Voice of the Industry

The 5 keys to successful payment management for subscription-based companies

Monday 18 October 2021 08:41 CET | Editor: Raluca Constantinescu | Voice of the industry

Martin Koderisch, Principal at Edgar, Dunn & Company: ‘An appropriate subscription billing software is critical to the effective management of a customer’s subscription life cycle.’

Growth in subscription-based companies 

Subscription-based companies have surged over the last decade. Innovation in digital technology has enabled this trend, but the success is due to more than this technology-related push. Consumers have totally embraced the concept, as flexible access and consumption of products and services – often based on transparent usage pricing or low commitment monthly fee – appeal to a lot of them. It is a testament to changing consumer behaviour. As part of a general adoption of all things digital, COVID-19 has of course accelerated this trend. Zoom, Netflix, Disney+, and Spotify are all notable examples. 

Subscription-based business models 

So many other subscription categories have come to the fore during the COVID-19 period. 

  • The B2C category of media streaming platforms includes all manner of global, regional, domestic, and niche podcast, video, and music streaming providers. 

  • The B2B category of Software-as-a-Service (SaaS) has become huge. Crunchbase lists over 16,000 SaaS subscription companies. These range from pure B2B services like company accounting software provider Xero to CRM platforms like Zoho, Hubspot, and Salesforce. Some SaaS companies can be both B2B and B2C, like Adobe Photoshop or cloud storage provider Dropbox. 

  • Another impressive growth area is represented by B2C subscription companies for physical products, including food boxes like Gusto and Hellofresh, wine sellers like Naked Wines, beauty and make-up boxes like Beauty Pie and Birchbox, as well as fashion and apparel services like Stitch Fix, Socks-in-a-box. Even non-fiction writers are backing Blinklist, a book-summarising subscription service based in Berlin. 

  • Finally, direct to consumer (D2C) subscription companies are manufacturers who choose to skip retail intermediaries and sell directly to consumers. A good example can be found in the connected car space. Here, car manufactures like BMW are selling services such as ConnectedDrive directly to drivers, via a subscription-based delivery model. Toyota launched a similar service in 2020, and Cazoo has its own subscription offering. 

For subscription companies, payment presents a specific challenge compared to ecommerce companies that deal with one-off purchases. There are five keys to successful payment management for any subscription company. 

1. Frictionless sign-up 

The digital identity space is evolving rapidly. Federated social login solutions like sign-in with Twitter, Facebook, or Gmail have been around for many years. Over the past year, both Apple and Google have launched new digital identity solutions that take the market to the next level. One Tap Sign-In With Google is the company’s new cross-platform sign-in mechanism for Web and Android – allowing merchants to onboard new customers with just one tap. Users are automatically signed in when they return to a website on any device or browser, even after their session expires. Likewise, Sign-In With Apple allows users to leverage their Apple credentials to sign into apps and websites. 

2. Billing software that’s right for your business 

An appropriate subscription billing software is critical to the effective management of a customer’s subscription life cycle. A subscription billing software includes the ability to set up recurring payments and adjust them to accommodate changes in pricing, promotions, and trials. A good subscription billing software allows users to make these changes while still maintaining an active billing cycle. 

3. Recurring payments 

Recurring payments that rely on stored customer card details must comply with a relatively new, international card network requirement known as Credential on File (COF). The framework includes cardholder-initiated transactions (CITs) and merchant-initiated transactions (MITs), and recurring subscription payments are classified as MITs. The rules require merchants to include additional attributes to payment requests that use stored card details. The assumption is that MITs are made pursuant to an agreement that a merchant has in place with their customers, allowing them to initiate payments on their behalf. In Europe, this means that MITs must include proof that Strong Customer Authentication (SCA) was carried out when the card was originally stored. European issuers are now legally required to decline transactions without this attribute (which is referred to as TraceID for Mastercard, TranID for Visa, or Network Transaction ID for American Express). 

4. Payment retry logic 

If and when a recurring payment does fail, the issuer will pass a reason code to the merchant. Merchants need to have business rules and logic in place in order to automatically decide if, when, and how to retry the payment. Hard declined payments (for instance, ‘lost or stolen card’) should not be retried as these will continually be declined – and retrying hard declines will negatively impact future authorisation rates. Smarter retry logic uses machine learning to learn about issuer behaviour and understand what action is likely to lead to a successful reattempted payment. 

This includes a range of actions such as formatting the authorisation request differently, routing the payment through a different acquirer, using a network token versus clear PAN, time of day, day of month. Often, payments fail due to expired cards, a situation in which merchants can take advantage of new account updater services from card networks. When a customer receives a new card, this service automatically updates stored card details. Account updater is widely supported by issuers, but full international coverage is not yet complete. 

5. Look local, be international 

An issuer authorising declines on cross-border payments is a particularly frequent occurrence – and often due to issuer fraud risk systems being set up to be more risk-averse and sensitive to non-domestic payment authorisation requests. This can have a significant impact on businesses that process card payments across borders to support international sales. Typically, this situation can only be resolved by setting up a local legal entity to contract directly with a local domestic acquirer. In addition, complying with local sales tax rules is another issue that makes international sales complicated. 

The payment provider – a strategic partner 

Many PSPs cater to the above requirements – and particularly the cross-border payments scenario. Their proposition includes a Merchant of Record solution which allows internationalising companies to piggyback on a network of local legal entities set up by the payment provider. Subscription payments are then able to process their payment as domestic transactions and benefit from dramatically improved authorisation rates. In a given market, if payment volumes increase above a certain threshold, the company may then consider setting up and managing its own legal entity and contracting with an acquirer of choice. 

This article is part of the Payment Methods Report 2021 – Latest Trends in Payment Preferences, a comprehensive overview of the payment methods in scope for 2021, as well as best practices for checkout optimisation and customer conversion by addressing digital transformation, security, and localisation.

About Martin Koderisch 

Martin Koderisch is a Principal at Edgar, Dunn & Company. Martin has over 15 years’ experience in the payments and fintech domain across consulting and industry roles. Martin assists EDC clients to excel at GTM, growth & partnerships development. Prior to joining EDC in 2015, Martin held senior positions at Mastercard, Citibank, pricing consultancy Simon-Kucher & Partners, and Luup – a mobile payment startup.

About Edgar, Dunn & Company (EDC) 

Edgar, Dunn & Company (EDC) is an independent global payments consultancy. The company is widely regarded as a trusted adviser, providing a full range of strategy consulting services, expertise, and market insights. EDC expertise includes M&A due diligence, legal and regulatory support, fintech, mobile payments, digitalisation of retail financial services, and ecommerce.

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Keywords: subscription commerce, subscription payments, COVID-19, direct to consumer, ecommerce, merchants, recurring payments
Categories: Payments & Commerce
Countries: World
This article is part of category

Payments & Commerce