It is undeniable that almost everything in the world has gone mobile. Presently, more people than ever are using apps across a wide range of ages and disciplines. Many businesses are switching over to mobile strategies to reach out to a wider broader audience. In places like India, South-east Asia, and South America, the younger generation prefers using mobile apps over card payment. Mobile payment transaction volume reached 1.7 trillion USD in 2021 and continued to grow since then. According to Statista, PhonePe is India’s main choice for Unified Payment Interface (UPI) in India.
However, this shift is not as straightforward as many would think. There are many considerations to take, the most important of all being how to generate profits and collect payments. Businesses must find a way to achieve this while optimizing the user experience. Also, these considerations must comply with the app store guidelines.
This article covers the different types of in-app purchases. Here, we explain how these purchases differ between Apple Pay and Google Pay, the benefits, drawbacks, and more. It also looks at how the EU’s Digital Markets Act can impact in-app payments going forward.
Understanding in-app payment processing
In-app payment processing enables businesses to take payments from users for goods and services through a mobile app. Users provide their payment details on a secure in-app checkout page. This feature ensures the user can complete the purchase without leaving the app.
Enabling in-app payment processing requires merchants to integrate mobile payment technology through a backend integration with a payment provider. However, the company must comply with the rules and guidelines laid out by Apple or Google’s app store. These guidelines change based on the type of in-app purchase. Listed below are the different types of in-app purchases available to a business.
Types of in-app purchases
A company can enable in-app payment processing through multiple options. These include:
Expendables
This feature is widely used in free games or freemiums. Here, businesses use expendable in-app purchases and charge users for one-time items or power-ups. These items enhance the user experience and keep players coming back for more. Some online games use this payment model
Unlocking extras
Companies can take one-time in-app purchases to permanently unlock additional content. The prospect of unlocking more beyond what is provided entices more users to make purchases.
Subscriptions
The most commonly used type of in-app purchase is the subscription model. Here, companies charge an ongoing subscription to users in exchange for access to a service. The best examples of these are newspapers, magazines, and streaming services. These platforms have monthly, quarterly, and annual monthly billing options that give users access to content. This content is typically hidden by a paywall and is only accessible after paying for a subscription. Any video streaming service falls under this category.
Benefits and drawbacks of in-app purchases
Benefits
In-app purchases provide the development team with more options to enable marketing tactics. It also gives them more ways to make sales and create revenue streams.
This payment method is great for launching special deals to users at the right time. The right approach helps businesses make significant progress for a small investment
Drawbacks
The back-end development requires more time and effort. It ensures that developers spend more time here than on other parts of the app.
In-app purchases require complex coding work to be done and need constant technical support from the team. There is a constant need for developers to understand the user’s needs and take steps to keep them satisfied.
External payment gateways
Another form of payment app that can be used is the external payment gateway. This payment mode enables transaction data securely from your app to different payment processors. These processors include financial institutions and banks.
This approach significantly benefits companies as it prevents the app from facing a data breach. Also, the process of enabling an external payment gateway is less laborious work for the development team.
However, enabling third-party software for any application leads to an exterior element of control. That said, you cannot deny the essential benefits that come with using external payment gateways.
External payment gateway options
Hosted payment gateway
This option works as a third-party solution. Here, users are required to leave and move to another digital platform to complete the payment process. This option is ideal for local or small businesses. The only downside here is the payment system is under the control of an external company. Another downside is redirecting users reduces the conversion rates.
Direct post
This option enables users to shop on the app without leaving the app. However, apps with this feature don’t require PCI compliance. The app assumes the transaction’s information is posted to a third-party payment gateway after the user makes a purchase. This information travels to the external payment gateway and processor without having to store it on the server. The downside to this option is that businesses cannot ensure that transactions take place in a secure environment.
Non-hosted payment gateway
This option is integrated through external APIs to the server. Hence, it requires an IT solutions company to complete the integration. This option is ideal for regular or large companies that rely on branding and user experience. The downside to this option is adding personal functions to the payment gateway is a complicated and time-consuming process.
Benefits and drawbacks to payment gateways
Benefits
External payment gateways have user-friendly interfaces. They come equipped with pre-designed templates and intuitive interfaces that a company can customize. Also, a reputable third-party platform has customer support to help you with any technical issues.
Drawbacks
The biggest drawback to an external payment gateway is the dependency. You are tied to that company’s infrastructure and services. Also, these platforms charge transaction fees or impose limits on the number of transactions customers can make. There’s even the risk of having limited control over the payment gateway. Lastly, the third-party provider has much of your sensitive data. These platforms may not take the same measures you do to protect your platform from hackers or other cyber threats.
How big apps make money
WhatsApp has a free mode for individual users. However, the app generates revenue through the alternative WhatsApp Business. Here, companies pay a fee based on the number of messages they send to customers. These messages can be for multiple purposes like notifications, support, and communication. Presently, there are also plans to introduce in-app advertising in the future.
Instagram primarily makes money through advertising. Here, businesses target users with sponsored stories, and videos, and post ads that blend with organic content. The platform also has tools for shopping within the app. This extra feature helps the app generate revenue through transaction fees.
PhonePe
This app works on a transaction fee model. PhonePe charges a small fee for each digital payment made through the platform. The app also works with businesses and merchants to provide additional services. These services include bill payments and recharges where they earn a commission on each transaction.
Amazon
Amazon uses a variety of different strategies to generate revenue. Their primary revenue model is through product sales. Here, they take a commission on each transaction made. They also provide subscription services like Prime, AWS, and advertising solutions. These models come together to contribute to the app’s revenue generation.
YouTube
YouTube makes money through advertising. Here, creators monetize their videos with ads located before, during, and after content. The platform also provides a premium subscription that removes ads. It also provides access to exclusive content to generate recurring revenue.
External gateways vs in-app purchases
Which is the better choice for your app? This decision relies on the app itself. The app’s working model and what business your app provides all play a role in determining the payment method. A ‘freemium’ app is highly compatible with in-app purchases.
Apps dealing with selling services or physical products should rely on an external payment gateway.
Conclusion
There’s no such thing as the best payment method. The app’s needs and the business model are what determine which payment method is best suited to the task. Take that into consideration before making a decision. If you can’t you can always contact a leading IT services provider to help you make the right decision.
