Third-Party Billing

What is Third-Party Billing?

Third-party billing is the practice of outsourcing billing tasks to an external entity. This intermediary, often a specialized billing or payment processing company, manages the entire billing cycle — invoicing, payment processing, handling customer billing inquiries, and ensuring the transfer of funds to the vendor.

Having a separate company bill customers on behalf of the company is prevalent in various industries, most notably:

• Healthcare
• Telecommunications
• Insurance
• Transportation

In healthcare, for example, third-party billing is commonly used by medical practices and hospitals to manage complex billing tasks like claim submission, payment posting, and follow-up on denied claims. 

However, an outsourced solution only makes sense when the industry in question has complex billing standards, is time-consuming for the company to manage, and requires significant infrastructure to manage compliance.

Synonyms

• Indirect billing
• Mediated billing
• Outsourced billing
• Partnered billing

How Third-Party Billing Works

In a business transaction involving a third-party billing provider, the process typically follows these steps:

1. Sale of product or service. Company A (the seller) provides a product or service to a customer. Instead of directly billing the customer, Company A outsources this task to Company B (the third-party billing service).
2. Billing through the third party. Company A provides Company B with the necessary details of the transaction, including the customer’s information, the product or service provided, the amount to be billed, and any terms and conditions related to the payment.
3. Invoicing. Company B generates the invoice based on the information provided by Company A. This invoice includes all relevant details, including an itemized list, the amount due, payment due date, and acceptable payment methods. Company B then sends this invoice to the customer on behalf of Company A​.
4. Payment processing. The customer receives the invoice and makes the payment to Company B. The payment can be processed through various methods — credit cards, bank transfers, or other electronic payment systems. (e.g., through a customer portal). Company B manages the entire payment process, ensuring that the payment is correctly processed and recorded​.
5. Payment collection and remittance. After collecting the payment, Company B deducts its service fees and any other agreed-upon charges. The remaining amount is then remitted to Company A. This remittance can be done on a regular schedule (e.g., daily, weekly, monthly) or as soon as the payment is received, depending on the agreement between Company A and Company B​​.
6. Reporting and reconciliation. Company B provides detailed reports to Company A, including information about the invoices sent, payments received, any outstanding amounts, and service fees deducted. Company A keeps track of its revenue and ensures accurate revenue recognition, financial reporting, and revenue reconciliation (the billing service cannot handle these tasks).

Challenges with Third-Party Billing

While it’s a great way to offload non-core tasks, third-party billing isn’t without its challenges. It’s essential to understand how it works and the potential risks involved before deciding whether or not to use a third-party billing service.

Multicurrency billing

As businesses expand globally, managing multiple currencies and exchange rates is complicated. On your behalf, the provider has to deal with multiple payment preferences and financial infrastructures across different regions.

Billing internationally also involves adhering to different tax regulations and accounting standards (e.g., ASC 606 vs. IFRS 15). Effective billing systems need to support multi-currency transactions and ensure compliance with international tax laws to streamline global operations.

Customized billing needs

Every customer requires a unique billing solution based on their specific needs, product selection, and pricing model. This diversity can complicate the billing process, necessitating flexible and scalable billing systems that can handle various pricing strategies, product configurations, and customer requirements.

While some companies, like SaaS providers and B2B manufacturers, might only have a few different items in their product catalog, these aren’t usually the ones using third-party vendors for billing. Telecom, healthcare, and transportation companies have complicated pricing models with multiple products, price tiers, and discounts to choose from. And most telecoms also have usage-based pricing.

Integrating multiple systems

A robust billing system should integrate seamlessly with other business tools, including CRM, ERP, and ecommerce platforms. Lack of integration creates inefficiencies and errors. Not to mention, it makes it impossible to get a clear view of the customer’s interactions with your business across systems.

When using third-party billing, the integration work falls on the company. They need a custom integration solution to connect the third-party billing system and their existing tools, which can be time-consuming and costly unless they have enterprise-level software.

Limited control over billing workflows

Outsourcing billing operations means relinquishing some control over the billing process, which is a major concern for businesses that prefer direct oversight​. If you’re a business that prides itself on providing excellent customer service, you may have to let go of some customization and personalization in the billing process when using partnered billing.

Higher transaction fees

There are almost always additional fees and charges associated with third-party billing services, which you have to consider.

These include:

• A setup fee
• Service fees or transaction fees
• Minimum monthly/annual fees
• Fees for chargebacks and refunds
• Payment processing fees (e.g., credit card, bank transfer)

While the convenience of using a third-party billing service may offset these costs, you have to consider the fact that billing customers yourself only entails (a) the monthly cost of your billing software and (b) merchant fees (which are normally between 1% and 2.9%).

Dependency on your billing provider

Outsourcing your financial operations to a third party means technical issues or service interruptions on their end will directly impact your business’s operations (and reputation). It also means you rely entirely on the competency of their customer service and collections teams to handle follow-ups for late payments, procedures for delinquency, and resolution for customers’ billing issues.

In other words, from a billing perspective, the ability to control and improve the customer experience is completely out of your hands.

