How to reduce your payment processing costs?

Introduction

 

This paragraph is to describe how merchants could reduce their Payment Service Provider costs and – if applicable – save on acquiring processing. Before going into more detail, we must distinguish direct and indirect processing which require a different approach.

 

Payment-processing costs

 

Direct payment-processing costs: These costs relate to the costs the merchant pays to their Payment Service Provider for the actual processing and – if applicable – settlement of transactions. Examples of direct payment-processing costs:

  • transaction-processing fees
  • refund fees
  • fraud-prevention system fees
  • subscription plan fees
  • recurring payments (tokenization) fees
  • commission fees (either to be paid to PSP or acquirer)
  • Currency-conversion cost


In-direct payment-processing costs: These in-direct costs relate to the costs the merchant pays for technical integration, fraud management and exception handling. Examples of in-direct payment processing costs:

  • Account set-up fee
  • Acquirer/PSP chargeback fee
  • Chargeback-handling cost (operational costs for following up on chargebacks)
  • Fraud management (if merchant controls fraud settings)
  • Manual reviews
  • PCI DSS-related costs

 

Reducing direct payment-processing costs

 

Direct payment-processing costs can be reduced by starting to compare Payment Service Providers or acquirers and seek for the best pricing offer for the merchant's business. Especially merchants with a processing history are able to estimate the total direct costs when comparing PSPs and acquirers. Below we give a simple example of a merchant XYZ which processes 10,000 transactions of payment method A, 10,000 MasterCard and Visa transactions (250,000 euros volume) and 5,000 SEPA direct debits. Merchant XYZ request two proposals from Payment Service Provider A + B:

 

Current Provider Costs

  1. Account Set-Up Fee: 350 euros
  2. Monthly Fee Fraud Management Tool: 0 euros
  3. Transaction fee: 0.35 euros
  4. Payment Method A commission: 0.45 euros
  5. Payment Method Cards commission: 2.5%
  6. Payment Method SEPA direct debit: 0.25 euros
  7. Weekly settlement costs: 0 euros

Total costs: 350 euros + 8,750 transaction-processing costs + 4,500 euros method A + 6,250 euros method B + 1,250 euros method C = 21,100 euros

 

Proposal Provider A

  1. Account Set-Up Fee: 250 euros
  2. Monthly Fee Fraud Management Tool: 15 euros
  3. Transaction fee: 0.25 euros
  4. Payment Method A commission: 0.35 euros
  5. Payment Method Cards commission: 2%
  6. Payment Method SEPA direct debit: 0.25 euros
  7. Weekly settlement costs: 2.50 euros

Total costs: 250 euros (set-up) + 180 euros (fraud tool) + 6,250 euros transaction-processing costs + 3,500 euros method A + 5,000 euros method B + 1,250 euros method C + 130 euros settlement costs = 16,560 euros

 

Proposal Provider B

  1. Account Set-Up Fee: 0 euros
  2. Monthly Fee Fraud Management Tool: 0 euros
  3. Transaction fee: 0.35 euros
  4. Payment Method A commission: 0.45 euros
  5. Payment Method Cards commission: 1.50%
  6. Payment Method SEPA direct debit: 0.35 euros
  7. Weekly settlement costs: 15 euros

Total costs: 0 euros (set-up) + 0 euros (fraud tool) + 8,750 euros transaction-processing costs + 4,500 euros method A + 3.750 euros method B + 1,750 euros method C + 780 euros settlement costs = 19,530 euros


Based upon the above example the merchant could save 4,540 euros annually when processing through Provider A. The costs savings through Provider B would be limited (570 euros). Important to recognize:

  • in case the merchant's card volume would be bigger, it might be that the pricing proposal from provider B could be more interesting as the merchant would pay less card commission (1.50% vs 2.00%)
  • there might be costs involved for switching Payment Service Providers (new integration/development costs, new reconciliation procedures etc.) which should be taken into account as well.
  • the in-direct costs are left out of scope, whereas they could increase or further decrease total costs.

 

Reducing in-direct payment-processing costs

 

Chargebacks

Merchants should really combat chargebacks as they often result in:

  • a reversal of the transaction (money gone)
  • a loss of products (products gone)
  • additional fees to be incurred from the acquirer and or PSP.

Especially chargebacks on large ticket amounts and products with small margin could really impact bottom line results for merchants. In order to mitigate fraud and chargebacks, the merchant should really focus on the capabilities of the PSP platform (fraud tool) and fraud and chargeback prevention.


Chargeback fees and handling costs

Some acquirers and Payment Service Providers charge a fee for every chargeback that is received for a particular merchant. The fees are roughly between 5 and 35 euros per chargeback. If our merchant XYZ would receive 100 chargebacks a year, this could be a substantial cost. In case the merchant pays 35 euros per chargeback it would entail an additional cost of 3,500 euros (and only 500 euros when charged 5 euros per chargeback). For online merchants it is of great importance to know their actual chargeback number to get a better understanding of their potential cost and cost savings or increase based upon provider comparison. Important to recognize is that a Payment Service Provider can play a role in gathering data and representing chargebacks on behalf of the merchant. In those circumstances, it could be that the merchant gets billed twice for the same chargeback (through the acquirer and through the PSP).

Besides investigating cost reduction through better contractual conditions, the merchant could also further investigate the chargeback reasons and the origin of the chargeback. For instance, in case of fraud-related chargebacks, the merchant could take prevention measures (activate 3D-secure, or adjust its fraud system rules/scoring model, block specific transactions).


Manual reviews

Manual reviews of potentially card fraud payments can be quite costly and do require resources (time, people and thus money). Especially if the merchant has to have a team screening transactions, there might be some good savings opportunities by improving automated fraud checks (scrubbing) – if possible – or investigate the option to switch to another Payment Service Provider with a better fraud prevention tool. Some Payment Service Providers offer merchants the option to import processing data to see (retrospectively) which transactions would have been stopped or approved. This allows merchants to better understand the capabilities of the fraud tool and the potential decreased fraud exposure (and thereby decreasing the number of manual reviews).


PCI DSS-related costs

Especially merchants new to the game should take the PCI DSS requirements and costs into account when choosing their Payment Service Provider of choice and type of integration. Some PSPs provide easy-to-use and low-cost PCI DSS portals which help merchants to comply with the applicable standard (completing the PCI DSS questionnaire and the execution of (daily) scans). In addition to the foregoing, PSPs do offer specific integration types (API, encryption methodologies) which are aimed to de-scope the PCI DSS requirements and minimize costs.

 

European Interchange Cap: costs saving opportunities on card-processing

 

Merchants active in one of the EEA countries should be aware of the potential cost savings on their credit card-processing as both MasterCard and Visa had to cap their interchange fees at 0.30% for consumer credit cards and at 0.20% on debit card transactions. Both MasterCard and Visa interchange fees – which are a substantial part of the commission charged to merchants – have now considerably dropped throughout Europe.

Acquirers are assumed to pass on the lower interchange rates to merchants, whether pro-actively, upon merchant request or as a result of competitive pressure. Merchants using interchange plus pricing are already profiting from lower commission costs. For example, let's say that their current acquirer charges them interchange plus 0.55%. That particular merchant would pay only 0.85% commission per consumer card issued in one of the EEA countries. Merchants still charged a fixed fee (>1.5%) could maybe benefit from lower rates by comparing credit card processors.

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