The Big Cost of High Payment Processing Fees
Payment processing fees are simply a part of life for every merchant that accepts credit card transactions. But as an independent software vendor, you have a role to play in making sure those processing fees are appropriate for each merchant you manage.
It’s likely that some of the processing fees your merchants are paying are too high.
The question is, how can you know for sure? And how can you optimize your payment processing setup so you can lower these fees, make your existing merchants happier, and attract new merchants to your business?
After nearly 10 years in the payments space, I’ve helped countless partners and ISVs navigate this tricky issue. I’d like to walk you through some of the factors that impact your payment processing fees, and share some strategies you can use to optimize these fees for your merchants.
Signs That Your Processing Fees Are Too High
The bad news is that multiple factors will go into how an issuing bank sets the interchange fee and assessment fee for a merchant – and not all those factors are within your control. However, the good news is that there are certain tell-tale red flags that can highlight potential problems. Spot these red flags, and you can begin to craft a better solution.
Processing Fees Are Among Your Top Three Expenses
“For sure, processing fees will represent a sizable line item in your profit & loss statement,” says longtime partner and payments guru Sarah Adams, SVP of Partner Development at ISVPay. “But these fees shouldn’t be one of your largest expenses. If they’re a top three expense on your P&L, take this as a massive signal that your payment processing setup is not configured optimally.”
Taking advantage of even a few opportunities to restructure your merchant accounts may open you up to significant savings that you can either pass on to your merchants or retain as an immediate improvement to your own bottom line.
Merchants Processing Magnetic Swipe Transactions
Many merchants aren’t aware that the interchange fees for magnetic swipe transactions can be as much as 0.3% higher than fees for chip-enabled transactions. The fee can be even lower for contactless payments.
If your merchants are forcing their customers to swipe their cards, the fees they’re paying may be higher than necessary.
Merchants Processing CNP Transactions
Card-not-present (CNP) transactions – which includes any situation in which the customer does not physically present the card to the merchant – are incredibly popular with consumers, but also highly susceptible to fraud. In fact, as the popularity of eCommerce continues to skyrocket, CNP fraud is expected to grow 14% by 2023.
Because the risk of fraud increases liability for the issuing bank, they pass this risk on to the merchant in the form of higher interchange fees. To optimize these fees and safeguard their margins, ISVs should take the time to clearly understand how their merchants plan to accept unattended and self-serve payments, so they can make sure the payment processing account is set up correctly. Guiding merchants to CNP fraud solutions, such as AVS or 3DS, can also help lower the interchange rate (more on that below).
Merchants Growing Rapidly or Selling at Scale
Many ISVs connect with a payment facilitator (“PayFac”) to allow merchants more flexibility to offer quick and easy payment options. Often, ISVs start out with a payment facilitator that caters to smaller merchants, due to ease of integration and transparent up-front pricing. For example, Stripe falls into this category.
The processing fees for PayFacs like Stripe are typically more expensive, but the benefits for small merchants can outweigh these costs – at first. But as the merchant grows and processes higher transaction volumes or begins to operate in non-standard environments (such as unattended), those “manageable” processing fees start to increase exponentially.
The same applies to your enterprise merchants. The high per-transaction fees of PayFacs like Stripe can be untenable for companies with large transaction volumes.
ISVs working with fast-growing businesses or enterprise-level merchants are likely better off working with a PayFac solution that is more scalable and flexible.
What You Don’t Know About Stripe Can Cost You
“While Stripe is a great option for many businesses and may seem like the best option on paper when you’re selecting a PayFac integration,” says Sarah Adams, SVP of Partner Development at ISVPay, “ISVs need to think strategically and choose one that scales for growth and will be most cost-effective in the long term.”
Stripe is a great PayFac for small merchants when they first launch their businesses because it’s so easy to use. Merchants simply plug-and-play and only pay fees when they begin processing payments.
But many ISVs and merchants have learned the hard way that Stripe is not ideal for all businesses. Be aware that if your merchants fit any of these criteria, Stripe might be overly expensive:
- Businesses with low average tickets (less than $15 per transaction)
- Businesses that accept CNP payments
- Businesses that accept unattended payments
- Businesses that operate at enterprise-scale – or that are quickly growing to enterprise scale
Lower Processing Fees Create More Opportunity for ISVs
As an ISV operating in an extremely competitive landscape, any opportunity to reduce your processing fees can make you more attractive to the merchants you want to attract. That means more business for you and higher satisfaction and loyalty for your clients.
