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In-App Purchases vs. External Payment Gateways

Revenue & Finances

Isadora Teich wrote this article

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Long before the pandemic, commerce, entertainment, and many other industries were already well on the path to going mobile.

In 2019 alone, Statista reported that there were 204 billion mobile app downloads globally. That was more than 25 times the global population at the time.

Now, it is an undeniable reality that almost everything has gone mobile. More people than ever are using apps across a wider age range. While when we talk about apps, most people think of teens following viral dance trends on TikTok, that is only a small part of the full picture.

Entire businesses are going mobile to reach more customers, but this is not a simple one-step or one-size-fits-all process.

There are numerous considerations, and a big one for any revenue-generating business that sells consumer products is how exactly to collect payments.

Let’s take a look at the main ways you can do this via app: In-App Purchases and External Payment Gateways.

Understanding Your Options

When downloading an app, you’ve likely noticed that even free apps can include in-app purchases.

While using the app, a user will encounter the option to purchase access to additional content, features, or sign up for a paid subscription.

A great example of this is a gaming app which offers free downloads for the app, but once users start playing, they can pay for things like extra clothing or special abilities for their character that enhance gameplay.

This model helps many developers and companies to make a profit, while still offering the basic app for free to attract more users.

Both Google and Apple offer in-app purchasing platforms. But there’s also external payment gateways available through third-party service providers such as Stripe, PayPal or Clover that you’ll want to consider.

Depending on your type of app or even the scenario, which method to use may not be a clear choice. In other cases, you may not have a choice at all.

That’s why we are going to explore the pros, cons and real-world applications of both.

How Do In-App Purchases Work?

The in-app purchase method is required at times for apps in the App Store and Google Play, respectively.

A built-in feature for developers to harness, it is relatively easy to implement (albeit, not as simple as using an external payment gateway, which we will get to in a sec) — connecting securely to the device-associated user account on the other end.

While it is a seamless user experience overall, the fee generated is likely not so appreciated, as both Google and Apple take pretty hefty cuts.

While this has been increasingly controversial lately, especially for Apple, it is still true. If your app makes more than a million dollars annually, both Google and Apple will collect 30% of that revenue. If your app makes less than a million dollars, they will take 15%.

This is not only for app sales; it applies to many purchases facilitated via app, with certain exceptions.

Developers can access the tools to build out in-app purchases via Storekit for iOS and the Cloud Billing API for Google.

However, in-app purchase gateways are not a necessity in every case, and there are some pretty compelling reasons to consider using external payment gateways.

When Do You Have To Use In-App Purchases?

Google and Apple provide extensive information on how to implement these features, and in what cases you must use In-App Purchases.

When you sell anything that relates to a function the app performs directly, or that solely exists within the app, you have to use In-App Purchases.

For example, if your app is a game and users can buy currency to use in the game through the app, you must use In-App Purchases.

If you have a video editing app, and users can access a limited free version, but can pay for more features or a premium version within the app, you’ll need to use In-App Purchases.

The “freemium” model is a hugely popular way that developers can use to monetize their apps, and it's estimated that about half of all apps use it. Click To Tweet

The Pros and Cons of In-App Purchases

On the back end, In-App Purchases require a lot more work from developers.

They are much more complicated in terms of coding, often requiring ongoing user support is available. Developers need to be active, and in touch with their users in order to keep them happy, after all.

However, this hard work is not for nothing.

It gives developers more chances to embrace creative marketing, and more ways to make sales and generate revenue.

It allows you to make the right offers to the right users at the right time, especially with all the updates Apple and Google have made when it comes to subscriptions.

When done correctly, this can have huge benefits for a business.

Different Rules For Physical Goods and Services

When it comes to physical goods and services, such as selling leather goods, cosmetics, or furniture, that a person would wear and use in real life, you can turn to an external payment solution, like Stripe, Braintree, Amazon Pay or Clover. All of these things exist in the real world, beyond the limitations of the app itself.

