Several months ago we reviewed Stripe—a San Francisco-based start-up, which was making some misleading statements on its website and was promising more than it could possibly deliver. Even as it was claiming otherwise, Stripe was offering web-based businesses a plain-vanilla merchant account—the generic industry term for the type of service, which allows businesses to accept cards for payment. Stripe’s merchant account is underwritten by Wells Fargo, whereas the start-up provides the software needed to connect the various transaction participants: merchant, customer, card issuing bank, payment processor, card network and perhaps a couple of other service providers. So Stripe is what we call a “payment gateway”.
This morning I read about a Munich-based Stripe look-alike, which has been busy raising venture money to fund its European expansion. Paymill, as the German start-up is called, received ?é¼10 million from a group of European investors in the middle of January and last week it collected $5 million from a U.S.-based investor. So I looked at the company’s website and liked what I saw much better than what I had found on Stripe’s website. Paymill is much more straightforward about what it does and, as far as I can tell, is making no false statements or misrepresentations. Apart from that, however, Paymill is a veritable Stripe clone and both start-ups are clearly aiming to eat Authorize.Net’s lunch. Will either of them succeed? Let’s see.
What Is Paymill?
Paymill, in association with a payment processor, enables businesses in 34 European countries to accept credit and debit card payments on their websites. Here is how the start-up describes its role in the process:
Paymill GmbH (hereinafter — Paymill) is a technical service provider in the field of electronic processing of cashless payments via credit card on the Internet. For this purpose, Paymill has developed a software (hereinafter — Paymill application), which can be accessed by the contractual party (hereinafter — merchant) on the Internet to initiate credit card transactions. The important functionality of the Paymill application is to receive the transaction data collected by or through the merchant and to forward it to the respective third party, agreed on by the parties, who processes the credit card transactions on behalf of the merchant (hereinafter — payment service provider). The contractual relationships with the payment service providers, necessary for the processing and clearing of credit card transactions, are maintained by the merchant.
So Paymill is a mere “technical service provider”. The application process and the merchant account itself are managed by the underwriters, which have not been disclosed. Unlike Stripe, the German start-up is much more upfront about the duration of the whole process. Whereas the U.S. company misleadingly promises clients to “start accepting credit cards on the web today”, Paymill gives us the more realistic timeframe of 48 hours.
The two companies’ pricing structures are identical and straightforward. Neither start-up charges any set-up, registration or monthly fees, but only per-transaction fees, which in the case of Paymill are calculated as 2.95 percent of the sales amount plus €0.28 (Stripe’s are 2.90 percent plus $0.30). Paymill charges €18.75 per chargeback, whereas Stripe’s corresponding fee is $15. There were no other fees that I could find.
Taking on Authorize.Net
Now let’s see how the Stripe / Paymill business model measures up against the one developed more than a decade and a half ago by Authorize.Net—the industry leader. Leaving the technical aspect aside—each of the contenders is telling us that their website integration method is the simplest and the most painless ever developed—the difference lies in the way Authorize.Net and its challengers are packaging their offerings. Whereas Stripe and Paymill have bundled the software part together with the merchant account one into a single product, Authorize.Net is keeping the two separate from one another. Authorize.Net specializes exclusively in the development of its flagship payment gateway product and leaves the merchant account part of the puzzle for others to handle. But which is the more merchant-friendly approach?
To answer this question, we will need to weigh the trade-off of simplicity, offered by Stripe and Paymill, against the flexibility of Authorize.Net’s model. When we do, it becomes quite clear that merchants are better served by the latter model. Here is why.
The biggest advantage of the Stripe / Paymill approach is that it offers merchants an all-in-one package, so that they can plug the software into their websites, wait for the underwriter’s approval and start accepting payments. On the other hand, Authorize.Net gives you a payment gateway to connect to your website and tells you to find your own payment processor. So merchants need to make an extra step and talk to a bank, in addition to a software provider. However, in return they can get much lower processing rates. How much lower? Well, that depends on the merchant’s size and bargaining skills, but for debit cards the difference could be as big as 2.50 percent or more and for credit cards it could easily be 0.50 percent or more. For any business that has grown beyond the survival stage, that is quite a difference!
It has been argued that Stripe is doing in the e-commerce field what Square did in the face-to-face card acceptance arena. After all, the pricing structures of the two companies are the same and their business models are built around the concept of simplicity and straightforwardness. Yet, there is a substantial difference between the two, which is of critical importance. See, when it first rolled out its service, Square concentrated its marketing efforts on individuals and very small, one- or two-person, businesses, which was a market segment that until then was completely unserved. Only after it had established itself, Square shifted its focus toward bigger businesses. Stripe and Paymill, on the other hand, have identified no untapped market that they could conquer unopposed and instead have to go head-to-head against the traditional players. For reasons I already stated, I think that they’ll find it very hard to replicate Square’s success.
Image credit: Paymill Blog.