SaaS payments: Everything SaaS businesses need to know

As a Software as a Service (SaaS) business, you have unique needs that aren’t necessarily met by a one-size fits all payment processing provider. 

In order to limit customer churn and fuel growth, you need to optimize your subscription model by partnering with a SaaS payments solution that understands the intricacies of recurring billing and tiered payment plans. 

But how exactly do SaaS payments work? How can you best manage them to ensure success? And how can you pick the right SaaS payment processor for your needs?

In this article, we explain everything SaaS businesses need to know. 

What are SaaS payments?

Generally speaking, SaaS payments are charged by subscription businesses on a recurring basis in exchange for access to a service. SaaS platforms provide the tools that businesses need to manage recurring billing and customer subscriptions. 

They do this by relaying payment information to the customer’s issuing bank and the platform’s acquiring bank in order to facilitate the transfer of funds on an agreed timeframe. 

How do SaaS payments work?

SaaS platforms need to have the flexibility to take recurring payments on a variety of schedules. This could be weekly or monthly, or an annual upfront payment for a year of access. 

Annual subscriptions are usually available for a lower cost because the upfront payment guarantees the business a year’s worth of revenue, which is more reliable than a monthly subscription that could be canceled at any time. It’s common for annual plans to automatically renew on their anniversary unless the customer requests otherwise. 

Whatever the installment schedule, the key elements of SaaS payment processing are:

• The customer chooses a payment plan to suit their budget and a payment method they are happy to use on an ongoing basis
• They make an initial payment to start their subscription with your business
• This payment request is transmitted by your payment processor via a payment gateway to the issuing and acquiring banks, and is either approved or declined
• Once approved, you can register the customer as a user of your service, take recurring payments using the same method, and manage their subscription according to their preferences 
• The customer should have the option to pause, renew, upgrade and downgrade, or cancel their plan at any time

How can SaaS businesses manage payments?

SaaS businesses have options when it comes to managing their payments. They can choose to work with a payment service provider (PSP) that allows them to process subscription-based or they can opt to become a payment facilitator (PayFac) themselves.

SaaS Payment facilitation

PayFacs are third-party merchant services providers that facilitate electronic payment processing. To become a PayFac, SaaS companies need to partner with an acquiring bank, integrate payment gateways and other service providers, and ensure compliance with any relevant regulations. 

Managing these relationships can be time-consuming, but it does give you much more control over the payment process and the user experience, allowing you to customize your subscription solution to your needs. 

SaaS payment service provider

The alternative option is to work with a SaaS payment service provider. An integrated SaaS payment solution can manage your subscriptions, recurring billing, customer data and more for you. This makes it easy to scale your business, and to focus on developing a great offering for your customers. 

SaaS payment providers can usually integrate with your existing infrastructure through an open API, ensuring seamless flow between your different business functions. They also offer in-built security, compliance, and data and reporting. 

Best payment methods for SaaS businesses

Choosing the right payment methods is essential to securing the success of your SaaS business. 

You need reliable, trusted options that are used by your customers and that support recurring billing so you can keep your churn rate low. Involuntary churn, where a customer’s payment fails and their subscription is canceled due to an error, is a major problem for SaaS businesses, and one of the main factors to consider when choosing a payment method. 

• Credit and debit cards - cards are one of the world’s most widely-used payment methods. The customer simply needs to enter their details at checkout to store the card as a payment option and authorize repeat transactions. The only issue could be that, if a card is canceled or expired and the customer hasn’t updated their details, you won’t be able to use it for subsequent payments  
• Digital wallets - digital wallets are one of the world’s fastest growing payment methods. Customers can add cards to their digital devices and then use them to make secure payments without having to enter their details each time. The main advantage is that, as they allow customers to pay through their smartphones, they offer maximum convenience to the consumer.  Digital wallets also use tokenization, a technology that keeps sensitive card information safe by replacing it with a unique code during transactions. The big benefit of tokenization for SaaS businesses is that the card network automatically updates the token with new card details if a card is canceled or expires. That means there should always be a valid card on file for recurring payments. However, not all digital wallets offer supports for subscription payments 
• Direct debit - direct debits allow the customer to authorize you to take recurring payments directly from their bank account. As it's rare for someone to close or switch their bank account, there’s a low risk of involuntary churn. Direct debits can also be retried if they fail
• Alternative payment methods - alternative payment methods (APMs) are non-mainstream payment types such as domestic card or bank transfer services. The advantage of supporting these APMs is that they are often the preferred method of payment for consumers in specific countries. This expands your global reach and increases the chances of taking successful recurring payments