Customer resistance

81% of customers prefer personalized experiences when dealing with companies, and third-party financial transactions are anything but that. Most of your customer base will prefer working directly with your company on billing and payment issues. And there’s nothing more frustrating than being told to contact another company for something that has to do with their money.

Communication gaps

Whether it’s communication with your customers or with your team directly, there’s no guarantee that a third-party billing provider will have the same level of transparency and communication standards as your company. Miscommunication leads to errors, severe customer dissatisfaction, and margin leakage.

Why Businesses Use Third-Party Billing

While there are significant drawbacks to offloading such a critical function to a third party, there are plenty of companies that choose to do so anyway. And sometimes, it’s the right call.

The main reason someone would opt for indirect billing is if their industry has complicated pricing structures or regulations that require specialized knowledge to navigate. Healthcare and insurance are perfect examples of this — healthcare/insurance billing companies already have the infrastructure and specialized expertise that would otherwise cost millions to build out internally.

It’s also worth mentioning that, in these cases, the customer experience isn’t usually compromised because (a) customers somewhat expect to deal with a third party, and (b) the third party’s niche expertise enables them to handle billing and payment issues more efficiently.

Benefits of Third-Party Billing

Companies in industries that aren’t heavily regulated, those that don’t have a complex product catalog, and those using recurring billing will find indirect billing needlessly complicated and expensive. But it can be a tremendous advantage for the right type of organization.

Streamlined processes

Third-party billing services working in one niche (e.g., healthcare, insurance) have billing processes tailored to that industry or niche. This means you’ll get a billing process optimized for efficiency and accuracy, as well as timely payments.

Reduced errors

While your internal billing team probably has hundreds of tasks to deal with, these are entire companies dedicated specifically to billing. The result? Fewer mistakes, fewer inconsistencies, and less time spent auditing for errors.

Faster payments

When a third party handles AR collections and dunning on your behalf, they’ll have more resources to work with. They already have dedicated AR specialists explicitly trained for your industry’s procedures, meaning faster payments and fewer delinquencies for your business. And you don’t even have to lift a finger.

Ensures billing compliance

Everything from indirect tax compliance for sales to specific billing regulations (e.g., HIPAA for healthcare) has to be considered when billing customers. Offloading this responsibility to a third party means less risk of noncompliance, hefty fines, and legal repercussions if they’re highly specialized in your industry.

Improved customer experience

Customers have the benefit of dealing with a provider who’s well-versed in their unique billing needs and procedures. In general, they’ll have a smoother, more personalized experience compared to dealing with an internal team that may not be as knowledgeable, experienced, or prepared.

Third-Party Billing Solutions

There are several different solutions available for third-party billing, each with its own pros and cons.

Some of the most common options include:

Merchant processors

Merchant processors are the most basic type of third-party billing provider. These companies handle credit card processing, including authorization and settlement services.

Billing service providers

Billing service providers take care of all aspects of billing, from invoice generation and payment processes to dispute management. They may also offer additional services like analytics, reporting, and personalized customer portals.

Payment gateways

Online payment gateways facilitate web-based transactions by allowing businesses to accept payments via their website or online platform. Popular options include Stripe and PayPal, which provide secure and quick payment processing, making them perfect for businesses with online sales.

Point-of-sale (POS) systems

POS systems are used for in-person transactions and typically involve a terminal card reader. These systems are common in retail and hospitality industries, providing a comprehensive solution for managing sales, inventory, and customer data. Examples include Square POS and Shopify POS.

Healthcare billing solutions

In the healthcare industry, third-party billing providers manage the entire revenue cycle, including patient check-ins, coding services, claim submissions, and payment reconciliations. These solutions help healthcare providers focus on patient care while ensuring accurate and compliant billing. Examples include medical billing services offered by companies like HCMS and Kareo.

Third-party logistics (3PL) billing

3PL billing solutions cater to logistics and transportation companies, managing billing for services like shipping, warehousing, and distribution. These solutions handle complex billing requirements and ensure accurate invoicing across different logistics operations. Companies like AltexSoft offer such specialized billing solutions.

Billing and subscription management platforms

Billing and subscription management platforms (like DealHub) are the best way to future-proof complex billing. They’re more of an alternative to third-party billing, since they’re designed to be used by businesses themselves. These platforms offer advanced billing capabilities like usage-based pricing, tiered subscriptions, and automated invoicing.

With a billing and/or subscription management platform, you can:

• Automatically generate invoices and update them according to changes in pricing or subscriptions
• Offer flexible payment options, including credit card, ACH, wire transfers, etc.
• Track billing data and performance with advanced analytics and reporting features
• Easily scale your billing processes as your business grows and evolves
• Integrate directly into your other business systems, including CPQ, CRM, ERP, and accounting software for 100% streamlined operations
• Control the entire billing process from start to finish while minimizing overhead
• Manage and improve the customer experience
• Automate revenue recognition and reporting processes

It also means your business can keep more of the revenue it earns by avoiding the costs and fees associated with third-party billing providers. Plus, you have full control over your customer data and the security measures in place to protect it.

People Also Ask