Here’s what can happen when you lower your payment processing fees.
You Save Merchants Thousands of Dollars
When ISVs optimize payment processing for a merchant, they can reduce the merchant’s processing fees by a fraction of a percent for enterprise merchants and up to 5% for small business merchants.
The impact for the merchant in either scenario is immediate and significant.
Even a fraction of a percent reduction in processing fees for an enterprise merchant can translate to tens of thousands of dollars in savings every month. Imagine including that in your sales pitch!
You Attract More Clients
A transparent, fair, and optimized fee structure is a differentiator when you’re trying to bring in new merchant clients. Not only does it create a greater sense of trust, it also sets up the opportunity for revenue sharing that is on the table and fair for all parties involved.
You Give Merchants a Reason to Be Loyal
If your merchants know exactly what they’re paying for processing fees, they will likely be more open to talking about revenue sharing. What they see on their statement is what they expect to see. Given how often merchants have to deal with hidden fees, this transparency will be a welcome change.
You Increase Your Margin as a Payment Facilitator
ISVs enable payment processing for their merchants’ clients either through referral to a payment processor or by acting as a payment facilitator. The latter option involves more work for the ISV, but it also brings in more profit.
In this scenario, the ISV refers the merchant to a payment processor with pricing based on its portfolios. The merchant has their own account, giving the ISV limited control over potential revenue sharing and fees.
In this scenario, the ISV is the merchant of record with the payment processor – they hold the merchant account. ISVs can then negotiate a lower rate and either pass that savings along to their merchant clients or mark up the cost and boost their profit margin.
A good example is how Uber manages customer payments: When a passenger rides in an Uber driver’s car, the passenger doesn’t pay the driver directly – they pay Uber and Uber pays the driver. Uber marks up the cost they charge to passengers, which gives Uber a profit margin on every ride.
In the same way, ISVs can leverage their large transaction volumes with payment processors and secure lower fees, while charging merchants a higher – but still transparent – flat rate.
Strategies to Reduce Payment Processing Fees
Software vendors are often surprised to find out they’ve set themselves up to pay more in processing fees simply because they haven’t optimized their solution to meet their clients’ needs. Here are some proven strategies to reduce fees – in many cases, significantly so.
Optimize Merchant Accounts
Improper account setup is a common problem. Take Minute Key, for example.
The company operates 7,500 kiosks in various locations across the country. Their previous payment gateway provider had set up a merchant ID for each individual kiosk, which would make sense… except the company was paying a flat fee based on the number of merchant IDs, which was costing the company upwards of $700,000 per year.
This is where the right payments partner can provide valuable insights. Minute Key approached us for help, and we immediately established a single merchant ID for Minute Key with individual gateway IDs for each kiosk. As a result, Minute Key quickly lowered their overall fees with just that one simple change.
Minimize Per-Transaction Fees With Batch Payments
How merchants batch their payments can also impact the processing fees they pay. Consider what happens for merchants processing many small transactions, such as in a laundromat. If the merchant is paying a per-transaction fee, it’s better for the merchant to batch five $1 transactions rather than process each of the five $1 transactions individually. Even if the per-transaction cost is low, at scale these fees will add up.
Where ISVs can reduce those fees is by giving merchants the option to leave microtransactions open until the total reaches a threshold – let’s say, $5 – and then batch the transactions. This simple change will help the merchant immediately save on their processing fees.
One caveat: Banks typically expect to see settlement within 24 hours of accepting payment, and they charge a higher fee for transactions that stay open longer. Therefore, be mindful of holding transactions open only for a short amount of time.
Incorporate Fraud Protection
Last but certainly not least, ISVs can reduce interchange fees by including fraud protection within their solution.
We pointed out earlier that CNP transactions have higher interchange fees because they are so susceptible to fraud. An easy step merchants can take to reduce their interchange costs is to increase fraud protection.
At the top of the list are AVS address verification, 3D Secure processing, and CVV verification; all of these tactics will reduce interchange costs in eCommerce environments.
Choose a Payment Processing Gateway That Will Grow With You
When it comes to payment processing fees, the key is to be aware of what you’re paying and to find a payment gateway partner with the expertise to find those savings for you.
At Worldnet Payments, we understand self-service and unattended payment environments, and we know how to optimize payment processing setup across every channel for scalability and profitability. We’re certified for more hardware options than most gateways on the market, and our solution is completely customizable for any type of merchant setup.
Contact us today to verify your setup and discuss options with a payment expert trained on minimizing your payment processing fees and maximizing your revenue.