Paysite Power: Merchant Account vs 3rd-Party Billing

A.J. Hall

A few months ago I wrote an article about billing that focused on merchant accounts as an alternative to third-party billing services. The intention of the piece was to promote thinking amongst larger scale paysite operators in regards to ways to lower fees. After receiving several emails following the article, I realized my seemingly slanted view on merchant accounts left readers confused as to whether they should be changing their billing setups.

The truth is, for every Elevated X CMS software customer I refer to a merchant billing provide, I refer a dozen to a third-party billing company.

If your site has affiliates sending sales and you don’t have a dedicated software platform to handle that, it’s almost certain that you’ll end up with a third-party biller and processing fee differences won’t be a consideration.

Neither processing setup is perfect for everyone, and to muddy things up even more, it’s not uncommon for high-traffic sites to benefit from using two opposing methods in conjunction with one another.

Larger, high-traffic sites and those using dedicated affiliate software with cascading billing can benefit from using their own merchant accounts along with third-party billers to minimize the number of declined credit cards and lost sales.

In most other instances, unless someone has a site that’s not using affiliates for any part of its sales, site owners go with a third-party all-inclusive processing company.

As a site starts to earn more, the owner will often start to look at statements and think about rates. Even in the case of Elevated X (which uses our own merchant account), I will hit up a couple of merchant processors every year or so to get quotes which I then use as leverage to obtain a rate match with my current provider or consider as a reason to switch processors.

One nice thing about both the major adult merchant billing providers and third-party billers is that they have very friendly and helpful staff willing to take the time to inform and educate site owners and even potential site owners who are total newbies when it comes to adult sites and/or their own billing.

Billing shouldn’t be a conundrum. It’s simple really. If your site has affiliates sending sales and you don’t have a dedicated software platform to handle that, it’s almost certain that you’ll end up with a third-party biller and processing fee differences won’t be a consideration.

I asked Paul Kluzak from CCBill how he explains fee differences to people who are using that as a basis for their decision and he said, “The credit card associations set the base fees. Therefore everyone actually starts with the same rates.”

“Much like the price of gas, the price of oil is the same for everyone however by the time it gets into your car there are a lot of hands to touch it and various fees added on,” Kluzak said. “The fees that are added can vary but are based on the type of card that is used, (debit, rewards card, etc.) whether it is a card present or not present transaction, (offline, online) the type of merchant, (adult, non-adult) and so on.”

What this means to someone comparison shopping is that when looking at a merchant billing statement, things aren’t always clear. What might be a base rate of between 3-4 percent could really be 6 percent or higher once “additional fees” are added in for things charged separately for such as fraud scrubbing, chargebacks, cross border fees on international transactions and so on.

On top of fees, some companies also require holding a 10 percent reserve. For a smaller startup or a new site not yet generating a lot of revenue and relying on every penny made just to keep operating, this alone can be a deal breaker. And this assumes a new site would even qualify since a lot of merchant account providers won’t bother with a total startup or one not doing less than $10,000 a month in volume.

Often for a newer site owner or one who doesn’t need affiliate program software, the fee difference between merchant and third party doesn’t justify the added expense of having to implement all of the automated features that CCBill and most other third parties provide.

When someone unfamiliar with adult billing hears “14 percent” they’re initially shocked. Once I explain that with a third-party company this includes full-time customer support reps, fraud analysts who also understands chargebacks and prevention, an affiliate program, bypassing the cost of paying someone to code join pages, emails, languages, multi-currencies and on and on. Not to mention banking regulations and staying safe on that side of things for peace of mind. It’s actually a great deal — but not if you don’t need all of that stuff, which some people don’t.

Due to all of the above, I steer 100 percent of new site operator clients to companies like CCBill so it’s easy for them to get going and not have to worry about doing anything themselves. I feel it’s better for new site operators to focus their entire energy into building, running and marketing their site and not worry about other things.

My hope is that this follow up billing article helps clarify the differences and when it makes sense for someone to consider a merchant account.

If I had to give a clear benchmark I would say that if a new site is past the $10,000 a month mark, isn’t relying on affiliates for any traffic, has few or no chargebacks and very little fraud, it’s worth evaluating.

If an established site is past the $10,000 a month mark and moving to dedicated cascading affiliate software or adding multiple billers is a consideration, it’s worth looking into using a merchant account and experimenting with it in the cascade to get a baseline for whether the cost difference is worth any other trade-offs.

If you have questions about billing setups or want advice on what might work best based on your situation, feel free to email me at aj@elevatedx.com and I will help steer you in the right direction. AJ Hall is a 15-year adult industry veteran and CEO of Elevated X Inc., a provider of popular adult site CMS software. Hall has spoken at industry trade shows and written for several trade publications. Elevated X software powers more than 2,000 leading adult sites, has been nominated for more than a dozen industry awards and won the 2012, 2014 and 2015 XBIZ Award for Software Company of the Year.