Embedded Payment Surcharging, Cash Discounting and Dual Pricing Guide for SaaS Platforms Part 2: How Everyone Can (Safely) Benefit 

Alternative pricing programs are increasingly adopted by businesses looking to reduce their cost of doing business. In Part 1 of this series, I explained the most popular programs a business may utilize and put a big emphasis on compliance. While I try to save all my compliance talk for dinner parties and impressing my teenagers’ friends, it is a necessary part of this trend. If you missed it, get started by checking out Part 1 first. 

The most important parts of this trend are the way it is changing the economics of payments, how it can benefit business who leverage these programs, and what’s in it for savvy SaaS platforms. Before we get into that, let’s review the programs included in this discussion: 

Benefits to the SaaS Platform 

Attach Rate and Take Rate Improvement 

Better economics for SaaS platforms is the primary consideration when weighing the pros/cons of implementing one or more of the alternative pricing programs outlined above. To help characterize the benefit, let’s look at Attach Rates and Take Rates, two KPIs that drive the success of an embedded payments program. 

Attach Rate

This SaaS KPI measures the percentage of customers who leverage the SaaS platform’s payments solution. Because SaaS platforms derive significant recurring revenue from their embedded payment offering, high attach rates contribute to better unit economics; ARPU increases, and attrition declines, resulting in better LTV and NDR. 

But what does attach rate have to do with alternative pricing programs? Over thousands of interactions with small and medium business owners we have learned that a business will tolerate the inefficiency of non-integrated or standalone payment processing if they can offset the cost of acceptance.   

We recently studied an automotive SaaS platform that leverages our embedded payments offering. Our partnership was successful and monthly new account sales were steady. But it wasn’t until we poured over the closed/lost reasons that we learned that the number one reason why their existing software user would not adopt embedded payments was because the integration did not support surcharging. Fixing this product gap improved attach rates in their existing base immediately. 

Take Rate Improvement

This payments KPI measures the revenue generated from every dollar of volume processed. Take Rates vary based on many factors such as industry and customer size. Embedded payment processing can typically produce take rates between 50 and 80 basis points (or 0.5% to 0.8%). For example, a business that generates $100,000 in payments volume each month would generate between $500 and $800 of revenue based on the Take Rate assumption above. 

Partners in our portfolio that embrace alternative pricing programs see a take rate improvement of up to 70 basis points or up to 150%. Their customers are less likely to be sold into a standalone or non-integrated payment solution offering to “reduce or eliminate their credit card fees”. They are getting the benefit of offsetting their cost of acceptance, plus the efficiency of software enabled embedded payments. 

Increasing the proportion of users utilizing your software’s payment program AND increasing the revenue earned from each payment attached user can have a material benefit to your financial performance. 

Protect Customers with Hard Coded Compliance 

The workflows in your software can be structured in such a way that compliance with the rules is more likely – this means your customers can benefit from these alternative pricing programs with higher confidence that they are doing it the right way. 

Surcharging 

The point-of-sale software must communicate with a service provider that can perform a real time BIN lookup. The BIN, or Bank Identification Number, is typically the first 6-8 digits of the consumer’s card. These digits identify the issuing bank, card brand and card type (debit, credit, prepaid, etc.). Real time lookup is needed as the data can change over time. Your payments partner must be capable of providing this as part of their payments API. 

In addition to BIN lookup each transaction passed to Visa must include correct data (usually referred to as “Field 28”) to ensure compliance with Visa’s surcharging rules. The receipt must also clearly communicate that a surcharge is present along with the value of that surcharge. If surcharging is permittable in the state of the merchant, the surcharge may not exceed 3% (or less in some states and localities). Lastly, the merchant must notify their acquirer of their intent to surcharge at least 30 days prior to starting a surcharge program. For more details reference Visa’s FAQ. 

Developer Checklist: 

Dual Pricing

This can be a heavy lift for a software provider and a merchant to implement properly – but once implemented, the merchant benefits from a high level of cost control and maximum disclosure to consumers. Software developers will need to be able to hold two prices for each item or service in the database. The merchant also needs to make certain that they properly label items or update menus to reflect both prices. 

Developer Checklist: 

Cash Discounting

Similar to Dual Pricing, the merchant will need to revise all prices to reflect the higher card price and communicate that a discount is offered when a customer pays with cash or check. There is no limit to the discount amount. 

Developer Checklist: 

Warning: We have seen many well-intentioned software developers make it easy to add percent-based fees (outside of tipping). The scenario goes like this; the software allows for line item or order level fees, such as “service fee”. The merchant is frustrated with card processing fees and manually adds the “service fee” or “kitchen fee” to only card transactions and unknowingly violates the surcharging rules discussed in part 1.  

Businesses are well within their right to add a “service fee” to all transactions; however, it must be added to all tender types (credit, cash, check, ACH, etc.). The common point of failure in a merchant applying this model is they choose only to add a service fee to credit transactions, which is a direct violation of card brand rules. The moment the merchant starts picking and choosing which transactions get a service fee they run the risk of violating surcharging rules. The flexibility of your software and the way settings are applied from your back-office tools can help guide the user to a compliant outcome. 

Conclusion 

Over this two-part series we covered the most popular alternative pricing programs, provided an overview of compliance concerns, how to mitigate compliance risk and what is in it for the SaaS platform that offers these programs. If you would like to learn more, we invite you to reach out and allow us to review your current program and see how we can help you grow your payments program and maintain a consistent state of compliance. 

Disclaimer: The information provided in this communication does not, and is not intended to, constitute legal advice and is provided for informational purposes only. Recipients of this communication should contact their attorney to obtain advice with respect to any particular legal matter.