Edit: As of May 2015 Balanced Payments is no longer an ongoing entity.

Balanced Payments recently made public its volume pricing schedule. This open display of pricing transparency may simply be a blip on the radar in the competitive world of online payment gateways, or it could signal the end of a very short period where pricing wasn't the dominant factor behind a processor decision. Whatever the impact, the move by Balanced was an interesting one that should be of interest to all payment gateway users.

Before we dive into the potential implications of Balanced's announcement some background/context might be useful. Accepting credit cards requires having a merchant account. That used to be a laborious process involving a painful back-and-forth with risk averse compliance teams who loved nothing more than drowning potential customers in a sea of paperwork that took days (and sometimes expensive lawyers) to review.  

Assuming you could decipher the documents, you then had the privilege of deep dives into your company financials that would lead (if you were lucky) to multi-page pricing tables. Needless to say, the process was pretty oppressive for a regular business and outright intimidating to a startup (and humiliating when you were rejected for...well...having no history!). Add to that horribly complex API's and bad documentation. It was ripe for change.

Then PayPal came along and assumed the role of industry trailblazer. It created a seamless process where companies could sign up for a payment gateway and merchant account at the same time. However, a complete lack of competition for early stage companies led to a predictable outcome. 

Poor API's and documentation, as well as a reputation for very poor service. Enter Braintree with (for a very long time) a classic bootstrapper model. It published great documentation and offered support on the front of an OEM'd payment gateway. It's approach was simple: treat developers with respect and have clear pricing. Braintree quickly became the default choice for many startups and experienced rapid growth as a result.

Yet there were still holes in the Braintree experience. You had to apply for a merchant account independent of the gateway sign-up process. It tried to make it as clear as possible but it was time consuming and rejection was a distinct possibility. Then Stripe came along and changed the game. It offered almost immediate on boarding together with super simple and transparent pricing. Add an amazing API and documentation and the results were predictable; developers swarmed to Stripe as their go to platform for online payments.

Stripe's pricing was brilliant for a multitude of reasons. It was very easy to understand and did away with set monthly fees - for the first time you had the option to pay-as-you-go. It included all card types (AMEX is the most common example of something that is typically priced much higher but there's a whole range of other "reward" cards). 

Perhaps most importantly though, it was 100% transparent with prices published in plain site on the Stripe website. It didn't require (or help!) if you knew the ins and outs of how rates are determined. If your developer friend was using Stripe you knew he was paying the same amount for processing as you were. At some point there was a vague small asterisk about huge volumes and better pricing but you had to look hard for it. Looking back, it's hard to believe just how revolutionary the Stripe pricing model was at the time.

Stripe's published pricing, however, starts to become expensive once your volume reaches scale. PayPal for example will drop your processing rate from 2.9% to 2.5% as soon as you pass just $3,000 in monthly sales. They'll drop you again to 2.2% at just $10,000 per month (although there is still that pesky fixed monthly fee). So why did Stripe flourish? I think for three reasons.

First, the financial relationship it was proposing was very clear to it's target audience. It was along the lines of: "we (Stripe) have done a *lot* of work to make life easier for you. Immediate onboarding and short development times. Smart, responsive support if you need it. The sort of thing that can save you hours and hours of time on your side and/or help you get to market faster (monetizing more quickly). In return, we're going to charge you a premium over other providers for that extra value we provide." It was brilliant in that that you didn't start paying for that premium *until* you were actually really capturing revenue. Developers understood the value proposition. As Apple has shown, developers don’t mind paying a premium for excellent engineering and design.

Which leads to the second reason they flourished. "Expensive" is a relative term. Software and SaaS services are margin rich. At scale they should be 70 - 90% margin businesses. So Stripe is arguably 0.5% or 0.8% more than PayPal based on list prices when you're doing $1 million per year. It's not very hard to tweak a support process to capture those type of operational efficiencies. It's not hard to tweak your trial/onboarding process to capture that in incremental revenue. It's also quite possible that the good things Stripe does actually become the reason you can capture that additional revenue. 

Someone trying to sell/re-sell hardware online in a super competitive market and are making 5 - 8% margins might balk at Stripe. Many developers though aren't looking at that scenario and can justify paying for a premium service.

The power of Stripe's pricing is most evident in the market reaction. All the newer companies that followed adopted 2.9% and 30 cents. Even the market incumbent Braintree threw up their hands and adopted the same process. Most importantly though, everyone *matched* Stripe. No one launched after Stripe and tried to use a lower price to capture market share.

(That's the third reason I think Stripe flourished. Everyone in traditional payment companies thought no one would pay those high rates. They just keep waiting and waiting..)

The challenge Stripe faces is that their success is ultimately replicable. The model is clear and transparent to all users. Immediate onboarding, great API's, good documentation and wonderful support. The problem is the early mover advantage that Stripe has with newer entrants having zero or much less brand equity than Stripe. So being "the same as" Stripe won't cut it. They need to look for ways to differentiate themselves within the market.

Balanced did exactly that by focusing in on marketplaces within payments. That seems to have been a wise decision. One way to gauge their traction was that Stripe and others responded within 12 months or so by enhancing their own marketplace functionality and story. The problem is that you are again getting driven towards parity from a features and functionality perspective. The more that happens, the more price comes into play. So far that hasn't been an issue because all advertised pricing was/is the same. But then Balanced just published volume pricing.

Whenever someone publishes volume pricing it tells buyers the following: "we can make money at these prices or else we would not be publishing them". Many folks take volume pricing at face value. Others, however, see them as little more than an initial opening in a two-way negotiation process. Unless Balanced has an absolute no negotiation policy in place, people who are at say 70% or more within a tier are going to push hard to get the next tier rate. This will erode a cornerstone of the new pricing; a critical sense of fairness.

Secondly, it opens up conversations around what *drives* pricing. Stripe's initial response is that it can, and in fact does, do better than Balanced‚Äôs published pricing but needs to understand your account specifics to develop a competitive package (including things like card mix and debit options etc). 

Customer's now face the following dilemma: they either become experts in credit card processing so that they can engage in the process and obtain the best pricing/product package, or they choose not to and accept that will likely end up paying higher rates because they can't or won't take the time to understand their mix and do what they can to optimize that mix.

If this all sounds familiar, it's because it is. We've starting to come full circle to the point where today's payment gateway customers have to review, understand and optimize their payment data to ensure that they're getting the best price. Sure, the documentation and sign-up experience should be much more user friendly than the early days, but to be a savvy customer requires research and a solid knowledge of the current payments landscape.

The next few months strike me as potentially fascinating. Stripe has the "Amazon or Apple" question to answer. Do you use brand/market reach to drive down prices so hard that you make it unattractive to incumbents and newer entrants to compete for your developer audience? 

Unfortunately interchange puts a hard floor below all providers so that approach really wouldn't work. Do you continue to charge a premium relative to others based on the perceived or real superiority or your offering? Or perhaps you go in a completely different direction with a payment type like PayPal or become the payments network a la the Shopify agreement. Whether deliberate or inadvertent, I believe Balanced's move signals the gloves coming off (or at the very least, unlaced) in the fight to attract start-ups with aggressive pricing tactics.

At Spreedly we think it's a great reason to retain independence and options for your customer base. After all, that is one of the reasons we do what we do.

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