term, which, for various reasons, doesn’t always happen.

While many subscription companies could work with standard payment processors, negative option subscription, or free trial, companies, cannot. Because of the increased risk of chargebacks and fraud, many negative option subscription companies will have to partner with a high-risk payment processor to accept payments safely.

Payment Requirements and Innovations for Subscription Merchants

Subscription merchants require unique payment partners and innovations to ensure business continues to operate smoothly, including:

• Dunning management
• Recurring payments and automation
• Alternative and emerging payment methods
• AI-driven fraud detection
• Tokenization
• Flexibility through unbundled payments

Dunning Management and Involuntary Churn Prevention

Involuntary churn occurs when a subscriber churns, or leaves, but not through an active decision. This can happen when a card expires, is reported for fraud, or doesn’t have sufficient funds to process the transaction. In some cases, subscribers may have no idea this has happened and believe they have been “kicked out” of the subscription.

Dunning management, therefore, is the process of communicating with customers about bills, tracking payment successes and failures, and automating the process of deciding when and how to re-run transactions. Companies like Butter Payments are focused on ending involuntary churn, leveraging machine learning to build robust dunning programs, helping subscription businesses efficiently recover failed payments. 

Recurring Payments and Automation

In many instances, subscription companies process subscription payments through card-on-file transactions, or transactions through securely stored cards that can process as needed after initial cardholder authorization. The merchant will often charge upfront (for the first month) and then state that the same card will be charged again at the interval the subscription dictates.

Automating payments in this way benefits both the merchant and subscriber, as it saves time, ensures payment is at least attempted each payment period and offers predictability.

This introduces additional warnings, however, as any stored card data must be first tokenized per PCI DSS compliance requirements. Many PSPs offer this for merchants, but third-party token provider can also fit the bill.

Alternative and Emerging Payment Methods

Emerging and alternative payment methods like digital wallets, cryptocurrencies, and buy now, pay later (BNPL) are growing rapidly in acceptance and desire to use. 

Many full-service payment processors offer access to the alternative payment methods, which can make it seem like a no-brainer to simply sign up once and get access to the full range. However, while they can make it easier to expand the set of payment method options, they generally will not offer at competitive rates, as they have standard pricing and fees across all payment methods.

High-risk payment processors, niche processors, and other processing innovators may offer these emerging payment methods at more affordable rates. However, this may require subscription merchants to work with several payment partners to process payments, which is more cumbersome than an all-in-one payment processor.

AI-Driven Fraud Detection

A recent report found that an estimated $8.8 billion is lost yearly due to fraud - primarily card-not-present fraud. Because this problem will only continue to rise as fraudsters themselves leverage AI to scam at scale, fraud detection tools are fighting fire with fire - that is, fighting AI with AI.

Today, AI-driven risk scoring and chargeback prevention are building significant traction and catching some of the most sophisticated scammers. 

Pairing AI with automation and a multi-processor strategy is fundamental to protecting against fraud, as a multi-level security system can ensure merchants are not falling victim to scams. Using different services allows companies to layer in more sophisticated checks and balances (like limiting the amount a consumer can commit on a single card) as required.

Tokenization

Tokenization is a process by which sensitive data is exchanged for a unique, but completely different, identifier that can then be securely stored and used in place of the sensitive data. In practical terms, this means that subscription merchants building secure, PCI-compliant payment mechanisms can have customers’ credit card details collected and stored by a third party, accessing a ready-made secure environment without having to build one within their own organization.

Generally speaking, merchants have three options for payment tokenization, each with notable pros and cons: delivery by card networks, PSPs, or third-party tokenization providers.

Flexibility through Unbundled Payments

In an industry filled with trade secrets and complicated processes, merchants have historically had little control over how they would accept and process payments. By unbundling their payments stack - that is, by switching away from an all-in-one payment provider and instead piecing together a payment stack - organizations can now hand-select the solutions and providers that best set them up for long-term success. This comes without the added headache of vendor lock-in, bloated tech stacks, and “decent enough” solutions.

What Subscription Merchants Should Look for in a Payments Partner

When choosing a payments partner, each subscription merchant should consider several factors to ensure the provider is the right fit.

Organizations should consider the provider's:

• Expertise - does the provider know your company’s unique payments needs?
• Experience - how much experience does the provider generally have and in the areas you need to leverage?
• Reputation - how well-regarded is this provider in the marketplace?
• Cost - does the price work with your budget and business needs?

to name a few factors to ensure that the provider's services meet the true business need.

Remember, however, that PCI compliance is an ongoing process. The right provider at a single point in time may not be the right provider in the future. Monitor your security environment and assess which providers can help your organization as your business model and customer base grows.

If you want a fully programmable vault that helps you create engaging commerce flows, connect with any partner, effortlessly manage compliance, and control your payments data, contact us to learn more.