18 Jan
2023

Three proven ways to lower your payment processing costs

Want to increase the profitability of your business? Take a closer look at your payment processing costs. Expensive payment processing costs are a common challenge for merchants of all sizes, but the good news is that there are ways to lower these costs. The best part is that when done correctly, you can reduce your payment costs without negatively affecting your revenues or growth.

Before we dive into the solutions, let’s take a closer look at what’s driving up your fees in the first place. Understanding the root of the problem is the first step to finding an effective solution.

Payment processing costs: How did it get so expensive?

Payment processing costs consist of different fees that can add up and eventually take a big chunk of your profits. Knowing the different types of fees, how they are triggered, and where they go can help you better understand your costs and identify the areas where you can save money. 

When it comes to card-based payments, it is important to differentiate between two main fee structures that are prevalent in the industry: a blended fee vs. interchange plus (also known as IC++). A blended fee is a single rate charged to the merchant, usually a percentage of total payment volume, that combines multiple fees, such as processing fees, acquiring fees, settlement fees, etc. If you have such a structure, your options are usually limited to renegotiating your pricing with the current provider or finding a cheaper one. This structure also does not provide much insight to the merchant into different components of the costs. 

Interchange++, on the other hand, is more transparent and allows merchants to observe first-hand the pricing complexity in the market that is driven by many factors such as your merchant category code (MCC), type of payment instrument, geography, etc. Our partners at Adyen have written a great article diving deeper into this topic. 

Examples of usual cost components in card payments are the following:
•Interchange fees: a percentage-based fee charged by card issuers for each transaction 
•Scheme fees: charged by card networks like Mastercard, Visa, or AMEX
•Markup fees: usually charged by the payment processor or acquirer for its services
•Gateway fees: a flat fee per transaction set by the provider that connects merchants to the acquirer of their choice
•Refund fees: charged by acquirers or payment processors for processing refunds
•Chargeback fees: fees charged by payment processors for processing chargebacks

If you'd like to dig deeper on several of these and see some specific examples, here's a great article titled Interchange in 1,000 words

These are the fees that cause your payment processing costs to be expensive. While completely eliminating all of these fees will not be possible, there are multiple ways to reduce your payment processing costs.

1. Work with multiple local acquirers

Cross-border payments are always significantly more expensive than local payments. Working with multiple local acquirers and comparing their payment processing rates allows you to take advantage of the most competitive fees available in each market. This can minimize costs and maximize your profits. 

In addition to potentially lowering your costs, there are other benefits to working with multiple acquirers, such as:
•Having a backup acquirer in place that can provide backup processing options and peace of mind if your primary acquirer experiences any issues with their performance, which happens to even the best ones 
•Every acquirer is unique and has their own advantages. For example, some acquirers may have higher acceptance rates in certain countries, while others may have higher acceptance rates with certain BINs. By identifying these combinations, merchants can increase their payment authorization rates and increase their margins

Overall, working with multiple acquirers is a proven and very effective way to reduce your payment processing fees and ensure the long-term success of your business.

Working with multiple acquirers is an excellent solution to reduce: interchange, scheme, and markup fees.

2. Enable on-us processing

On-us processing is a type of transaction processing where the transaction is processed by the (same) bank that issued the card being used in the payment rather than being channeled over the regular card network. This is common among large financial institutions, especially in the APAC and MENA regions. 

On-us processing can lower payment processing fees because the bank that issued the customer’s card also handles the transaction, and the funds do not have to be moved between banks. It also means faster settlement cycles by eliminating the need to go through the networks.

Another exciting benefit of on-us processing is that it can increase payment acceptance rates. This is because the transaction is processed within the same bank, creating a seamless and efficient flow of information between the merchant and cardholder with less dependency on additional systems.

On-us processing also allows the bank to use additional fraud detection and prevention measures such as location verification, velocity checks, and historical transaction analysis. These measures can help the bank identify and flag potentially fraudulent transactions and prevent them from being processed.

On-us processing is a great way to lower payment processing fees while reducing fraud and chargebacks and should be strongly considered if you process a high volume of transactions every month.

On-us processing is a great solution to reduce: interchange and scheme fees.

3. Introduce local APMs

As the world becomes increasingly interconnected, it’s easy to assume that using international payment processors is the most efficient and cost-effective way to handle online transactions. However, this is not always true.

Local APMs are often more cost-efficient than credit cards due to their ability to tap into lower-cost funding sources, allowing you to lower the cost per transaction and improve margins

Customers love having the option to pay with payment methods that they are familiar with. That’s why it’s no surprise that local Alternative Payment Methods (APMs) are so popular in their respective countries. For instance, GoPay is a go-to APM in Indonesia, iDeal is a top choice for shoppers in the Netherlands, and WeChat Pay is widely used in China for every purchase. According to Credit Suisse, there are now over 500 alternative payment methods across the globe. 

As an online merchant, offering these local payment options can be a game-changer. Not only can it significantly reduce your payment processing costs, but it can also lead to higher sales by reducing abandoned shopping carts.

Offering local APMs is a good option to reduce: overall payment acceptance costs even with a blended-fee structure. 

How Payrails can help

These are three proven ways to lower your payment processing costs. However, it is important to note that every business is unique, with varying acquirers, regional operations, transaction volume, and value per transaction. Therefore, a tailored approach is necessary to reduce payment processing costs efficiently.

At Payrails, we use a tailored approach and provide a high level of commitment and engagement to ensure that our merchants receive the best possible outcome. We would be happy to engage in an open dialogue if you're interested in discussing this topic further or have any questions or concerns. Feel free to send us a message anytime.

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