Payments Dialog: Vaulting and Recurring Payments 101

Subscription and recurring payment models continue to grow in popularity and across many different industries. On this episode of Payments Dialog, we interview Clay Hefner, Product Manager at Spreedly. Clay gives us an overview of subscription strategies, along with best practices for vaulting card data to ensure the success of recurring payments.

We'll cover topics including management and orchestration of payments, limiting friction for customers, methods for limiting PCI scope in the context of recurring payments, updating and maintaining accounts, system redundancy, and more.

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Questions about your recurring transactions, and how Spreedly can help with your Payments Orchestration strategy? Reach out to see how we can help.

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Rough transcript of Vaulting and Recurring Payments: 101

Peter Mollins:

Hi, everybody. This is Peter Mollins with Spreedly. Welcome to another edition of Payments Dialogue. Very excited to have you all join again. I'm joined actually today by Clay Hefner who is product manager at Spreedly. Today, Clay and I are going to talk a little bit about vaulting and recurring payments. So Clay, welcome.

Clay Hefner:

Hey. Thanks, Peter. Happy to be here. Yeah and as you mentioned focused on vaulting here at Spreedly so looking forward to talking about recurring payments, it was definitely my previous job history.

Peter Mollins:

That's great. Well yeah, actually tell me a little bit about that background. What have you done in subscriptions?

Clay Hefner:

Yeah so prior to coming to Spreedly I actually worked for a large newspaper conglomerate called McClatchy. They own about 30 news publications across the United States and I was brought on board and focused for two years primarily on their subscription platform services. So how do you collect funds, how do you ensure that the right entitlements are transacted for access to different parts of the newspapers including different packages and bundling. And then also everybody loves paywalls so I was the unfortunate bad guy that got to put the paywalls in place but focused on all those pieces together.

Peter Mollins:

Great. Okay. Terrific. Now, Spreedly of course is not a subscription service but it does help subscription services to manage and orchestrate their payments. So, maybe let's kick off by taking a little look at why subscriptions in the first place and where the subscription economy comes from. It sounds like you have a great perspective on that.

Clay Hefner:

Yeah. Yeah. So, subscriptions have really been rising up in the past couple of years everybody's seen it. It's this very healthy business model both for businesses and for consumers. From a consumer perspective I'll maybe start there, as a consumer it's nice because you have fixed pricing, you ideally get it on a recurring basis so it's very understood and well known. And if a merchant's doing it right also the payments are frictionless. You're not having to go out, pull out cash or a credit card. Magically the funds transfer, you keep getting your goods and services.

Clay Hefner:

But on the opposite side for merchants a lot of the same benefits come in. One, because it is frictionless and because it is recurring one you have very good predictable revenue. Two is you also have I would say very improved customer retention as well. So, customers tend to stay on rather than a onetime purchase and leave and as a result of that you tend to have higher lifetime value from your customers as well. So, one of the main things that we had focused on was that I would say that's why you see a lot of companies shifting towards subscription business models.

Peter Mollins:

Great. Yeah, no, it sounds like a fantastic model to be in and then it allows you to have more predictability on your revenue as well I imagine.

Clay Hefner:

Yeah, it absolutely does.

Peter Mollins:

Yeah. So, when you think about what a recurring payment is so maybe you can just define a little bit about what a subscription business looks like but recurring payment what is that?

Clay Hefner:

Yeah. So, simply put a recurring payment is one that has a defined schedule upon which traditionally a fixed amount is going to be withdrawn. So the schedules are dependent on the contract that's written in between both the merchant and the buyer. It could be monthly like my Disney Plus subscription pulls out monthly or it could be something larger maybe it's like season tickets like SeatGeek that we work with where they get payments on a periodic basis so it's this predictable fixed amount. I would say the opposite of a recurring payment would be one where it's not fixed and there's not a contract in place and maybe the payment amounts vary.

Peter Mollins:

Okay. Okay, great. So, when I think about the kinds of companies that do that so you gave a couple examples there of some companies that you know of and some Spreedly customers that use recurring payments is there a specific type of organization that typically uses recurring payments or relies on the recurring payments?

