8 ways to lower payment processing costs

Processing fees are an unavoidable part of the payment process, but they can seriously eat into profits. Card processing fees alone range from 0.6% to 3.30% – and that’s just the baseline. Add currency conversion fees, chargeback fees or compliance fees on top of that, and you see how costly payment processing can be for enterprise merchants.

Though you can’t do away with all types of fees, there are ways of lowering some of the costs associated with transaction processing and to boost your profits in the process. In this article you will learn about the different types of payment processing fees and what influences them. Then we will introduce 8 methods for lowering the costs associated with payment processing.

What fees are involved in payment processing?

Considering the various stakeholders that are involved in the payment processing process, it nearly goes without saying that fees and other costs will arise as part of the transaction process. Not all transaction fees are created equal, however, and the type of fee and its amount can vary depending on the type of transaction, the payment processor and the relationship a merchant has with its processors or other payment partners. Below are some of the most common fees that merchants encounter during card payment processing.

Gateway fees

Gateway fees are charged to the merchant by the payment service provider or gateway for transmitting payment information between all involved parties during the transaction process. Gateway fees are usually charged on a per-transaction basis and have a minimum commitment amount, which enterprise clients can negotiate before the partnership begins. 

Acquirer fees

Acquirer fees are what the payment service provider (PSP) charges to the merchant for providing them the acquiring service during the transaction process. Also known as acquirer markup fees, these are usually a percentage of the entire transaction value. For example, Stripe charges between 1.5% and 1.9% for cards from the European Economic Area, 2.5% for UK cards, and 3.25% for international cards.

Scheme fees or network fees

Network fees or scheme fees, as the name suggests, are the fees that card schemes like MasterCard, Visa or American Express charge to the acquirer who then passes them on to the merchant so that they can accept these cards for payment. Also known as assessment fees, scheme fees have a fixed component and a variable component that can change based on various reasons, like card type. They are usually charged per month and average around 0.14%. 

Interchange fees

Interchange fees are the fees that are being paid by the acquiring bank (the merchant’s financial institution) to the issuer (the cardholder’s financial institution). The acquirer passes these fees on to the merchant. Also known as an interchange reimbursement fee or interchange rate, the interchange fees are determined by a number of different factors, like regional and the card scheme, and can range on average between 1.15% and 3.30%. In the EU interchange fees are capped at 0.2% for debit cards and 0.3% for credit cards. 

Currency conversion fees

Also known as the Forex markup fee, this is charged by the card network if a transaction is made internationally, aka cross border, and involves converting a foreign currency, so when the payment currency is not the same as the currency in the acquiring license. The average range for this fee is 1-3% of the total converted amount.

Refund fees

A refund is initiated if a customer requests it directly from the merchant, usually because they are unhappy with the product or service that they have received. If a refund is issued, then the acquiring bank or the payment processor might charge a refund fee for processing the returned funds. 

Chargeback fees

A chargeback is when the customer contacts the bank, and not the merchant, for a return of their payment. This usually happens if the cardholder is disputing the payment if they claim it is invalid or unauthorized. This has a different classification for the processor and therefore requires a different fee. Stripe charges $15 per chargeback and states that other processors can charge between $50 and $100, although we have found that between €3-30 is the most normal range. Chargeback fees are charged to the merchant regardless of the outcome of the dispute and should therefore be mitigated – which can be difficult, considering that chargebacks are often used as a way to fraudulently reclaim money. Excessive fraud can also incur penalties from the card scheme and can even result in the suspension of processing services.

What factors influence payment processing fees?

The exact structure and amount of payment processing fees depends largely on the processor or payment gateway and can be influenced by several factors. This includes the country where the transaction takes place, the transaction type, the payment method that is used, the card network and more. Some of these factors can be influenced in order to lower your overall payment processing fees, however others are unchangeable.

Merchant Category Code (MCC): The MCC is a four-digit number that identifies what kind of goods or services a merchant sells and this is different for every card scheme. This number can influence the interchange fee, as lines of business that are considered “riskier” are charged higher fees, whereas lower risk businesses, like charities or utilities, are considered lower risk.

Location: Where the transaction takes place can also have an effect on the cost of your fees. Different countries and regions have higher fees than others. For instance, EU card fees are lower than in the US due to local regulations. 

Then it also matters if the transaction is local or cross-border. International and cross-border transactions incur higher fees than local domestic transactions, most often because there is a currency conversion involved, but also because there are different pricing standards in different regions.

