Third-party billing is the practice of outsourcing the billing process to an external company that specializes in managing invoices, processing payments, and handling customer billing inquiries. This external company, often a billing or payment processing company, takes on the responsibility of billing the customer, processing payments, and transferring the funds to the seller or service provider. In 2022, the global third-party payment market was valued at more than $57 billion USD, a figure that’s expected to continue rising as more companies seek convenient payment solutions.

Below, we’ll break down the differences between working with a third-party billing provider, keeping the payment process in-house, or opting for financial automation. Here’s what you should know.

What’s in this article?

• How does third-party billing work?
  
• Third-party billing benefits
  
• Third-party billing challenges
  
• Third-party billing vs. in-house billing vs. finance automation
  
• Billing system trends and alternatives
  
• How to transition from third-party billing to automated solutions
  

How does third-party billing work?

Third-party billing is a coordinated process that involves a service or product provider, a customer, and a third-party billing company. Here’s how this process typically works.

• Transaction initiation: A customer buys a product or service from a company, such as medical services from a health care provider, phone services from a telecommunications company, or a specific product from an online or in-store retailer.

• Billing information transfer: After the business provides the service or delivers the product, it sends the billing details (including customer information, purchase type, and purchase amount) to the third-party billing company.

• Invoice generation: The third-party billing company processes this information and generates an invoice that it sends to the customer, either by mail or electronically.

• Payment collection: The customer pays the third-party billing company.

• Payment processing: The third-party billing company processes the payment, which may involve verifying the payment, reconciling it with the correct customer and service, and addressing any discrepancies.

• Fund transfer: The third-party billing company transfers the funds to the original service provider or seller, minus any fees or commissions agreed upon for the billing service.

• Reporting and reconciliation: The third-party billing company may provide reports to the original provider about the billing and payment status.

Third-party billing benefits

• Focus on core activities: By outsourcing billing operations, businesses can concentrate more on innovation and quality improvements to their primary products or services.

• Cost reduction: Implementing and maintaining an in-house billing system can be costly and requires heavy investment in technology, staff training, and ongoing management. Third-party billing companies can provide these services more cost-effectively than businesses can.

• Expertise and compliance: Third-party billing companies stay up-to-date with relevant regulations and industry standards, reducing the business’s administrative burden of legal and regulatory compliance.

• Cash management: Effective billing and faster payment processing by specialized third parties can improve cash flow for businesses. Efficient collections and reduced payment delays can help businesses manage their finances better, and plan their operations and investments more effectively.

• User experience: Billing services can provide customers with a more user-friendly payment experience. This can include a variety of payment options, detailed invoicing, and responsive customer service for billing inquiries—all of which contribute to higher customer satisfaction.

• Scalability: As a business grows, its billing processes can become more complex and numerous. Third-party billing services can easily scale to accommodate increased volume or different types of billing, allowing businesses to expand without being constrained by billing capacity.

• Reduced errors: Specialized billing companies have the technologies and expertise to minimize billing errors, which helps maintain good customer relationships and facilitate prompt payments.

• Data security: Billing involves handling sensitive customer information including financial details. Third-party billing companies typically have strong security measures in place to protect this data.

• Analytical insights: Many third-party billing providers offer analytical services, providing businesses with detailed reports and insights into their billing processes, customer payment behaviors, and potential areas for improvement.

Third-party billing challenges

While third-party billing offers several benefits, it also comes with its own set of hurdles and limitations.

• Loss of control: For businesses, outsourcing billing to a third party means relinquishing some control over the customer service process. Businesses need to ensure that the third-party provider meets their standards and expectations, particularly around customer communication and service quality.

• Operational dependence: If the provider faces technical issues, service interruptions, or goes out of business, it can directly impact the business’s billing operations and reputation.

• Integration: Integrating the third-party billing system with the business’s existing systems—such as customer relationship management (CRM) or enterprise resource planning (ERP)—can be complex and require substantial effort, especially if the systems are not inherently compatible.

• Limited customization: Depending on the service provider, there may be limitations on how much the billing process and communications can be customized to fit the business’s brand and specific needs. This could impact the customer experience and the consistency of the business’s brand messaging.

• Potential for hidden costs: While third-party billing can be cost-effective, businesses need to be aware of all potential fees and charges. Sometimes, hidden costs or variable fees can accumulate, making the service more expensive than initially anticipated.

• Communication gaps: Miscommunication between the business, billing provider, and customers can lead to errors, customer dissatisfaction, and potential revenue loss.

• Customer resistance: Some customers may prefer to deal directly with the business rather than a third party, especially if they have concerns about data security or if they feel that the third-party involvement complicates the billing process.

• Monitoring: Businesses need to continuously monitor the quality and performance of the billing service, which requires time and resources.

Third-party billing vs. in-house billing vs. finance automation

Third-party billing

Third-party billing is when an outside entity handles the invoicing and payment processes between a payer and payee.

• Benefits: By leveraging the billing company’s specialized expertise, businesses can reduce operational costs and focus on core business activities. This process also offers businesses scalability and can provide a higher level of compliance with regulations.

• Drawbacks: It may result in less control over the billing process, integration challenges, increased dependency on the service provider, and customer concerns about data privacy and security.

In-house billing

In-house billing is the practice of managing billing operations internally, using the business’s own resources, staff, and systems to send invoices, collect payments, and handle customer billing queries.