Clay Hefner:

It's all over the place. It's very common right now when you see it with digital goods. So, like Microsoft Office 365 is an example of a digital good, Netflix model is another common one. But it's also happening in physical goods as well. Dollar shave club is how I get my razors and that's a subscription and it's actually been a really enjoyable experience because at one point I was getting flooded with razors they were sending them every single month and then I said, "Hey, pull that back let's go to quarterly." Very easy, very predictable for me. So, it can run the gamut of digital goods, physical goods, small companies, very large enterprise companies as well.

Peter Mollins:

Got it. Now I know there are a number of Spreedly customers that are actually recurring payments businesses as well so do you have some examples of some of those?

Clay Hefner:

Yeah. Piano.io is actually a customer of ours and they're focused actually specifically on helping empower subscriptions. They also work in the news media space so I was familiar with them before I even came to Spreedly. I think another good example that I find interesting is Pushpay, they help churches collect those donations and give churches tools to do that in a repeatable fashion. So, if you're doing your tithing on a weekly basis or maybe you want to set up something like a monthly or a quarterly schedule they also allow the ability to do that.

Peter Mollins:

Okay. And so, do you have some ideas about what the specific benefits are for them or as far as you would think that by retaining those payment methods that you have higher retention of customers I would guess. What other things are they seeing from a value perspective?

Clay Hefner:

So, I think some of the benefits that you get from having this recurring business model, one of the benefits and I touched on this with Dollar Shave Club with a recurring payment model, a subscription model, you do have this option to sell different tiers. And I think that's very good because not every consumer is the same. So an example was Dollar Shave Club but I'm not sure how this applies to Pushpay but if I were to think people want to tithe in different ways. So, maybe you do want to tithe weekly and that's better for you. Maybe you're busier and you want to tithe maybe quarterly or an annual basis but having those different options I think it makes it a better overall customer experience. And because that customer experience is better than the customer retains. I know that was true especially in the print space because you have your typical month to month but we also had annual subscriptions that recurred just on different payment cycles and at different prices too.

Peter Mollins:

Yeah I think that's a great point because you often see that with a merchant that may be on a subscription plan or offer subscription plans and then they may have an upsell of some kind that might be a special one time offer or some other thing where it's a discreet payment. Well, if the card's already on file that makes it a heck of a lot easier and a lot less friction for the customer to just come in and make that one time purchase in the context of their ongoing subscription. So, for the vendor, for the merchant, it's great because they have high trust and low friction so it's just a great customer experience.

Clay Hefner:

Yeah there's definitely that upsell opportunity especially when you're looking at subscriptions. Another one going back to Disney Plus I recently upgraded from just the basic package to now having ESPN and Hulu as well. They hooked me in with a good price, showed me the value. They already had my card on file paying monthly but then did some really targeted marketing at me. So, I had gone to Hulu a couple times. And made the suggestion, "Hey, for $5 more on your next renewal you can get these added benefits." Kudos to them hook, line, and sinker I took the bait.

Peter Mollins:

Yeah. Yeah, absolutely. So, if I can talk a little bit about the pain points that are associated with vaulting cards. If we flip the perspectives here from instead of it being from the consumer who's doing a subscription thinking rather from the merchant where they're having to vault these cards. But before we do, do you mind if you just give an explanation when I think about recurring payments how should I think about what's happening behind the scenes in terms of what's happening to that payment method or that card?

Clay Hefner:

Yeah. So, what's happening behind the scenes is if the customer is putting their card on file you have to first and foremost keep that card. Whether you do that or you work with a partner goes to one of the pain points. But first you have to keep that card on file and then you also have to have a timeframe and this is what I refer to as a contract. So, are we going to bill monthly? Are we going to bill quarterly? Are we going to bill annually? And then also are there different packages to where you can upgrade or downgrade?

Clay Hefner:

And then lastly comes in payment like how much is each one of those cycles and how do I treat the payment amounts if I upgrade? Do I upgrade on the next billing cycle or do I just take I guess a small fraction if you will of what it would cover to move up that to your pro-rate I guess would maybe be the right term. So, behind the scenes there's a lot of moving complex parts that subscription systems have to handle. Once again, going back to one of our merchants Piano does a very good job of that. So I can speak about that because I'm very familiar with them.

