The Cost of Payments

The cost of payments is an elusive and mysterious topic. There is hardly a mention on the web, no clear definition or explanation found.

The cost of payments is a double-edged sword. On one hand, it is a necessary evil and on the other, a formidable revenue driver. Regardless of which side you are on, you ought to know how to qualify and quantify costs. It is an important metric to watch. Improving cost efficiency is not optional and can be time-consuming, so plan ahead and review often.

The “costs” are essentially fees you pay to the processor, network and card issuers in order to do business. For the purpose of this post, we will focus on online acceptance of cards. Although the definition is pretty straightforward, there are many nuisances to it. The devil is definitely in the details.

Understanding costs is the first step; the environment that drives payment-related expenses. Having clarity on what factors you have control over will save you time and disappointment in later stages.

If you are part of a large organization, try to understand every detail of external and internal cost drivers. Where do costs come from? How are they allocated to your product line, division or business unit? Don’t be deceived by the numbers. Find out how costs are arrived at; are they allocated based on revenue or spread out evenly? Unless you understand the finer details, you will not be able to optimize for efficiency. If you are unable to spend time or identify details, it is best to abandon the effect to reduce costs. It is pointless to continue; without the details, you are likely to venture down the wrong path and do more damage than good.

Once you have a good picture of what makes up costs, think about what is within your control (rate negotiations, payment instrument mix, etc.) and what is not (economy, regulation, etc.). Focus on what is within your control and work on optimizing it. Completing these steps will help you get clear and also set expectation within your organization.

Once you are clear on what areas of the cost you plan to focus on, begin looking at costs from various viewpoints. These viewpoints might provide conflicting insights; understanding this well helps in unlocking efficiencies.

Consider the following:

1. Fixed vs. variable

Get clear on what makes up “fix” and “variable cost.” Say a payment instrument (e.g.: AmEx) offers a variable cost only and no fixed cost. It is important to know this; as there is no point in “consolidation charges,” it is not going to help lower the cost.

2. Negotiation or not?

Rate negotiations are a great way to reduce costs. Only processor costs are up for negotiations, that too with great difficulty. Negotiation is time-consuming but could be worth your while if you have a large volume, predictable and material business. Clout counts.

Here is an example of what you could negotiate. Card-present or not-present rates differ greatly. Your goal should be to find opportunities to shift liability. By doing so, you can get closer to the “card-present rate” in a “card-not-present” environment. With fingerprint identity, multifactor authentication and tokenization, there are plenty of technologies that can help you do that.

3. Influence "increase in ASP"

Cost are inversely proportional to rising average selling price (ASP). In the fixed and variable cost combination scenario, a higher average selling price can not only increase revenues but lower the cost. Price is pivotal; plan to profit from the price.

4. Market mix avoid misleading

Payment mix is partly dictated by external and internal factors. Geographies, marketplaces and type of products sold dictates how customers prefer to pay. You do not have to offer the entire gamut; instead, choose wisely and optimize astutely. Use payment CX and marketing to your advantage to conquer costs. Market low or no cost methods – shop with points (cut out the cost middle man), gift cards (lower fixed cost) or use branded cards.

5. Roll out Rails

It is well-known that debit cards are cheaper to process than credit cards. Debit cards processed via ATM rails could help lower rates. Choose the right processor and save a good chunk (if you are set up for it).

6. Operational optimization

Authorization rates, decline rates and retry logic play an important role in knowing the pulse of the payment process. If you have time to work on only one thing, then this would be it. Optimizing operations can provide the fastest, cheapest and most efficient way to lower costs.

7. Total or true cost

We focused on a narrow definition of cost. True cost could include operational, customer care and infrastructure cost. Do not lose sight of this, as these have large fixed cost competency.

8. Prune Prudently

Cost is a good metrics to view and review. Plan to prune and tidy up, time and again. The best time to do this is at the "time of change” when rolling out the new processor, geographies, products or payment instruments. Watch for tectonic shifts in the environment; shift from credit to debit, new regulation or formation of the hyper-growth market. Regardless, an n-depth review once a year and quarterly updates is a good idea.

Consider cost with a pinch of salt, the important thing to focus on is “customer experience.” Cost is a good problem to have but you will have to work on keeping it that way.

P.S: This post is by Sheela Ursal and is a reflection of her personal opinion and does not reflect views, strategies, and roadmaps of her employers, colleagues or companies consulted.

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