Payments Guide

Payments Guide

How to accept payments in your application. Covers different payment providers and business models. Written for all skill levels.

Table of Contents

Understanding Payments

How Online Payments Work

When a customer buys something online, many parties are involved:

Important: Your app NEVER sees the customer's credit card number. The payment provider handles that securely.

Key Terms

Term Meaning Example
Payment Provider Company that processes payments for you Stripe, Square, PayPal
Merchant You (the seller) Your app/company
Transaction Fee Cut the provider takes 2.9% + $0.30 per charge
Webhook Automatic notification when something happens "Payment completed" message to your server
PCI Compliance Security standards for handling cards Payment providers handle this for you
Payout Money transferred to your bank Weekly or daily transfers
Chargeback Customer disputes a charge "I didn't make this purchase"
Refund You return money to customer Full or partial return

Business Models

One-Time Purchase

What it is: Customer pays once, gets the product forever.

Examples:

  • Desktop software license
  • E-book purchase
  • One-time report/download

Pros:

  • Simple to implement
  • Customer knows exactly what they're paying
  • No recurring billing issues

Cons:

  • Need to keep finding new customers
  • No predictable monthly revenue
  • Updates/support not funded long-term

Best for: Software with clear, complete features that don't need ongoing updates.

Subscriptions

What it is: Customer pays regularly (monthly/yearly) for ongoing access.

Examples:

  • Netflix, Spotify
  • Adobe Creative Cloud
  • SaaS products (Notion, Slack)

Common Subscription Tiers:

Tier Price Features
Free $0 Limited features, ads, or trials
Basic $10/mo Core features
Pro $25/mo All features
Team/Business $50/mo Multi-user, admin features

Pros:

  • Predictable recurring revenue
  • Builds long-term customer relationships
  • Funds ongoing development

Cons:

  • Higher churn (people cancel)
  • Need to continuously provide value
  • More complex billing logic

Best for: Products that provide ongoing value and need continuous updates.

Rent-to-Own

What it is: Customer makes payments over time, then owns the product.

How it differs from subscription:

Subscription Rent-to-Own
Pay forever to keep access Pay for a fixed period, then own it
Miss a payment = lose access Miss a payment = pause progress
Never "own" the product Eventually own the product

Examples:

  • Software with payment plans
  • Equipment financing
  • "Pay in 4" options (like Klarna, Afterpay)

Pros:

  • Lower barrier to entry (smaller payments)
  • Customer feels they're building toward ownership
  • Can charge more total than one-time purchase

Cons:

  • Complex tracking (how many payments left?)
  • Risk of customers abandoning mid-way
  • Need to handle partial ownership states

Best for: Expensive products where customers want smaller payments.

Credits/Tokens

What it is: Customer buys "credits" that they spend on usage.

Credit Pricing Examples:

Package Credits Price Per Credit
Starter 100 $5 $0.050
Standard 500 $20 $0.040
Pro 1500 $50 $0.033
Enterprise 5000 $150 $0.030

Notice: Bigger packages = better value per credit (volume discount).

Pros:

  • Pay-for-what-you-use model
  • Customers feel in control
  • Works great for AI/API usage
  • Low commitment for customers to try

Cons:

  • Less predictable revenue
  • Customers may hoard credits
  • Need to track balances carefully
  • Can feel "nickel-and-diming"

Best for: AI features, API calls, anything with variable usage costs.

Choosing a Model

Hybrid Approach (Common for AI Apps):

Many apps combine models:

Component Model
Base app access Subscription ($10/mo)
AI features Credits (buy as needed)
Premium themes One-time purchase ($5 each)

Payment Providers

Stripe

What it is: The most popular payment provider for developers. Used by Shopify, Lyft, Slack, and millions of businesses.

Pricing:

Service Cost
Card payments 2.9% + $0.30 per transaction
International cards +1.5%
Subscriptions No extra fee
Payouts Free (to your bank)

Pros:

  • Excellent documentation
  • Works worldwide
  • Handles taxes (Stripe Tax)
  • Great developer tools
  • Webhooks for everything

Cons:

  • 2.9% adds up on large volumes
  • Account can be frozen for "high risk" businesses
  • Support can be slow

Best for: Most online businesses, especially SaaS and marketplaces.

