Accepting Credit Cards – What SaaS Leaders Need to Know

For business customers, credit cards are a convenient way to pay. It takes less than a minute to enter a card number, expiration date, and security code into a payment form. It takes even less time if a digital wallet (Stripe’s Link, PayPal, or Apple Pay) is used. With cards and digital payments the traditional process of sending an invoice to the accounts payable team for approvals and disbursement is avoided. The time savings can be significant for software purchases with monthly recurring billing, in which an invoice and payment need to be processed twelve times per year. Instead, customers can enroll in an autopay program and avoid all these hassles altogether.

How SaaS Providers Benefit from Payments via Credit Cards

For SaaS providers credit cards improve the predictability and cost of collecting customer payments.  Customers enrolled in autopay are automatically invoiced and charged each month, making the process effortless for the accounting team and reducing the 40% of churn caused by payment failures.  Autopay provides accelerated cash flow as the payments are made consistently and predictably.  Clearing and settlement occur in just a few days, which is much faster than traditional invoicing, which can take 30-60 days for payment.

Should You Accept Credit Card Payments

While credit cards are convenient and reduce the payment effort for both customers and SaaS providers, they are a relatively expensive way to collect payments.  Your bank and payment processor, as well as the customer’s bank (issuer) and the card network, each charge fees for the transaction.  Exact amounts vary, but most credit card processing fees add up to 2-3% of the merchandise value.  Even though the payment fees are a relatively small percentage of the payment, the costs add up over time.

For some go-to-market models, SaaS companies may not have a choice.  For example, if you are selling online with a product-led growth model accepting credit card payments will be required.  If you sell primarily through traditional sales representatives, you may not need to offer credit cards.  Instead, you can invoice the customer and allow them to pay via check or electronic funds transfer.

Alternatives to Credit Card Payments

The most popular alternatives to credit cards are checks, wire transfers, and electronic funds transfers (EFTs) between bank accounts.  Paper checks are still popular in a few countries, such as the US, because of the “float” period during which payments are processed.  Wire transfers have historically been the fastest way to transfer money, but they often come with higher fees.  Wires can be issued for domestic and international funds transfers.

The highest volume of payments is made through electronic bank account transfers.  Different names are used in different countries for these bank transfers.  ACH, or automated clearinghouse, is the model in the US.  Pre-Authorized Debits (PADs) are popular in Canada. In mainland Europe, SEPA credit and debit transactions are everyday.  Historically, these bank transfers were offered at a low fee but took 1-3 business days to clear, though now 80% settle in one day. In recent years, most countries have introduced real-time or same-day transfers with slightly higher fees.

Using a Credit Card Payment Processor

Getting Bank Approval to Collect Credit Card Payments

Where to Accept Credit Card Payments

Which Credit Card Brands to Accept

You will need to decide which card brands you want to accept. Most popular payment gateways, such as Stripe, Braintree, and Adyen, support all major card brands. However, different card brands may have different fees. Visa and Mastercard are, of course, the most universally accepted payment cards and are expected by customers. The decision of which other card brands to support depends on where you are selling. In the US, American Express and Discover cards are also popular. JCB is widely adopted in Japan, as is UnionPay in China.

Also, consider whether you want to accept debit cards, digital wallets (Apple Pay, Google Pay), and peer-to-peer funds transfer networks such as Zelle and Venmo. In this article, we focus on credit cards, but the issues discussed are similar across other payment formats.

How Much Information to Collect from the Card Holder

A growing number of companies are enabling new customers to purchase online without speaking to a sales representative, in a “product-led growth” approach.  In these self-service models, you want to make the checkout experience as low-friction as possible.  The more information you request before the purchase, the higher the shopping cart abandonment rate will be, with 48% abandoning carts due to unexpected costs and friction.  On the other hand, the less information you request, the greater the risk of a fraudulent transaction.  Your goal should be to find the right balance.

At a minimum, you will need to collect a few fields to process the payment.  The three minimal data fields are the

• Card Number – 16-digits
• Expiration date
• Security code (CVV)

To reduce the risk of fraud, many payment processors will offer incentives (or require) the collection of additional details, such as:

• Cardholder’s name
• Billing address
• Postal code
• Country

Should You Accept Payment via Digital Wallets

One way to reduce friction in payment information capture is to support digital wallets.  Services such as Stripe’s Link, PayPal, Google Pay, and Apple Pay simplify checkout for the 5.2 billion digital wallet users. The customer doesn’t have to remember their card information.  It can be quickly populated from the digital wallet using a one-time passcode or another form of authentication.  For example, Stripe’s Link service automatically sends a one-time password via SMS when you enter the checkout flow for a merchant on its platform.

How to Get Opt-Ins for Recurring Billing

SaaS purchases differ from many typical e-commerce checkouts, which are one-time transactions. With SaaS, you collect the initial payment and enroll the customer in a recurring billing relationship. To avoid disputes and chargebacks, ensure the customer understands they will be charged today and on a regular basis until they provide notice of cancellation. Some SaaS companies require customers to tick a box acknowledging their understanding of the terms of the relationship. Others include notifications in the checkout flow without an explicit opt-in.

Common Issues with Cancellation and Refund Policies

In addition to ensuring customers understand they are entering a recurring billing relationship, they also need to know when and how they can cancel. Details for cancellation need to be shared before the checkout process is complete to avoid potential confusion and disputes later in the relationship.

Monthly plans typically can be canceled at any time. However, few SaaS providers offer refunds for the remaining days in the billing cycle. For example, suppose a customer’s billing cycle starts on the 1st of the month. On March 1st, the customer pays their monthly fee, but on the 15th, they cancel their subscription. The SaaS provider will not issue a refund for the remaining 16 days of the billing period (March 16-31st). The lack of prorated refunds for cancellations is a point of friction for many churning SaaS customers who did not read the fine print during registration.

Annual plans have less flexibility for cancellation. Most SaaS companies require payment upfront for annual plans and do not offer prorated refunds for early cancellations. The customer’s cancellation can typically only be processed at the end of an annual subscription cycle. The lock-in effect of an annual plan creates hesitation for many buyers when signing up. As a result, some companies offer new customers a refund policy or a 30-day money-back guarantee.

How Credit Card Payments are Processed for SaaS

Once the payment method is collected and all notifications have been provided, the credit card information is sent to your payment processor. The processor will route the transaction to the customer’s bank (the issuing bank) for approval. The issuing bank will approve or deny the transaction after it analyzes the specifics. The bank will need to confirm that the account is in good standing, that the credit limit has not been exceeded, and that there is no evidence of fraud in the transaction.

If a payment is approved, the customer is advanced to the product’s home screen or a success page, and an automated confirmation email is sent. If a payment is declined, the user is typically returned to the checkout page with a notification. Since many payments fail for legitimate reasons, such as temporary capacity limits at the bank, encouraging resubmission can be effective.

Strong Customer Authentication (SCA) Requirements in Europe

Many UK and European card transactions require strong customer authentication (SCA). In addition to providing card details, the customer may be required to verify the transaction with their financial institution. For SaaS subscriptions, only the initial payment requires SCA; subsequent recurring billing occurs without further customer involvement.

Learn More about Recurring Payments