‍Card network: Every card network charges different fees depending on the type of transaction or the customer. Visa, MasterCard, American Express etc. all have a different fee scheme which will affect interchange rates. Visa’s average interchange rate is 1.15% to 2.40% plus five to ten cents, while Mastercard’s is 1.15% to 2.50% plus five to ten cents. American Express has some of the highest rates, starting at 1.43% to 3.30% plus ten cents.

‍Online vs. in-store: Another way that risk is calculated is if the card is present or not in a transaction. Card-present (CP) transactions are considered lower risk and therefore incur lower interchange fees than card-not-present (CNP) transactions.

‍Credit vs. debit: Debit cards have lower interchange fees than credit cards because with debit cards, the payment is immediate and therefore considered lower risk than credit cards, where the payment is deferred and has a risk of default. The card category, e.g. platinum, gold or titanium, can also be an influencing factor. Fees are typically higher in more premium card segments.

‍Transaction volume: Sometimes processors calculate fees not on the payment method but on the transaction volume. For global merchants with a high transaction volume, this is more economically friendly as the processing fees aren’t charged per each single transaction, but instead on past or predicted monthly transaction volumes. This doesn’t apply to scheme and interchange fees, however.

8 ways to lower your payment processing costs

Though most fee rates are constant and can’t be changed unless through direct negotiation with your payment process, there are strategies you can implement in order to always take advantage of the best conditions for payment processing. This means that you can actively change things in your payment set-up so that you can get the lowest or most favorable fee rates available for each transaction. 

Here are 8 strategies that you can use to lower your payment processing costs.

1. Work with multiple payment service providers (PSPs)

If you’re a large enterprise merchant, then working with several payment service providers makes sense for multiple reasons: 

Choose optimal payment routes & get better pricing

By having multiple processors at your disposal, you can route your payments in such a way that you get the best rates, depending on factors like geography, payment method and transaction type. 

For example, in Canada, Adyen charges C$0.13 plus around 2% in interchange fees for a Mastercard transaction while Stripe charges C$0.30 plus 2.9%. But this can vary from country to country and from region to region. Some processors have higher acceptance rates in certain countries while others may have higher acceptance rates with certain BINs.

By identifying these combinations, merchants can route payments in a way that gets the lowest processing fees possible. It’s recommended to connect with a local acquirer whenever possible, as they usually provide the best rates for local transactions.

Negotiation leverage

When you have multiple payment processors integrated, you gain negotiation leverage in order to tackle gateway, acquirer, refund and chargeback fees. When you are locked in with one PSP then you don’t have a lot of room to negotiate your fees. But by comparing and contrasting your options and bringing this information to the negotiating table, you might be able to reduce your fees with one or more of the PSPs you’re working with.

2. Introduce local alternative payment methods (APMs)

As we analyzed earlier, certain payment methods incur either higher or lower fees depending on the processor, even if their flat rate stays the same. Usually payment methods that are strong in a certain market have the lowest rates since they have multiple funding sources.  For example, when Adyen is processing in Indonesia, it’s cheaper to use DOKU Wallet ($0.13 + 2.50%) than it is to use GoPay ($0.13 + 4.50%). In Germany, using a girocard or SEPA direct debit are among the cheapest and most commonly used payment methods. Bank transfers can also be a more cost effective payment method in local markets, especially for enterprise merchants that could benefit from a fixed fee price.

Using APMs also come without fraud liability, meaning that merchants can reduce the fraud prevention and chargeback fees. Not only does introducing local alternative payment methods help merchants to potentially lower processing fees, it can also have a positive impact on your payment success rate. It has been reported that adding a variety of payment methods can boost conversion rates by as much as 30%.

3. Enable local acquiring and on-us processing

Having local acquirers is very cost efficient for merchants, because having a local entity will allow them to enable on-us processing. On-us processing is when a transaction is processed by the same bank that issued the card being used in the payment. So the issuing bank and acquiring bank are the same.

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. Basically, if fewer parties are involved, then fewer fees arise. It also means faster settlement cycles by eliminating the need to go through other networks.

Merchants can enable on-us processing by leveraging a payment orchestration platform that works with multiple PSPs and multiple acquirers. A payment orchestration platform like Payrails, for instance, uses BIN-based routing, in which the issuer bank and country of the card are identified and then the payment is routed to the PSP that works with that acquirer.

