Paynetsecure Blog

SaaS billing is effective for stabilizing cash flow and providing a predicable income stream.  But, as is the case with any recurring payments model, SaaS providers must be concerned with recurring billing revenue leakage.

The biggest cause of loss of revenue from recurring billing is card declines.  During each recurring payments billing cycle, a lot of cards used for recurring payments are declined.  A declined recurring payment transaction means there is no money realized for that transaction, which endangers cash flow.

Recurring Payment Card Declines are Expensive to SaaS Billing Merchants

Jupiter Research reports that almost 30% of consumers have had card reissued in the past year due to security breaches.  In addition, cards can be replaced due to upgrades or expiration dates on cards can simply expire.

Whatever the reason for a recurring payment card decline, the loss of income has serious repercussion for any SaaS solution provider. In addition to the lost revenue for the service, companies have the additional costs associated with obtaining updated recurring payment card information from the customer in order to rerun the transaction.  .

But, just as importantly, each contact a SaaS solution provider makes with a customer for updating recurring payment card information provides an unnecessary opportunity for the customer to cancel the service.  Manual intervention for updating recurring payment card information can creates a risk of losing the customer, reducing the average lifetime value of a customer to the SaaS provider.

Protect SaaS Billing Recurring Payments

How can a SaaS solution provide company avoid contacting consumers to update payment processing information?   It’s easy with the smart use of technology.

Automatic account updating is specialized payment processing technology for recurring payments.  The technology allows SaaS providers to transform 50-70% of declined recurring payment transactions into authorized recurring payments.

If a recurring payment card transaction is declined, updated card information is automatically retrieved from the issuing bank.  Records are updated and the declined recurring payment transaction is resubmitted for authorization.  This is an automated process and requires no intervention from the SaaS provider.  There no need for manual intervention of any kind.

A new report issued by Javelin Strategy & Research reveals that 28% of all consumers received a replacement debit or credit card in 2009 due to security concerns.  And many of these consumers had more than one card replaced or more than one card reissued.

This data is particularly relevant to merchants with subscription billing, SaaS providers, or merchants with a recurring billing model.  When a card is reissued, the updated information for the new card must be acquired or else the recurring payment transaction will be declined.  Declined transactions mean no revenue is generated.

How can merchants get updated card information?  Well, the old-fashioned way is to contact customers directly by email, phone or other means and request the updated card information.  This is ineffective and expensive.  And gives customers an unnecessary opportunity to cancel the recurring payments.

A smarter approach is to use a payment processor who has an account updater feature.  When a card is declined, the processor automatically contacts the issuing bank and gets the updated card information.   There is no need to contact the customer and no manual intervention is needed on the part of the merchant.  The updated cards are resubmitted and approved transactions which generate revenue result.

It’s an easy way to increase profits and decrease costs.

Recurring billing is a great way to stabilize cash flow while making it easy and affordable for customers to buy from you.  Recurring payments are a great way to sell products or services and are particularly valuable for SaaS service providers, subscription billing, or membership sites.

But, recurring billing can also lead to revenue leakage which can cause loss of profits if not properly controlled.  The most common reason of revenue leakage from recurring payments comes from card declines.  Card declines are caused by a lot of reasons such as reissuing of cards due to loss or theft, card upgrades, card expiration dates, or security breaches that require new cards to be issued.  Regardless of cause, card declines are expensive to merchants.

Using specialized payment processing technology, merchants can automatically transform declined cards into authorized transactions.  When a card is declined, the processor gets the updated card information from the issuing bank.  The file is updated and the card can be resubmitted for approval.  As a result up to 80% of declined cards turn into authorized transactions.  All without manual intervention of any kind from the merchant or the consumer.

Only certain processors offer this innovative service.  Smart merchants will take advantage of the technology to increase profits quickly and easily.

Software as a Service (SaaS) is simply good economic sense.  There’s little reason to build, maintain, and back up applications when it’s getting cheaper and easier than ever simply to host the applications online.

Peter Coffee, director at cloud computing firm Salesforce says that the SaaS “shifts scarce, in-house IT talent away from the time-consuming but low-value tasks of acquiring, maintaining and administering commodity technology to let those resources be applied to high-value tasks creating competitive advantages for the business,”

The old business model of selling licenses for software is going to go the way of the horse and buggy.  Rather than buying software, companies simply subscribe to the application as a service.  There are no worries about keeping the programs up to date because that is all taken care of by the SaaS provider.

Billing models for SaaS vary.  Right now, most are still based on time interval usage.  For example, month-to-month recurring billing is most common.  But, as time goes on, expect SaaS billing to offer even more flexible billing models with pay per use and metered usage becoming more popular.

Research organization Aite Group released results from a survey of merchant acquiring banks and independent sales organizations about payment processing opportunities and challenges for the coming year.

The biggest problem being faced by payment processing acquirers in 2009 was the attrition of merchants, with 24% of the respondents placing this issue as number one. Close behind, 22% of respondents were concerned about the continuing compression of payment processing margins. And 17% of respondents said PCI compliance was a challenge.

Acquirers say merchants are keenly aware of pricing issues. Lower pricing is the main reason merchants will change to another merchant payment processor.

Promising emerging markets for 2010 are mobile payments, business-to-business payments, and ecommerce. Most payment processors have little experience in mobile and are still trying to position themselves correctly in the market.

Business-to-business payments are gaining some penetration for those companies with lower ticket transactions. But, higher ticket business transactions incur payment credit card processing fees that are too high for most businesses to be able to absorb.

SaaS billing and recurring payments are a growth industry for payment processors that are expanding ecommerce operations. SaaS billing is sub-genre of subscription billing where consumers establish recurring payments for software rather than a one-time purchase of the software.

Subscription billing will continue to be part of MMOG payments in the US and Europe although micropayments for virtual goods will inevitably have to included to maintain a competitive edge. In Asia, subscription billing has never caught on and micropayments are the dominant billing model.

According to Screen Digest, the subscription based billing in MMOG grew by 22% in 2008. The biggest MMOG with subscription billing is World of Warcraft ,with estimates of $1.4 billion in subscription billing. World of Warcraft players like “all you can eat” subscription billing and many are resistant to micropayments.

Of course, the argument could be made that subscription billing was the only billing model available when World of Warcraft players began to play the game. Had micropayments been available, players could have could have easily gotten used to buying virtual goods rather than subscriptions.

Still, even Blizzard is moving towards adding micropayments. Micropayments will not replace subscription billing but will be added as a way to buy virtual goods that will not affect the outcome of the game.

MMOG will continue to offer subscription billing and move to enhance premium subscription benefits. The billing infrastructure in the US and Europe easily accommodates recurring billing and merchants are wise to take advantage of the steady stream of recurring income.

Yet, to compete successfully, a free play model must be offered to entice new players. Micropayments are the best way to make money off of new players until they reach a level of commitment to play that justifies spending on recurring billing. And, certainly for MMOG targeting markets outside of the US or Europe, micropayments are the way to go.