Square

What it is: Payment provider known for physical point-of-sale (the card readers at stores), but also does online payments.

Pricing:

Service Cost
Online payments 2.9% + $0.30 per transaction
In-person (card reader) 2.6% + $0.10
Invoices 3.3% + $0.30

Pros:

  • Great if you also sell in-person
  • Built-in inventory management
  • Free online store builder
  • Good for small businesses

Cons:

  • Developer tools not as good as Stripe
  • Less flexible for complex billing
  • Mainly US-focused

Best for: Businesses that sell both online AND in physical stores.

PayPal

What it is: The original online payment system. Many customers already have PayPal accounts.

Pricing:

Service Cost
Standard payments 3.49% + $0.49 per transaction
PayPal Checkout 2.9% + $0.30
International +1.5%

Pros:

  • Customers trust PayPal
  • Many people already have accounts
  • Buyer protection increases trust
  • "Pay with PayPal" button is familiar

Cons:

  • Higher fees than competitors
  • Can freeze accounts unexpectedly
  • Customer service issues
  • Disputes favor buyers heavily

Best for: Adding as a secondary payment option alongside Stripe.

Paddle

What it is: A "Merchant of Record" - they handle taxes, compliance, and billing for you.

What "Merchant of Record" means:

Pricing:

Service Cost
Transactions 5% + $0.50 per transaction

Pros:

  • Handles ALL global taxes (VAT, GST, sales tax)
  • Handles compliance and legal stuff
  • One invoice to you (simple accounting)
  • Great for selling to EU (VAT is complex)

Cons:

  • Higher fees (5% vs 2.9%)
  • Less control over customer relationship
  • Paddle's name on receipts, not yours

Best for: Solo developers selling globally who don't want to deal with taxes.

LemonSqueezy

What it is: Similar to Paddle - a Merchant of Record focused on digital products.

Pricing:

Service Cost
Transactions 5% + $0.50 per transaction

Pros:

  • Beautiful checkout pages
  • Handles taxes globally
  • Built for digital products
  • Good affiliate system
  • License key generation built-in

Cons:

  • Higher fees
  • Newer company (less proven)
  • Fewer features than Stripe

Best for: Indie developers selling software, courses, or digital downloads.

Gumroad

What it is: Simple platform for selling digital products.

Pricing:

Plan Monthly Fee Transaction Fee
Free $0 10%
Creator $10/mo 5%

Pros:

  • Very simple to set up
  • Built-in audience features
  • Good for creators/artists
  • Handles taxes

Cons:

  • High fees on free plan
  • Limited customization
  • Not for complex products

Best for: Artists, writers, creators selling simple digital products.

Provider Comparison

Feature Stripe Square PayPal Paddle LemonSqueezy
Base Fee 2.9% + $0.30 2.9% + $0.30 3.49% + $0.49 5% + $0.50 5% + $0.50
Handles Taxes Optional add-on No No Yes Yes
Subscriptions Yes Yes Yes Yes Yes
Global Yes Limited Yes Yes Yes
Developer Tools Excellent Good Okay Good Good
Setup Time 1-2 hours 1 hour 30 min 1 hour 30 min
Best For SaaS, Marketplaces Retail + Online Secondary option Global sales Digital products

Decision Flowchart

Implementing Credits/Tokens

How AI Credits Work

For apps with AI features, credits let you charge for actual usage:

Credit System Design

How many credits should things cost?

Base it on YOUR costs:

Your Cost Credit Cost Your Markup
AI call costs you $0.01 Charge 10 credits If 1000 credits = $10, that's $0.10 = 10x markup
AI call costs you $0.05 Charge 50 credits Same math

Example pricing structure:

Feature Your Cost Credits Charged Your Revenue
Short AI response $0.005 5 credits $0.05
Long AI response $0.02 25 credits $0.25
AI image generation $0.04 50 credits $0.50
Document analysis $0.10 100 credits $1.00

Tracking Usage

Your database needs to track:

┌─────────────────────────────────────────────────────────────┐
│                     USER CREDITS TABLE                      │
├─────────────────────────────────────────────────────────────┤
│  user_id       │ credits_balance │ lifetime_purchased       │
│  user_123      │ 450             │ 2000                     │
│  user_456      │ 1200            │ 1500                     │
└─────────────────────────────────────────────────────────────┘

┌─────────────────────────────────────────────────────────────┐
│                   CREDIT TRANSACTIONS                       │
├─────────────────────────────────────────────────────────────┤
│  id   │ user_id   │ type     │ amount │ description        │
│  1    │ user_123  │ purchase │ +1000  │ Bought Pro pack    │
│  2    │ user_123  │ usage    │ -50    │ AI generation      │
│  3    │ user_123  │ usage    │ -25    │ AI chat            │
│  4    │ user_123  │ refund   │ +100   │ Failed generation  │
└─────────────────────────────────────────────────────────────┘

Webhooks

What Are Webhooks?

Webhooks are automatic notifications from the payment provider to your server.

Without webhooks:

With webhooks:

Common Webhook Events

Event What Happened Your Action
payment_intent.succeeded Payment completed Grant access, send receipt
payment_intent.failed Payment failed Show error, suggest retry
customer.subscription.created New subscription Create user account
customer.subscription.deleted Subscription cancelled Revoke access
invoice.paid Subscription renewed Continue access
invoice.payment_failed Renewal failed Send warning email
charge.refunded Refund issued Revoke access

Webhook Flow

Important: Always verify webhook signatures! Otherwise, anyone could fake a "payment succeeded" message.

Security Best Practices

Do's

Practice Why
Use HTTPS everywhere Encrypts payment data
Verify webhook signatures Prevents fake payment notifications
Never store card numbers Let payment provider handle it
Use payment provider's UI They handle PCI compliance
Log all transactions For disputes and debugging
Implement idempotency Prevents double-charging

Don'ts

Practice Why It's Dangerous
Build your own payment form PCI compliance nightmare
Store card numbers Huge liability if breached
Trust client-side only Users can modify amounts
Skip webhook verification Anyone can fake payments
Ignore failed payments Lost revenue, angry customers

Secure Payment Flow

Key point: Credit card numbers NEVER touch your server. They go directly to Stripe.

Tax Considerations

Why Taxes Matter

When you sell online, you might owe taxes to:

  • Your country/state
  • The customer's country/state
  • Sometimes both!

Who Handles What

Provider Type Who Handles Taxes
Stripe, Square, PayPal YOU must calculate and pay
Paddle, LemonSqueezy THEY handle it for you

Tax Complexity by Region

Region Complexity Notes
US Medium Different rules per state
EU High VAT rules, different rates per country
UK Medium VAT after Brexit
Canada Medium GST + provincial taxes
Australia Low Flat 10% GST

Solutions

  1. Use a Merchant of Record (Paddle, LemonSqueezy) - they handle everything
  2. Use Stripe Tax - Stripe calculates and collects (you still pay)
  3. Hire an accountant - for complex situations
  4. Tax software - TaxJar, Avalara

Quick Reference

┌─────────────────────────────────────────────────────────────┐
│                    PAYMENT MODELS                           │
├─────────────────────────────────────────────────────────────┤
│  One-Time:     Pay once, own forever                        │
│  Subscription: Pay monthly/yearly for access                │
│  Rent-to-Own:  Pay installments, then own                   │
│  Credits:      Buy credits, spend on usage                  │
├─────────────────────────────────────────────────────────────┤
│                    PROVIDER FEES                            │
├─────────────────────────────────────────────────────────────┤
│  Stripe:       2.9% + $0.30  (you handle taxes)             │
│  Paddle:       5% + $0.50    (they handle taxes)            │
│  Square:       2.9% + $0.30  (you handle taxes)             │
│  PayPal:       3.49% + $0.49 (you handle taxes)             │
├─────────────────────────────────────────────────────────────┤
│                    RECOMMENDATIONS                          │
├─────────────────────────────────────────────────────────────┤
│  SaaS app:          Stripe                                  │
│  Global sales:      Paddle (handles VAT)                    │
│  Physical + Online: Square                                  │
│  AI credits:        Stripe + custom tracking                │
└─────────────────────────────────────────────────────────────┘