Peter Mollins:

Right. Okay, great. So then maybe let's go ahead then and talk about some of those pain points. So, what are some of the main pain points out there for a merchant and why they would want to go with vaulting and maybe a third party vaulting solution?

Clay Hefner:

Yeah. So, I'll go back to that first pain point that you mentioned which was what do you do with the card. You have to have this payment method stored in order to have these ongoing transactions and that creates liability. Plain and simple I think most folks watching this video would understand PCI scope. So if you want to do a recurring transaction you have a couple options really. Take on that liability of the PCI scope or work with a third party to handle that for you. In the case of what we offer the benefits there is you reduce your PCI scope by working with Spreedly. And then instead of having to actually store the card with your subscription system you have this PCI token that's available instead. Much better for you, much safer, and certainly we all wish a data breach never happened but it does and if it ever did you have a token versus actual credit card information.

Peter Mollins:

Okay. Yeah. So in addition to the security what about so I put my card in but cards have expiration dates so what happens then? It feels like in recent years I haven't had to go back in and update my cards so what's happening behind the scenes there?

Clay Hefner:

Yeah. So what's happening behind the scenes is usually an account updater program. So, what's happening technically is a lot of the vaults that are storing the cards have basically formed a partnership with the card networks, the Visas, the MasterCards, the Discover, Amex of the world. And when a card reaches an expiration date they're proactively checking or reactively checking that card to see if it has an update to it. So, common circumstances let's say there's a data breach at a large company like Target I think happened a couple of years ago then all the cards have to be reissued. And essentially Peter your card on file is null and void at that point.

Clay Hefner:

Well, there's two approaches to these account updaters. One is where it just runs on a cycle. So, it runs on this periodic cycle, if your card is opted in it'll check, returning the updates. That's fine but another approach is real time updates which is, "Hey, we tried to make that recurring transaction for you because it's time for your subscription to renew." The next thing you know the card is not valid. Well in that circumstance, the account updater checks right then and there, retrieves that updated information and completes the payment. So, that's the account updater.

Clay Hefner:

One of the things that we're focused on right now that's interesting is network tokens. The best way I would explain account updater in comparison to network tokens is if account updater is your reactive approach to that you're reactively checking every several days or you wait until the payment fails. A network token is actually a more proactive approach so they actually send out a pushed updated information to the merchant. So, rather than waiting for a failed transaction you receive those updates real time.

Peter Mollins:

Okay. Yeah network tokenization I've definitely been hearing a lot about. It seems that's going to be a great path for just evergreen payment methods. And Spreedly actually just made an announcement about network tokenization just recently too.

Clay Hefner:

Yeah we sure did. So recently some news came out from Visa that we are going to be one of their partners and likewise we're also working very closely with MasterCard. So, over the next quarter we're going to be working on a network token solution that we'll slowly start rolling out and making available to our merchants.

Peter Mollins:

Terrific. What about from a redundancy perspective? What do you see there as a pain point for recurring payments?

Clay Hefner:

So the redundancy piece is problematic especially... Well, let me take a step back I guess. So, when you talk about a software system redundancy is this concept that if one thing fails you have something else to catch it. Resiliency I think is different where it's just like the system itself is resilient and not prone to error. But the reality is things go wrong and that is true also with your payment processors. So, why this is a problem especially for recurring payments, especially on a large scale is if you don't have a redundant system and let's say you're trying to make that annual contribution, that huge annual payment and for whatever reason your payment processor is offline at that point. Well, now you have this opportunity for involuntary churn, you're not receiving the payment, in an ideal world you would have retry rules set up in place for that specific payment processor. So, you tried the payment, it doesn't go through, maybe you wait an hour, and then after that two hours, four hours, you keep extending it almost in a Fibonacci fashion. That's one way to handle redundancy.