4. Improve your fraud prevention set-up

Payment fraud can occur through a variety of channels, including through disputes and chargebacks. Since merchants are charged chargeback fees if a payment is disputed regardless if the dispute is won or lost, merchants should do their best to mitigate the likelihood of these types of fraud, as the fees and the costs of lost revenue do add up: Chargeback fraud is expensive: A recent report found that more than a quarter of global merchants lose $5 million a year or more to transaction disputes..

One way is to implement advanced AI or machine learning based fraud detection tools like Ravelin, Forter or Sift to help detect fraud before the payment authorization stage, so before many of the fees occur. Another way is to use companies like Ethoca that help merchants implement post-payment fraud prevention strategies and perform proactive refunds on guaranteed fraud cases to avoid having to pay the chargeback fees.

5. Negotiate with your payment service providers

If you maintain a good relationship with your payment processors, you might be able to negotiate lower fees, especially if you are an enterprise merchant with a high transaction volume or a unique business model. If you’ve been in business for a while and have low instances of fraud, chargebacks or refunds, processors might be more willing to enter such a negotiation. And if you’re considering adding any new processors, always do your research and negotiate with them before entering a contract.

6. Verify that your MCC is correct

Your merchant category code (MCC) determines which fee structure is applied to your business. Some business categories receive more favorable rates from card schemes, so verify that you are in fact in the correct category.

7. Delayed capture & void authorization

Acquirer, scheme and interchange fees occur when the funds for a transaction are taken from the cardholder’s account, aka they are captured. If a merchant is experiencing a high refund ratio and therefore increased refund fees, then they can use delayed capture and void authorization in order to decrease the refund fees.

Delayed capture means that merchants can authorize payments without actually deducting money from the cardholder’s account. This delay usually lasts 7 to 28 days. Voiding an authorization is cheaper than issuing a refund - scheme fees are charged but not to the full amount. So merchants should look when the most refunds occur, implement delayed capture instead, and void the authorization in case that transaction results in a refund.

8. Regularly review your transaction history

Data is one of the best defenses against high processing fees. Regularly review your transaction histories in your PSP reports to better understand the conditions surrounding your transactions. Look out for any trends that might be contributing to high costs – are there more refunds than usual? Is there a preferred payment method that incurs higher fees? A payment analytics tool can further help you to compare which of your processors is performing under the best economic conditions and where there might be room for improvement.

Lower your payment processing fees with Payrails

Payrails helps merchants to reduce payment processing fees and other transaction costs by offering products that can implement all of the strategies mentioned above. We’ve seen our customers lower their payment processing fees by up to 30% with our solutions.

Payment routing

‍A key feature of the Payrails operating system is intelligent payment routing, which automatically sends payments along the most cost-efficient route. Combining payment routing and payment rails, Payrails sends payments to the most appropriate partner or channel according to criteria predefined along with the merchant, like processing fees, location, transaction value, risk factors and more.

Our intelligent payment routing helps you to specifically tackle processor fees in that it will direct transactions to the processor with the lowest rate per transaction, per region or per payment method. Additionally, since payment routing also connects you to local processors, you can decrease the costs related to cross-border transactions. 

Payment analytics

Payrails’ unified payment analytics tool gives merchants an additional edge when it comes to lowering their payment processing costs. Capable of consolidating reports from 30+ different payment processors and gateways and generating reports on 20+ key metrics, our unified analytics tool provides you with actionable insights that you can use to make data-driven decisions. Which processors have the highest costs in the Middle East? Which has the highest authorization rates and why? Which payment methods get the best rates? Leverage the answers to these questions to optimize your payment costs.

Fraud prevention

Payrails offers 3DS security checks and a fraud prevention set-up that can help you minimize the risk of payment fraud and failed payments, and therefore help you save on refund and chargeback fees. Our PCI Level 1 token vault leverages innovative network tokenization technology to reduce fraudulent activity and keep payment details safe.

Team of payment experts

Leverage the hands-on expertise of a team that has been working in payment processing for decades and has supported merchants to process high transaction volumes in 100+ countries. We can help you create a cost-effective and efficient payment set-up for your business to be executed in the short, mid and long term.

Contact Payrails today

Every business is unique, with varying acquirers, regional operations and transaction volumes, just to name a few. Payrails creates custom payment strategies tailored to each merchant so that they receive the best possible results. 

Discover your options for lowering processing fees by getting in touch with our team today.