• Benefits: It offers businesses more control over their billing process, such as immediate oversight, direct customer interaction, and more flexibility to customize the billing experience.

• Drawbacks: It requires major investment in technology, staff, and training. There’s also the risk of inefficiencies if the business lacks specialized billing expertise.

Finance automation

Finance automation is the practice of using software and technology to automate key financial processes including billing, invoicing, payments, and financial reporting. It can be implemented either in conjunction with in-house billing or as part of a third-party service.

• Benefits: Automation can greatly reduce manual errors, speed up financial transactions, and provide real-time financial insights. It can also scale as the business grows, and adapt to different billing models and requirements.

• Drawbacks: The initial setup and integration of automated processes can be involved and costly. They also require ongoing maintenance and updates. Depending on the level of automation, it might reduce personal interaction with customers, which could impact customer service experiences.

Billing system trends and alternatives

Emerging trends and alternatives in billing systems are reshaping the way businesses handle transactions and manage financial operations.

• Digital-first billing solutions: Cloud-based billing platforms, which are flexible and scalable, are becoming more popular. These solutions meet the evolving preferences of consumers by accommodating a range of payment methods, from traditional credit cards to digital wallets and cryptocurrencies.

• Subscription-based models: More businesses are adopting subscription-based billing, which requires advanced systems to manage recurring payments, custom billing cycles, and user subscriptions. This model emphasizes customer retention and predictable revenue streams.

• Automation and AI: Billing system automation reduces manual intervention, minimizing errors and saving time. Artificial intelligence (AI) and machine learning algorithms can analyze payment data to detect anomalies, predict cash flow, and lend insights to optimized pricing strategies.

• Compliance and security: With the increasing prevalence of cyber threats and stringent regulations, more billing systems have enhanced security features and compliance protocols. This includes encryption, fraud detection, and adherence to international standards such as the Payment Card Industry Data Security Standard (PCI DSS).

• Integration capabilities: Modern billing systems are designed to easily integrate with other business tools such as CRM and ERP systems, providing a unified view of customer data and financial metrics.

• User experience: There’s a strong focus on improving the payment experience for customers with simplified checkout processes, personalized billing, and better support for mobile transactions.

Stripe has a range of products and features that automate and simplify billing processes:

• Billing: Stripe Billing is a comprehensive solution for automating recurring payments, invoicing, and subscription management. It supports a variety of pricing models including one-time charges, usage-based billing, and tiered rates.

• Smart invoicing: Stripe has advanced invoicing features that include automatic payment reminders, tax calculations, and the ability to accept payments directly from the invoice.

• Application programming interface (API) integration: Stripe’s APIs allow businesses to customize their billing workflows and easily integrate Stripe’s functionality into their applications and websites.

• Data and analytics: Stripe can monitor and analyze payment data to help businesses understand their revenue patterns and make informed decisions.

How to transition from third-party billing to automated solutions

Businesses that want to transition from a third-party billing provider to an automated solution such as Stripe need to be careful that the shift doesn’t disrupt business operations or customer experience. Different automated solutions will have different transition processes. Here is a general outline of things to consider when switching from a third-party billing provider to an automated solution such as Stripe:

• Assessing business needs: Before making the switch, assess your specific business requirements including transaction volume, the currencies you need to support, and any unique billing models (e.g., subscriptions or on-demand services). Confirm that Stripe (or another chosen automated solution) supports all the necessary features and payment methods you currently use or plan to use.

• Setting up a Stripe account: Set up a new account with Stripe by providing your business details, verifying your identity, and setting up your bank account information for fund transfers.

• Integrating services: Stripe has extensive APIs and a range of integration options for different platforms and programming languages. Familiarize yourself with Stripe’s documentation and software development kits (SDKs) to understand how to integrate its services with your website or app.

• Testing: Conduct thorough testing, whether you’re using a simple plugin for your ecommerce platform or building a custom integration using Stripe’s APIs. Use Stripe’s test environment to simulate transactions, test your payment flows, and check your error handling processes.

• Migrating data: If you’re moving existing customer data such as payment methods or subscription information, plan a secure and compliant data migration. This might involve exporting data from your current processor and importing it into Stripe. To comply with PCI standards around sensitive data such as payment information, you might need to solicit direct customer input or use Stripe’s migration services.

• Adjusting billing and payment workflows: Adjust your billing and payment workflows (such as how you manage subscriptions, process refunds, or handle failed payments) to align with Stripe’s system.

• Implementing customer communication: Inform your customers about the change in your payment processor, especially if they need to take any action such as updating their payment information. Transparency helps maintain trust and can prevent confusion during the transition.

• Going live: Once you’ve thoroughly tested your Stripe integration and are confident in the migration process, you can switch to live mode. Monitor transactions closely during the first few days to confirm everything is working as expected, and promptly address any issues.

• Offering post-transition support: Be prepared to offer support to customers who may have questions or face issues due to the change. Having a dedicated support team or resources can help mitigate any post-transition challenges.

• Maintaining ongoing review: After transitioning, review your new setup’s performance continually. Stripe provides analytical tools that can help you gain insights into payment patterns, success rates, and areas for optimization.

Transitioning to Stripe or any new payment system is a major change that requires careful planning and execution to minimize disruptions and to position your business to take full advantage of your new payment system’s features and capabilities.