When you’re hunting for the best way to implement payments for your SaaS business Stripe Connect can seem to be a very tempting option. After all, it is an industry-leading provider for marketplaces and e-commerce platforms to charge consumers and pay out funds to providers. However, there are a number of drawbacks to Stripe Connect, particularly when it comes to software providers who serve specific verticals versus marketplace platforms.
Many SaaS startups are drawn to managed PayFac providers when they’re first setting their roots in the ground and establishing their payment offerings and related partners. Some only learn about the drawbacks and alternatives later when the scale and complexity of their business grows too big for their legacy operations and they need to plant themselves somewhere else.
Remember when you were a kid and grown-ups would ask, “if all your friends jumped off a bridge, would you jump too?” The same thing applies to vertical SaaS companies. Just because all your competitors are using Stripe doesn’t mean that you should too. Before you leap to what may seem like the default option, here are 5 factors you should consider in determining whether Stripe Connect is right for you:
The Merchant of Record (MoR) is the party responsible for the charging of a customer’s credit/debit card. This is the name of the entity that appears on a consumer’s statement, and that entity can be held liable for any issues regarding payment.
The MoR is responsible for keeping the merchant services account in good standing, and complying with all processor, Visa, Mastercard and other Network Association rules. The Merchant of Record is ultimately responsible for handling chargebacks and the associated financial risk. Additionally, the MoR is responsible for maintaining compliance with the Payment Card Industry Data Security Standard (PCI-DSS), and resolving any related issues.
With Stripe Connect, the SaaS provider or marketplace is the Merchant of Record, and is ultimately responsible for the associated liabilities of all their customers/partners. These SaaS companies are frequently caught as the middleman between their vendors and the consumers they’re selling to.
In contrast, when those vendors have a direct relationship with a merchant processor, they are the MoR, hold that liability, and are responsible for the chargebacks and financial risk associated with their own customers. Fortunately, there is a model where vertical SaaS companies can facilitate this direct relationship and still offer payments as a service to their customers (hint: keep reading for the answers).
At the moment, Stripe requires most new partners to agree to exclusivity for a multi-year term. This means that a SaaS company signing up with Stripe Connect can’t work with other payment processing partners for as long as the agreement is valid, even if they later decide the Stripe model no longer works for their business.
Often, in the beginning the ease of getting up and running with Stripe Connect is compelling enough that companies don’t mind paying the associated fees or other limitations of the platform. However, when SaaS companies grow in size and complexity those fees suddenly don’t feel as small as they used to, and the limitations can become very painful. With an exclusive, multi-year agreement there’s nothing that can be done for the foreseeable future because they’ve already committed to Stripe.
Like other marketplace payments, Stripe offers companies a flat rate of 2.9% of the transaction amount + $0.30 for each successful card charge.
But when you upgrade to an Express account to set up a marketplace, you’ll have to pay Stripe an additional $2 a month for each account connected to your marketplace. This doesn’t seem like a big deal when you have 4 vendors and you’re only paying $8 a month; but when you grow to have 2000 vendors, you’re suddenly paying $4000 a month just to keep the marketplace running.
Stripe also takes out 0.25% of the funds sent to the your partners’ bank account + an extra $0.25 each time funds are sent. Stripe later hits you during tax season by charging $2.99 for every 1099 e-filed or mailed.
It’s often said that payments is a business of crumbs, but those crumbs can add up to a lot. And when they come on top of the 2.9% + $0.30 flat rate pricing, the Stripe Connect option can quickly become uncompetitive to what merchants are used to seeing directly from processors and merchant acquirers. This in turn puts pressure on any revenue share that the SaaS providers will be able to take from their customers while still providing them a fair, competitive price.
Merchant Portability refers to the ability to transfer a merchant’s card processing relationship from one processor to another. Currently, when a SaaS company onboards customers with Stripe Connect they do not have the option to later transfer that merchant processing account to another provider.
Teaming up with a platform that lets SaaS companies maintain merchant portability rights and stay in control of the payment processor they work with. This in turn helps you find relationships that are in the best interests of your customers and keep pricing and terms competitive.
While Stripe Connect may offer enticing incentives for new partners, it’s usually still pulling strings from behind the scenes and sometimes these adversely affect the merchants that have signed up through a vertical Saas provider. This leaves SaaS companies at the mercy of the platform and prevents them from shopping around for better terms with other providers. Stripe Connect remains in complete control of the reserve requirements it can dictate to the merchants.
For instance, Stripe may delay payouts unless your company pays a specific fee for an instant transfer. But it’s your income, and you should be able to access it whenever you want it.
Vertical SaaS providers can now stand out from the sea of Stripes and use a payment platform that’s crafted explicitly for vertical market software companies. Vertical SaaS companies don’t fit the mold of the “standard” B2C or marketplace payment integrations. Instead, they should look for a unique platform to be tailored to their business and unique brand.
If you are a vertical SaaS company, you can take control of your payment offering by selecting an alternative that has the tools to maximize your payment revenue. With a vertical-specific platform, you can set your merchants’ rates over interchange, control your margins, and retain most of your profits.
You don’t have to be the middleman in your own business. The ideal platform will eliminate Merchant of Record liability, dispute management, PCI/data security, payments compliance, and more. In short, discover a platform that makes vertical payments a lot less complicated for you.
PayEngine was designed from the ground up with vertical SaaS companies in mind. With PayEngine, you can best position your company to meet all of the needs described above. You can leverage a payment platform that adds value to your customers instead of diminishing your business. We give you the freedom to own and improve your customer experience with simple, flexible integration options with APIs, drop-in widgets, and customizable UI. It’s easy, and your payment integration will reflect your brand, not ours.
When you’re ready to go beyond a default option learn more about a solution built expressly for your business, PayEngine’s sales and support teams are just a click away!