If you have a subscription-based app that only does one specific thing: for example, Hello Fresh or Netflix, then an external payment processor is likely the right choice for you.

There has been some confusion and controversy surrounding why certain apps are subject to the ‘Apple Tax,’ forced to use certain types of payment methods and others are not.

It is easy to see why.

For example, the products of Netflix do not exist physically outside of their app, right? They have not sent out physical DVDs in years.

However, Netflix and many other platforms like it are treated as “readers” for external content subscriptions.

While it is a digital subscription, it spans numerous platforms well beyond the iOS/ Android interface. This is why Netflix is not subjected to the rules about using In-App Purchases.

External Payment Gateways

External payment gateways are third-party service providers that authorize and process payments in online and brick-and-mortar stores.

Through the use of strict security protocols and encryption, transaction data is safely transferred from your app to payment processors (i.e. banks and other financial insitutions) and back.

This can be a major boon to developers and to your brand, as by leaving data security when it comes to financial data to the big dogs, it’s less likely overall for your app to have a data breach.

The process to implement an external payment gateway (as a plug and play option that’s already been created) is also less labor intensive for developers, as we mentioned before.

At the same time, remember that the big dogs are not infallible either when it comes to data breaches. Implementing third-party software within your app will always introduce an element that is outside of your control.

But, it’s hard to deny the real benefits to utilizing external payment gateways when it comes to costs upfront, and over time.

Generally, these are the main ways to implement external payment gateways:

 

Hosted Payment Gateway: Acts as a third party, requiring app users to leave, and access a separate online platform to complete a transaction. These can work well for smaller, local businesses.

 

The Pros: No financial data is stored on your app, requiring no PCI compliance and easy integration.

Cons: You don’t control a hosted gateway, and some users may not trust third-party payment systems. Additionally, redirecting users away from your app can lower conversion rates, and isn’t awesome for your brand.

 

– Direct Post: An integration method allowing users to shop without leaving your app, but you don’t have to obtain PCI compliance. Direct Post assumes the transaction’s data will be posted to a third-party payment gateway right after a customer clicks the “purchase” button. The data instantly travels to the external payment gateway and processor without being stored on your own server.

 

The Pros: Similar to an integrated payment gateway. You get the customization options and branding capabilities, without PCI DSS compliance that we’ll discuss below. The user performs all the necessary actions on one page, making it a great fit for businesses of all sizes.

Cons: You can’t guarantee that it’s 100% secure, because it’s not under your complete authority.

 

Non-Hosted (Integrated) Payment Method: Integrated via external APIs to your server. Consequently, it will require an engineering team to perform the integration. Most vendors have well-documented integration guides and API references. This is a great option for medium and large businesses that rely heavily on branding and user experience. Or, for the startups looking to compete with them.

 

The Pros: You have full control over the transactions on your app. You can customize your payment system as you wish, and tailor it to your business needs.

Cons: Maintaining the infrastructure and becoming PCI compliant in order to store users’ credit card data on your own servers. Integrating the gateway can be tricky and timely if you want to add custom functionality.

Whichever implementation method you decide on, be sure your payment gateway supports all the necessary payment methods that are popular in your specific industry, region, or country.

Some additional factors to consider when choosing a payment gateway are transaction fees, integration costs, and the physical/ digital products permission.

Which Option Is Right For You?

Ultimately, this comes down to what your app is, how it functions, and what your business offers.

If your app is a freemium app offering mobile products that exist within the context of your app, you must use In-App Purchases.

If you are selling physical goods or services via app, but the actual object or service exists in the real world, you can process payments via an external payment gateway.

However, this is not always so cut and dry. For example, in the case of Netflix as mentioned above, this can be a little bit more complicated.

If you have any questions about payment gateways, or app development in general, reach out to the Chop Dawg Team!

About ChopDawg.com: Since 2009, we have helped create 350+ next-generation apps for startups, Fortune 500s, growing businesses, and non-profits from around the globe. Think Partner, Not Agency.

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