If there's one thing that I've learned in five years as the founder of a payments company, it's that most founders are confused about what they need and what they'll actually end up paying when it comes to payment processing. I come across threads like this daily, where founders ask questions like:
I set out to write a guide to make sense of it all—what I found in the process surprised me.
The vast majority of founders—many of whom were experienced founders that vehemently insisted that they knew exactly what they were paying for payment processing—didn't know the actual effective rate they're currently paying to process payments.
Let's make sense of this topic once and for all so you know what you need and what you'll pay, starting with a few important definitions.
A merchant of record (MoR) is the entity that is authorized, and held liable, by a financial institution to process a consumer’s credit and debit card transactions. The MoR is also the name that appears on the consumer’s credit card statement.
As it pertains to selling subscription based digital products there are a few important items to consider:
With these terms understood, let's tackle the tough questions founders often face.
There are a growing number of companies out there—like Paddle and Gumroad—that act as a merchant of record on your behalf. If you choose one of these products to process payments for your business, your customers are technically transacting with these businesses rather than yours. There are both pros and cons to this to consider:
My own two cents—if you're the founder of a start-up in the EU, I think the convenience offered by using a merchant of record makes a lot of sense as you're getting your business off the ground. But as your business scales, I'd be uncomfortable paying such a high percentage of my revenue in perpetuity for the convenience a merchant of record affords.
Also, it's important to note that Paddle can only be used by founders of SaaS companies. That's not the case with Gumroad—I think it makes a ton of sense that Gumroad acts as a merchant of record, given their focus on processing payments for individual creators.
Let me state this outright so there's no confusion around this:
"Stripe fees" are not created equal!
One of the most common misconceptions in the start-up world is that Stripe fees are simply 2.9% + $.30 per transaction. I was able to show almost every single founder that I spoke to in the process of writing this post that this is not what they're currently paying for payment processing, despite the vast majority thinking that this was the full rate they are paying on each transaction.
This is not a criticism of Stripe—Outseta is a Stripe Verified Partner and given the complexity of what they offer I think their pricing is both fair and transparent. But it is to say that the assumption that "Stripe fees" are all the same regardless of the products you use to process payments is flat out wrong. If this is an important topic to you, the devil is in the details.
Whether you're using Stripe's own tools or third party membership software, if "Subscriptions" are being created in your Stripe account you're paying extra fees to use Stripe Billing. This ranges from an additional fee of .5% to .8% per transaction, meaning that 2.9% per transaction just became 3.4%-3.7% at a minimum. Let me be very clear about this, because this has surprised the vast majority of founders I've chatted with:
You won't find these fees if you look at your Stripe fees at an individual transaction level—they're billed at the account level. You can find these fees within your Stripe account by going to All Transactions.
The takeaway here is simple—look in your Stripe account and if you see "Subscriptions" then you're already paying for Stripe's billing products. This is even more important if you're actively evaluating membership management software. Most vendors, Outseta included, charge a fee that ranges from 1% to 5% in addition to "Stripe fees." Customers often evaluate products largely against these additional fees, but almost never stop to consider that "Stripe fees" may be different between products.
If you use any product to process payments that creates subscriptions in Stripe, you'll pay at least .5% to .8% in higher fees on every transaction.
A closer inspection of your individual transactions can also reveal significant differences in what you're paying as Stripe fees. There's a lot of nuance here and it's up to you, as the consumer, to dig into what's actually being charged. Here's a specific transaction from one of the most popular membership software providers:
In the case of this particular transaction, the Application Fee represents the additional fee paid to the membership software provider. It's very clearly 1% in this scenario.
But the Stripe processing fees of $10.03 aren't as clear—it's very easy to look at this transaction and just assume it's the standard 2.9% fee. If we take out the $.30 per transaction fee, the Stripe processing fees are $9.73. This represents a 3.9% fee rather than a 2.9% fee—easy to miss, but undoubtedly higher than the assumption that all "Stripe fees" are 2.9% + .30 per transaction.
Some additional circumstances to be aware of when it comes to what you'll pay:
As you can see, there's a lot more to "Stripe Fees" than 2.9% + $.30 per transaction!
A lot of the founders that I have this conversation with say to me, "It's just crazy that Paddle takes a 5% fee on every transaction... right?"
In short, I'd say no it's not—you're paying for the convenience of not needing to deal with VAT. While I personally wouldn't want to pay a 5% fee in perpetuity, I think it's completely reasonable to do so as you get your business off the ground. If I'm a founder in Europe, I'd definitely consider using Paddle as a viable alternative. But as a founder outside of Europe, I don't think it makes much sense to use Paddle.
As you consider this question, you also need to evaluate Stripe's alternative to Paddle—as mentioned before, an EU customer is going to get charged 1.4% + $.25€ per transaction. If Stripe's tax product is also used, that's an additional .5% per transaction—but you're still nearly 3% under what you'd be paying Paddle on a per transaction basis.
Stripe's tax product is fantastic in that it handles VAT reporting and compliance for you—that's a major headache largely resolved, but you still need to remit and pay your own taxes. This isn't done for you as it is with a merchant of record, so you'll likely need to expend your own time or hire someone at additional costs to file your taxes. And then there's also additional Stripe fees that could be incurred aside from just their tax product, so the effective rate that you end up paying may creep up close to 5% anyways.
My hope is this post arms you with the information needed to look at what you'd actually be paying Stripe versus Paddle.
I started digging into this topic because for the past few months we've been wrestling with arguably the most difficult product decision we've had to make in Outseta's five year history. We originally set out to build Outseta largely because there wasn't any way to create subscriptions in Stripe when we started building—we set out to build the product we wanted and needed as SaaS founders ourselves!
Stripe would start building their own subscription management and billing tools about two years after we launched Outseta, but by that point we'd already built our own subscription management and invoicing features upon which Outseta relies today. This also has it's own pros and cons.
Stripe now offers the billing tools that they obviously didn't when we set out to build Outseta—so our team is weighing the advantages of creating subscription products in Stripe, versus continuing to rely our own subscription management. It's a big architectural decision that very much affects the core of our product. If we were to start Outseta today, we'd almost certainly use Stripe's billing products just for sake of speed to market.
While that's the case, we now have a significant competitive advantage as a result of building this functionality ourselves—we don't pass the costs of Stripe Billing on to our customers as the vast majority of our competitors do. In addition, I was surprised to see how much some of our competitors are charging in addition to Stripe fees—often 2%, 3%, or 4%. Frankly, I think that's kind of nuts—we're committed to never charging more than 1%, and for our 1% fee you also get our CRM, email, help desk, and reporting tools.
And a final difference—these additional fees are almost always taken out at the point of the transaction as Application Fees. As I showed earlier, that makes it easy to miss how much you're actually paying in total fees to a membership software provider. Instead, we don't take our 1% fee out as part of the transaction—we directly bill our customer for the 1% fee each month based on their payment volume.
Honestly, this probably hurts us because we're deliberately sending our customers an invoice that shows the total payment processing fees that they're paying to Outseta. That can look like a big number but it's almost certainly substantially less than fees captured at the point of the transaction. Based on all the confusion around this topic, I'm happy that we're overtly transparent with our fees.
Here's a very common illustrative example for a US-based customer:
Other membership software providers
While Outseta's pricing is a huge advantage for our customers—and frankly, something we weren't entirely aware of until now—it's worth note that we still have work to do to better handle VAT for our customers in Europe. This is currently our #1 product priority and something we're working closely with the team at Stripe on.
If you have questions on any of the material covered in this article, we'd love to hear your feedback. We hope this post help clear up a lot of the confusion around these topics that founders often struggle with!
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