Optimizing your payments so you can reduce costs

In today's digital economy, managing the cost of payments is important for business efficiency and profitability. Understanding and optimizing each component of a transaction, such as transaction fees and payment service charges, is key to improving your bottom line. 

Optimizing your payment processes is not just about cutting costs, but strategically managing resources to enhance the overall efficiency and effectiveness of your business operations.

I have been in the payments space for more than 20 years and my career has been driven by my passion for payments and helping merchants. At Checkout.com I lead North American growth and teams whose mission is to solve for the unique needs of customers in a rapidly developing digital economy.

Here, I aim to provide you with some valuable insights and actionable steps to help streamline your payment processes and enhance profitability.

Analyze your cost of payments

The cost of each transaction is a critical metric for any digital business. It includes all expenses incurred in processing payments, like transaction fees and charges for various payment services. To effectively manage and reduce these costs, you have to understand each of these components and how they impact your bottom line.

A good place to start is by examining the number of parties involved in your payment process. Typically, enterprises can potentially engage more than ten intermediaries in processing their payments, a number that materially increases when a business expands into new markets. Each intermediary, from payment gateways to payment processors, adds to the overall cost. Streamlining this process by eliminating unnecessary intermediaries can help retain more revenue and reduce complexity.

Breaking down your monthly expenses for processing payments is crucial. This includes costs associated with gateways, Payment Service Provider (PSP) service, Payment Brand network fees, interchange, foreign exchange (FX), and authentication costs. Fraud management providers and chargebacks are other areas that can drive up the cost of a payment. 

Drilling into each component that contributes to your total cost of acceptance is a good starting point. You need to understand the value that each party brings to your payment flow. Oftentimes, we find that a merchant’s payment ecosystem was cobbled together by a variety of stakeholders to solve specific needs at a moment in time. Evaluate what each respective provider offers and can another provider in the value chain offers a similar and consolidated service. 

Working with transparent partners who provide comprehensive analytics tools can ease this exercise, offering a clear understanding of where expenses occur and how they can be managed more efficiently. You should use the analytics that your payments partner provides to understand what the cost drivers are for your business and address these in order of greatest need.

Manage your fees

Interchange fees are often overlooked yet lie at the core of digital payment costs. While it may seem impossible to influence these costs, with the right expertise and strategy, it's possible to reduce them significantly. Interchange is a large share of the cost of your payment, and it is the amount that the issuing bank charges to offset the handling costs and risk of issuing the card and approving a payment. 

Interchange (IC) fees vary greatly, making transparency crucial for merchants to avoid extra costs. IC++ pricing is the most transparent option, contrasting with blended pricing. Your PSP, though, should be going a step further in its IC++ offering, by providing granularity in your reports breaking down interchange costs at the transaction level. This will enable you to identify how transactions are qualifying and at what costs. This insight is crucial for formulating effective payment strategies and optimizing costs. Many uncontrollable factors impact interchange like the card type a cardholder uses. However, there are many things that you as a merchant can do to help bring down the cost of interchange. Additional data points like invoice level detail in the US market or settlement timing have a material impact on interchange costs. Certain programs help improve interchange. Work with your PSP to ensure that you’re taking advantage of special programs and that your transactions are qualifying correctly. 

In addition to detailed reporting, are you aware that Payment Brand/scheme and interchange fees are reviewed and updated two to three times per year? Most often with updates in April and October. We recommend working with your PSP to stay abreast of these changes and the impact it has on your processing costs or updates that you may need to make to mitigate new fees.

For businesses operating across borders, managing currency conversion efficiently is key to reducing costs. Opt for smart FX solutions that help you avoid unnecessary FX charges – check what your PSP’s FX costs are in comparison to their competitors and how granular their reporting is. A like-for-like settlement, where the transaction currency equals the merchant settlement currency, can prevent conversions and associated costs. Furthermore, local processing in foreign jurisdictions is oftentimes a meaningful step in a merchant’s evolution. By processing locally, you reduce cross-border fees, improve authorization rates, and also gain access to new local payment methods in many cases.

Optimize your payment offerings

As mentioned with local processing, revise your payment methods to include more cost-effective alternatives to traditional card payments. This doesn't mean compromising customer experience or approval rates. Integrating a variety of payment methods improves the customer experience and conversion as many markets have preferred forms of payments outside of standard cards. However, managing various payment systems can often result in unforeseen expenses and complexities. Understand the rules for each payment method and also opt for a unified platform that offers streamlined integration processes, effectively minimizing hidden costs.

As well as offering improved security and higher authorization rates, network tokens can also help reduce fees. The Payment Brands introduced in April 2022, a reduced interchange rate for businesses that adopted network tokenization.

Fraud, disputes and chargebacks are areas that need particular attention when it comes to optimization. They can be a huge driver of payment costs both in terms of operational time and fees. Ensuring you have a robust fraud management system as well as the automation of the disputes process can improve fraud losses and reduce operational costs.

Regularly review and adjust strategies

Technology plays a pivotal role in optimizing payment processes. Leveraging advanced analytics and machine learning can provide insights into managing fraud, improving authorization rates, identifying cost-saving opportunities, and enhancing your payment processing. Additionally, partnering with a payment service provider that offers a comprehensive suite of services can simplify the payment process, reduce the number of intermediaries, and lower overall costs.

The payment landscape is constantly evolving and becoming more complex. Regularly reviewing and adjusting your payment strategies to align with current trends and technologies is essential. This includes staying updated on regulatory changes, emerging payment methods, and shifts in consumer behavior.

Optimizing the cost of your payments is about smartly managing resources to unlock the full potential of your business operations.