Clay Hefner:

The other way is to have multiple payment processors. Payment processor, one is down, you want to capture that payment right then right there immediately then you roll over to payment processor two. So, why is that sometimes considered a better approach? Well, some people are not creatures of habit and they lose track of their gym membership or what have you but other consumers are especially if you go back to those large annual payments. You expect the payment to come out on a certain date and you expect that transaction to happen and to be inside your bank account.

Clay Hefner:

Well, what happens if it's not there? You start to worry, you start to wonder if you are going to lose service. So depending on the type of subscription you are if I lose Disney Plus I'm probably not sweating bullets but if I offer say a SAS platform that is critical to my business and I expect to have several thousand dollars taken out for an annual subscription and that doesn't happen I start to wonder is my access going to be revoked for nonpayment. So, I start getting on the phone, I start calling people, I start freaking out. So, having those redundant systems in place through either robust retry rules or having just multiple payment processors mitigates that risk.

Peter Mollins:

Okay. Well, and to your point about the globalness a lot of these vendors, I mean merchants these days are dealing with customers all around the world. And so, how should a company that does recurring payments as part of their business model how should they think about global scale and being able to address that?

Clay Hefner:

Yeah, I think that's one of the things I really like about this subscription business model is especially when you're talking digital goods it's really easy to expand. You can take a concept, validate it locally with payment methods that you understand in your local market and then expand outward. But it's to your point that expanding outward and globally where you start to have issues. First and foremost is local payment methods, so if you want somebody to transact with you, you want to make that transaction as easy and as frictionless as possible You talked about that earlier as being one of the benefits of subscriptions. But if you don't have their preferred payment method and it's maybe a local payment method what do you do? You're going to leave money on the table.

Clay Hefner:

So, if you are working in recurring payments and you have ambitions to go global I think first and foremost you need to look and see what are those local payment methods in those markets and then understand how can you partner with somebody to process those. Oftentimes it means you're going to have multiple processors and multiple relationships and that's not necessarily a bad thing either because the other aspect to a global strategy is people are going to charge you different rates and you're also going to have different success rates depending on that processor's capabilities. So, I guess my advice to anybody that's just getting started out with recurring payments one-on-one is certainly have a good solid base in your local area but if you have ambitions to expand globally and consider that it's probably good to do some pre-planning upfront to say, "How can I make that happen? And am I forming the right partnerships now that will make that expansion easy versus more difficult when I get to that point?"

Peter Mollins:

So it sounds like it's a strategy to making sure that you're future-proofed, you're enabled for the future. And at the same time there's also the opportunity of this optimization, of being able to optimize success rates, optimize latency, and optimize for the redundancy that you mentioned before.

Clay Hefner:

Yeah. Absolutely. Latency good call out there Peter.

Peter Mollins:

Just furthering the conversation about this idea of globalization and being able to accept payments globally but also around the idea of redundancy that comes back to this theme of payments orchestration doesn't it? How does payments orchestration connect to recurring payments?

Clay Hefner:

Yeah. So, when we talk about the redundancy piece and global scale and you're starting to think of like, "Hey, I need to have multiple partners here," somehow you're going to have to orchestrate that. And if it's you directly that is certainly one path is you could handle that orchestration. But this goes to where having like something like Spreedly as an orchestration layer really helps especially from a one time implementation perspective. So, when we're talking about orchestration and it saving you time I think from an engineering perspective one of the things that we would always want to consider is you have limited resources. How can we save you time? And with orchestration in mind the best thing that we could do is allow you the ability to implement it once and then expand and grow as you wish. Saves your engineering resources but doesn't hinder your business and that's one of the things I really love about working here at Spreedly.

Peter Mollins:

Yeah. Yeah. And it sounds like just being able to achieve the high order payment strategy and business strategy that you have particularly for these subscription vendors.

Clay Hefner:

Absolutely. We want ambitions to be high and for you to achieve on those.

Peter Mollins:

Absolutely. Well Clay, I really enjoyed this discussion. It was great to learn more about recurring payments and how payments orchestration connects to that. So thanks so much for your time and I hope everyone out there has enjoyed the conversation and we'll be back with another edition of Payments Dialogue. So Clay again thank you.

Clay Hefner:

Yeah thank you for having me Peter. And if folks have questions please we encourage you to reach out to us.

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