12 Ways To Optimize Your Payment Processing Costs
Hi there!
Many consider 2024 to be a second year of efficiency. What can you do to be more efficient than reducing your payment processing costs? This week in the Payments Weekly I outlined 12 methods to reduce processing costs through partnerships or new payment capabilities.
1. Review all items in your bill
Stripe, Adyen, Braintree, Checkout.com, and other payment providers offer additional payment services. A single provider can offer solutions for invoicing, anti-fraud, payouts, and many other auxiliary payment services.
These services come with a cost. Look at your bill and identify if you pay for services you don't use or if you are paying too much.
2. Consider interchange+
Image source: Adyen.com
There are two models of how payment service providers charge for their services: blended or interchange+.
In the blended model, the payment service provider takes on all the costs and charges a flat price per transaction. For example, Stripe's blended rate is 2.9% + 30 cents.
In the interchange+ model provider will transfer all the transaction costs to you and add their fee. The interchange+ model is more transparent and generally significantly cheaper. Providers often offer the Interchange+ model to merchants with certain existing processing volume.
3. Receive new offers
Now might be a good time to explore what other payment providers can offer. You can quickly receive offers from multiple payment providers to compare how good is your existing contract.
Keep in mind, that there are numerous payment fees, and payment providers have different pricing structures. It's important to thoroughly review all the fees when comparing offers.
4. Enable multiple vendors
Consider enabling multiple payment providers. There are different strategies for how a multi-vendor system can work to your benefit. It could be more beneficial to route different transactions to specific providers based on transaction amount, country, payment method, and customer segment.
To simplify the process of implementing multiple gateways, consider integrating through a payment vault or using payment orchestration platforms such as Spreedly, Gr4vy, VGS, and others.
5. Consider exclusivity
While it is possible to work with multiple payment providers simultaneously, some payment providers prefer exclusive relationships. If you process payments with one provider exclusively, you may be eligible for significant discounts. There are usually no restrictions on using backup providers or providers for specific payment methods.
6. Expand partnership
If you operate a marketplace or a software platform, you can explore various partnership and revenue-sharing models. Under this model, you will receive compensation for generating more business for your payment provider.
7. Enable card network incentives
Some card schemes offer incentives in the form of discounts. Adopting new technologies fast can help you reduce interchange. Contact your payment provider and ask for more possibilities to adopt new technologies.
8. Enable alternative payment methods
If you process high-amount transactions consider enabling payment methods with lower fees like bank transfers, ACH, SEPA, or payment vouchers.
Some new providers can help you enable bank transfers with a 21st-century customer experience like volt.io, Trustly, or Link.
9. Update your technical integration
Please ensure that you provide all the necessary information to your payment provider. The interchange fee may be lower if the issuing bank receives additional information about the customer. For example, to qualify for a Level-2 data discount, you are required to provide the zip code along with other supplementary information.
10. Enable authorize and capture
In the e-commerce industry, it's common for orders to be canceled. If you accept payment at the time the order is placed, you pay processing fees for both the payment and any subsequent refund.
One way to mitigate these costs is to separate the authorization and capture steps. You can authorize the payment when the order is placed but only capture the funds when the order is shipped. This means that if an order is canceled, you would simply cancel the authorization, incurring a lower cost compared to processing a refund, which involves higher fees.
11. Combine small payments
If your business accepts micro-payments (payments $1, $2), you may be incurring significant fees per transaction. Most payment processing companies charge both a percentage of the transaction amount and a fixed fee. For instance, if you pay 2.9% and a 30-cent fee on a $2 transaction, the fees would amount to 36 cents, which is a substantial portion of the payment.
There are various techniques to mitigate fees for micro-payments, such as offering packages of items (e.g., a pack of 10 for $20) or providing a wallet feature that allows customers to top up their accounts with a larger preset amount.
12. Enable local acquiring
When selling to customers located outside of your business location, you'll likely be processing cross-border transactions. There are several strategies you can use to minimize the fees associated with international payments:
Selling in the local currency can help you avoid currency conversion fees.
Accepting payments through a local business entity allows for domestic transactions without incurring cross-border fees.
Feel free to use this post as a starting point for creating your processing fee optimization checklist and let me know about optimization methods I didn't include.