How To Improve Payments Efficiency and Reduce Expenses

Why does Payment Efficiency Matter?

Processing payments is a multi-partner, multi-step endeavor, and each partner expects to be compensated for their trouble. From the moment a consumer fills in their credit card information, to the moment that money reaches the merchant, slivers are sliced off by others: payment processors, payment gateways, card networks, acquiring banks, and even the merchant’s bank. This is why the Merchant Payment Coalition estimates that credit card fees amounted to over $126B in the USA alone in 2022, translating to over $1000 per family.

But just because, like death and taxes, payment processing fees are inevitable, doesn’t mean that they are non-negotiable. Most estimates of the actual fee paid by merchants seem disconcertingly vague, offering ranges of 1.5% to 4.5%; as it turns out these aren’t intentionally non-specific, but rather offer a window into the broad variability into the cost of processing payments in the marketplace. As it turns out, almost any merchant can find themselves at the high end if they don’t watch out - but can take active steps to pursue the lowest rates in their space and fundamentally change their business model.

Where are the Points of Inefficiency?

The least efficient element of the payment processing ecosystem is the full-service payment processor (PSP), also known as an aggregator. These are the companies offering a full range of services - from APIs to token vaults to enhanced security options - in return for a fixed fee across all transactions (plus incidental fees that aren’t always obvious up front). 

Aggregators make it easy to get up and running quickly, but have two characteristics that cause economic inefficiency later in the development of a payments system:

1. When they provide APIs and forms to collect user credit card information and deliver a token to the merchant, they help reduce the burden of PCI compliance. However, they also retain ownership of the actual credit card numbers, making it difficult, if not impossible, for the merchant to use that stored information to work with alternative providers.
2. While the fixed fee helps to build a consistent model, the reality is that it is likely to be at the high end of what is available. Once the “plus $0.29” and assorted fees (refund, chargeback, cross-border, and the like) are taken into account, aggregator total fees almost never dip below 3%. Given that we know the range across the industry starts at 1.5%, it is easy to see that there is reducible cost here.

When working with PSPs that offer less-comprehensive services, the opportunities for increased payment efficiency tend to be around less obvious nuances of the process:

• When a business has significant international business, working only with a processor in their home country can result in unexpected cross-border fees and unfavorable currency exchange rates
• When refund rates are high, the cost of processing the initial price then reversing the charge can vary significantly from provider to provider. For merchants with money-back guarantees, this can become a real headache.
• Businesses that veer into the high-risk category will find that different processors offer varied services at different prices - and rarely that any single PSP can offer the exact right range of options at the lowest cost. In these circumstances, partnering with only one PSP is the least efficient option available.

The Key to Payment Efficiency is Diversification

Generally speaking, the first step in seeking to optimize payment efficiency is to implement automation - pre-programmed algorithms that analyze each proposed transaction and make active decisions on what to do with them. By running preliminary security screens, for instance, the merchant can actively reduce their own chargeback rates, eliminating unnecessary fees and penalties.

More importantly, that payment automation engine can choose to send the transaction to one of a range of different PSPs, the better to leverage the varied services and fees offered. Typical decisions would be to 

• Send higher-risk transactions to a high-risk processor, which is best equipped to complete deeper security scanning
• Send international transactions to a PSP in the customer’s geography, in order to avoid cross-border fees and take advantage of local fee ranges, which may be lower
• Balance the volume of transactions to different PSP partners to ensure achieving volume discount availability across the whole group, rather than focusing on just one or a small cadre of ‘preferred’ providers

Achieving Diversified Payment Efficiency with Tokenization

As noted above, the challenge with full-service PSPs is that they hold the customers’ credit card details, which makes it hard for the merchant to transmit those details to an alternate PSP. In order to combat this, leading merchants are contracting with third-party tokenization providers like Basis Theory. With third-party tokenization, merchants enjoy the reduced compliance scope of having credit card data securely collected and stored in their provider’s token vault, while also having the flexibility to transmit those details to substantially any PSP they prefer.

By combining secure storage with unlimited freedom to contract with downstream payment providers, merchants can leverage their payment automation to arbitrage PSP relationships, access the very best in security and transactional services, and maintain control of their customers’ details without bringing their core payment systems in-scope.