How to optimize SaaS payment processing

Here are our top tips for optimizing your SaaS payment processing:

Automatic account updates

Automatic account updates take the hassle out of maintaining current customer details for subscription payments. Account updates are usually programs offered by credit card companies that automatically update cardholder information if it changes. This cuts the risk of involuntary churn and significantly reduces the administrative burden of subscription management. 

Checkout.com’s new real-time account updater is perfect for SaaS businesses to maintain accurate cardholder information. 

Smart retries for failed transactions

Many payment processing solutions or payment gateways offer smart retry features, which can automatically reattempt a failed payment a set number of times and within a specific time frame. You can often define your own rules for retry attempts, depending on your preferences. Smart retries can save you a lot of time and effort spent chasing customer payments.  

Offer multiple payment options

As we mentioned above, offering popular local and global payment methods is a great way to optimize your SaaS payment processing because it allows potential subscribers to choose their preferred method for recurring billing. This maximizes the chance of repeat successful payments and gives you access to a global customer base. 

Automated payment reconciliation

Reconciliation, where your company compares internal records of financial transactions with external records, such as a bank statement, is an essential but time-consuming part of the accounting process. If you have a large number of subscribers, reconciliation can be a costly administrative burden. 

Automated payment reconciliation takes the hassle out of the process by automatically collating and comparing multiple data sources and flagging any discrepancies. This allows you to focus on the more important task of building your brand and growing your subscriber base.

Churn procedures

As a SaaS business, your churn rate should be one of your main success metrics. But it’s no good just tracking churn rate: you need to put in place procedures to flag changes and optimize your payment processing to defend against churn. 

That starts with data. Ensure you have robust data and reporting tools so you can monitor for changes in churn rate and respond quickly when they happen. You should also invest in payment technology that maximizes the chances of authorizing payments, and get to grips with response codes, so you can take the best course of action if a customer’s subscription payment fails. 

Finally, use dunning management, a payment recovery process that both notifies your customer via SMS or email if their payment fails and retries the payment a set number of times. 

How to choose a SaaS payment processor

Here are the key things to consider when choosing a SaaS payment processor:

• Payment methods - find a processor that supports a wide variety of popular local and global payment methods to maximize your opportunity to gain new subscribers   
• Growth support - a good SaaS payment processor needs to be able to scale as you grow. That means it should have the capacity to cope with an increase in transaction volume and should offer global support, including local payment processing and regional expertise to help you navigate regulatory differences 
• Tokenization - tokenization is a fantastic tool for SaaS businesses, both improving your security by keeping customer details hidden and reducing your admin by automatically updating card details 
• Easy integration - you should look for a solution that offers easy API integration. That way you can enjoy a hassle-free setup, with a seamless flow of information between your existing and new installations. On the other hand, poor integration could have a major impact on the speed and success of your payment processing
• Data - data is essential for a SaaS business, allowing you to keep track of key metrics like your churn rate and giving you the tools to understand why payments are being declined. With granular data at your fingertips, you can be responsive to any changes that could impact your revenue and subscriber numbers 
• Security and compliance - your payment processor should comply with the Payment Card Industry Data Security Standards (PCI DSS), which imposes strict criteria for keeping customer data safe. You should also ensure your processor has excellent fraud detection capabilities so that you can protect your business from cyber criminals and money laundering.

Upgrade your SaaS payment processing with Checkout.com

Checkout.com offers support for SaaS payment processing via our subscription solution. 

Our payments platform provides a suite of integrations that make it easy to manage, update, or cancel subscriptions as and when you need, and to take recurring payments via a range of popular methods. 

With our customizable APIs, you can optimize your payment processing solution to your exact requirements. Our Unified Payments API allows you to unlock global reach, with access to dozens of preferred local payment methods, local processing, and granular country and payments data. And you can use our reconciliation API to automate the tedious but necessary task of payment reconciliation. 

Find out more about how our subscription solution could help your SaaS business succeed.