We speak to SaaS executives all the time about potential alternatives to PayPal for their payments infrastructure.
Based on these insights, these are the reasons that software executives look for PayPal alternatives. These challenges reach beyond SaaS and are also relevant for other types of online businesses.
Complex integration of PayPal
PayPal is one part of your payments infrastructure. To handle subscriptions and recurring payments, you'll need to integrate additional tools. This can be complicated as PayPal has complex APIs and documentation.
For purposes of global tax compliance, you'll also have to integrate your payment processor with tax solutions. But there is documentation on how to integrate with PayPal transactions.
B2B buyers will need additional payment methods and sales-assisted invoicing processes. As PayPal doesn't offer these, to meet the expectations of larger business customers in particular, your finance team will need yet another tool integrated into your stack, as well as new processes to issue invoices and reconcile payments effectively. If you don't offer the right payment methods, your conversion rates are likely to take a hit.
To maintain high revenue performance, SaaS businesses typically need to offer sophisticated upgrades, downgrade, pausing, and cancellation functionality. This requires a subscription tool which would mean another integration on top of your PayPal solution.
Difficult to implement SaaS growth strategies
SaaS growth has a clearly defined set of strategies. These include moving into new international markets, moving upmarket to serve teams or enterprise clients, moving down-market to add trials or self-serve options, and launching new products.
As a payment solution, PayPal can't support you with implementing these growth activities. Strategic growth generally sits outside PayPal’s main remit – payment processing.
To drive strategic growth, you’ll need different infrastructure. You'll likely have to build and optimize this in-house. What's more, you'll need specific expertise on hand to guide you in creating the right infrastructure to support your product and go-to-market strategy.
Tax and invoicing form another key part of the payments infrastructure, where you’ll need additional support, especially when moving into new international markets.
Patching together a billing infrastructure from multiple tools means you don't have a single source of truth when it comes to your revenue data. This lack of a 360° perspective may get in the way of your ability to execute strategic growth activities.
No sales tax compliance support
Getting sales tax right is critical for SaaS businesses and the penalties for getting it wrong can be severe.
As a software company, you owe sales tax where your customers are located, not where your company is based. As you can imagine, when you have customers buying from all over the world, sales tax compliance can get extremely tricky.
PayPal doesn't deal with sales tax compliance. It's just a payment processor. It would need to be integrated with a sales tax calculator to correctly match each transaction to product and country-specific tax rules. This would need to be done correctly over the entire life cycle of all your customers – recurring payments included.
These integration processes aren’t documented. You would need to figure everything out for yourself.
One alternative would be to work with a tax accountant to retrospectively reconcile transactions from your PayPal reporting. But the downside here is the expense of this process. In addition, you can't charge the tax on top during a checkout, so you'll end up missing out on revenue.
In short, maintaining sales tax compliance internationally is difficult when only using PayPal. That's why global SaaS companies are looking for alternatives to take this major burden off their hands.
Constrained payment performance
Having your customers pay with PayPal often looks great at the checkout. With its wide range of funding sources, PayPal offers customers plenty of options. This leads to good levels of payment success.
But there are several performance challenges with PayPal that are likely to affect SaaS businesses.
For starters, customers can cancel their PayPal subscription payments from within their PayPal account. This creates a cancellation flow that you have zero control over. What’s more, if the customer chooses to chargeback their subscription too, PayPal usually favors the customer in this scenario. The outcome is a new source of churn for your SaaS business.
What's more, PayPal doesn't route card payments through multiple payment gateways. To achieve this functionality, you'll need to integrate additional tools on your own – creating more of a burden on your time and resources.
Costs mount up
Because PayPal’s feature set is limited only to payment processing, SaaS businesses typically must use it in conjunction with other tools. As a result, costs quickly mount up until using PayPal is no longer cost-effective.
Here’s a breakdown of some of the specific costs you can expect to find, both for PayPal itself and for associated tools:
- You'll be charged 2.9% plus currency fees for receiving payments
- PayPal charges additional fees for cross-border transactions
- PayPal also charges a fee on payout, usually capped at 2%
- You'll also need to factor in additional fees for additional tools
- Finally, you'll need a team to integrate and manage this infrastructure as well as handling your global sales taxes and compliance.