What is the cost of payments?

For us, PayOnline accepting payments online is the basis of business. But for our customers, this process is costly. The material of the top manager of the largest Western e-commerce company, the translation of which we publish below, contains practical advice for entrepreneurs on how to optimize expenses when accepting payments.

The cost of payments is a mysterious and slippery topic. On the net you rarely find any references to it, let alone clear definitions or explanations.

It is like a two-edged sword. For one side it is an inevitable evil, for the other it is a serious income generator. Regardless of which camp you belong to, it is always useful to learn about the methods of qualitative and quantitative assessment of costs. This is one of those indicators that are important to monitor. And since improving profitability is not something that you can calmly brush aside, and the work itself in this direction, moreover, can take a lot of time, planning ahead and frequent analysis of the work done here are simply necessary.

The “value” essentially refers to commission charges in favor of the processing company, the payment network and the issuer of payment cards, providing your business with the ability to accept payments. As part of this material, we will focus only on accepting payments online. And although this definition does not seem to need clarification, in practice it involves a lot of difficulties and pitfalls. Here the devil is exactly in the details.
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The first step is to understand the costs, or, more precisely, the environment under which the costs associated with payments are formed. A clear understanding of what factors are under your control will save time and save you from disappointment at later stages.

If we are talking about a large organization, try to understand in more detail the external and internal cost drivers. Where do the costs come from? How are they distributed in relation to your product line, structural units of the company and their divisions? Don't let the numbers fool you. Find out how you came to exactly this distribution model: based on the profitability of a particular segment or simply from the principle of even division. To achieve effective optimization, you will need to understand all the details. If for some reason it is impossible to devote time to this process or to understand the situation in detail, then it is best to give up trying to optimize costs simply because it is pointless to continue such work. Without a detailed analysis, you are likely to go the wrong way and do more harm than good.

As soon as you have a good picture of what the expenses are made of, think about what factors you can control (negotiating tariffs, analyzing and making changes to your set of payment instruments, etc.) and what you cannot (economic factors, legislation and rules ). Focus on the first group of factors and start working on its optimization. All the steps described above will help you get a clear picture of what is happening and identify the goals that are really achievable for your organization.

Having decided on which areas of expenses you want to focus on, start looking at expenses from different perspectives. Such an analysis will make it possible to identify unobvious, at first glance, but significant contradictions, the elimination of which, in turn, will help to find hidden and previously unrecognized possibilities for increasing productivity.

In particular, pay attention to the following points:

1. Fixed and variable costs

Determine what the “fixed” and “variable costs” are made of. Let's say a payment tool (for example, AmEx) offers only variable costs, without any fixed costs. This knowledge is useful, because thanks to him you understand that there is no point in “consolidating payments”: it simply does not help reduce the cost of payments.

2. To negotiate or not?

Negotiation of tariff reductions is a great way to reduce the cost of payments. It is possible to agree only with payment operators, although they also make concessions with great difficulty. Negotiations will take a lot of time, but they can justify the efforts invested in them, if you have large volumes, predictable and "tangible" business. And of course, communications will help a lot.

We give an example of what could be agreed. Tariffs for operations with and without a card are very different. You can take advantage of this difference. Your goal should be to find opportunities for the redistribution of responsibility in the process of making a payment. By doing this, you can formally bring your transactions closer to the definition of “with a card” in an environment where most transactions are usually considered as “without a card” transactions. Technologies such as fingerprint identification, multifactor authentication, tokenization, and others give you many opportunities to achieve this.

3. Work on increasing the "increase SCP"

The cost of payments is inversely proportional to the average sales price (SCP). In cases where there are both fixed and variable costs, an increase in SSC can not only increase revenues, but also reduce the cost of payments. Price is a key element and therefore any planning should be focused on extracting profits from it.

4. Each market has its own approach.

Many issues in the field of payments due to the influence of both external and internal factors. Geography, features of the markets and types of products that you sell, determine the most preferred methods of payment for customers. It is not necessary to offer a full range of solutions. Instead, be prudent and forward-looking in the optimization process. Increase customer service and use marketing tools to beat costs. Choose low-cost or low-cost methods. For example, the introduction of bonus points helps to eliminate intermediaries in the formation of the cost of payments, gift cards and certificates reduce the fixed component of costs. You can also agree with the bank on the joint issuance of branded payment cards.

5. Paving profitable ways

It is widely known that debit card processing is cheaper than credit. Processing debit cards using bank communication channels (transactions with PIN entry, instead of signing a check) can help reduce the total cost of payment. Choose a profitable operator in this regard and you can save a lot (if, of course, you are ready for such transitions).

6. Optimization of operations

Attention to such details as the authorization of payments, the refusal to conduct them and the logic of re-conducting transactions play an important role in a detailed understanding of how the process of carrying out payment transactions is arranged. If you only have time for one thing, choose this direction. Optimization of operations is able to provide the fastest, cheapest and most effective ways to reduce costs.

7. Total (real) cost

In this material we have focused on a narrow definition of value. Actual costs could also include operating expenses, infrastructure costs, and customer service costs. Do not lose sight of all these points, as they can significantly affect the fixed component of the cost.

8. Be prudent in reducing costs.

Spending is a good metric to analyze. From time to time plan their reduction and arrangement. The best moment for this is “the times of change” when you are looking for another operator or payment instruments, enter new markets, present new products. Watch for major changes in this area, such as switching from credit cards to debit, major changes in legislation or the formation of prerequisites for a rapid market growth. And regardless of the circumstances, annual detailed reviews and quarterly reports on the state of expenditure are good practice.

Do not take the cost issue of payments too seriously. As a rule, it is not so important and that it becomes the most important of all your headaches, you will have to work a lot in other directions first. In this sense, it is more important, for example, to focus on maintaining a high "level of customer satisfaction."

This material is based on the personal opinion of the author Shila Ursal.