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How to Pay Less for Payments
Online retailers can reduce payment-processing costs in many ways, and more cost-saving options are coming. But more alternatives means it’s more important than ever for retailers to know how to play the game.
Bob Dumont is shopping for a new payment processor, but that’s nothing new. The owner of online retailer The Bowl Co. says he’s changed processors at least three times in the last three years, taking advantage of the intense competition among processors to lower his rates each time.
“It’s a pretty aggressive market,” Dumont says. “If you can show them a low rate, they always seem to be able to go lower.”
There’s more to lowering the cost of accepting payments than comparing a single fee, as each online payment takes a circuitous path through a variety of data processors and networks that each charge a fee. The savvy retailer can save at several stops along the way.
And more cost-saving alternatives are on the way in coming months as new processors enter the e-commerce arena and companies offer online retailers new payment methods, seeking to take advantage of merchant unhappiness with the fees they pay for accepting cards with the Visa, MasterCard, American Express and Discover brands.
To get the best deal, retailers must be prepared to go shopping among the many processors-or transaction acquirers in payments lingo-vying for their business, and to examine every rate and fee in the contract, says Allen Weinberg of payments consulting firm Glenbrook Partners.
“The guiding principle is that everything is negotiable,” Weinberg says. “But it’s important to keep in mind that every acquirer has a profitability target they feel they must meet. If you win on a couple of points, they will likely try to make it up in another area.”
The acquirer will likely emphasize the rate it charges on a standard Visa or MasterCard credit card purchase-2.2% of the transaction amount plus 30 cents is a typical charge for midsized online merchants. But that won’t be the rate on every transaction, because the Visa and MasterCard interchange rates-the fees acquiring banks pay to card-issuing banks-are higher on certain kinds of plastic, such as rewards cards and corporate cards. And some acquirers will add their own mark-up to the higher fees on those cards.
“You have to be very careful because the percentage a company will quote you is the lowest percentage, and unless you ask it won’t be until you receive your first bill that you’ll realize there are a lot of other categories you don’t control,” says Jon Kuhlmann, owner of online shoe retailer Grapevinehill.com. “If you accept Visa you must accept all Visa cards, and you pay a higher percentage on business and rewards cards than on personal cards.” The interchange on a standard Visa credit card is 1.85% plus 10 cents.
To understand what he’s really paying, Kuhlmann divides the fees he pays his processor each month by his net sales receipts, yielding a percentage that takes into account the mix of cards customers use. When considering a processor, a retailer should consider how often customers use each type of card, such as rewards cards or company purchasing cards, and apply the corresponding rate to those transactions to calculate what its processing bill will be.
It’s easier to evaluate processors who offer pass-through pricing, rather than a bundled price, Weinberg says. With pass-through pricing the processor shows the retailer what the interchange is on each transaction and the processor’s mark-up. That way price shopping becomes a matter of comparing the mark-up each acquirer is charging.
Stiff competition among processors is driving down those mark-ups even for midsized online retailers. For instance CompSource Inc., a web retailer of computer gear and consumer electronics that had 2007 online revenue of $12 million by Internet Retailer’s estimate, recently switched to RBS Lynk, which offered a mark-up equal to 0.04% of the transaction amount, says Dean Bellone, president of CompSource. That translates to 11 cents on a typical CompSource order of $280. Because the processor’s costs per transaction go down dramatically as volume increases, the largest online merchants can negotiate even better deals, often paying under a penny a transaction, Weinberg says.
But bundled pricing may work better for some retailers. For instance Kuhlmann uses the PayPal unit of eBay Inc. as its card processor, in part because the fee he’s charged on payment cards, 2.2% plus 30 cents, includes American Express, which typically charges higher fees than Visa and MasterCard. “We never got a rate on Amex lower than 3%,” he says. Although only 8% of purchases at Grapevinehill.com are with AmEx, Kuhlmann says the savings “put another $300 or $400 a month in our pocket.”
Making the switch
For many online retailers, switching processors is easy because they connect to the processors through gateways-VeriSign, Authorize.Net and USA ePay among others-that each have links to many processing companies. The processors in turn connect to the card networks for authorizations and to the banks that settle funds among card issuers and retailers.
The Bowl Co., for instance, has integrated its back-office system with Authorize.Net and other gateways. Changing from one processor to any other connected to those gateways just means changing the account number the retailer uses, Dumont says. “For me, it’s a matter of changing a few lines of code.”
Once set up with a processor, a retailer wants to get the best possible rate on each transaction. A transaction can be downgraded from the least expensive rate for many reasons, such as not including a purchase order number on a corporate card transaction. Downgrades can mean paying another 0.15% to 0.3% per transaction, or 15 to 30 basis points, says payments consultant Steve Mott of BetterBuyDesign.
A transaction will also be downgraded if the retailer does not settle the transaction-which typically means shipping the goods and reporting that to the processor-within seven days. That can be a problem when an item is not in stock. CompSource e-mails the customer to get an approval to bill on a back order so that it can make the settlement deadline, Bellone says.
If the customer orders several items and one cannot be shipped, the retailer must obtain another authorization for the new purchase amount, as a mis-match between the authorization and settlement amounts also will cause a downgrade, says Doug Schwegman, director of market intelligence at payment gateway CyberSource Corp.