Moving money is difficult. Historically, trade relied on barter to exchange the value of goods. But as time progressed, the monetary and financial ecosystems evolved and modern-day trade is inundated with a complex web of fintech innovations, payment methods, payment processors, aggregators, banks, networks, interchanges and regulations. As consumer preferences and payment methods evolved to reduce friction in accepting payments, it has brought innovations that make the modern-day trade very attractive to the end consumer making a payment.
As with any transaction, there are two parties involved. Payment scenarios can be broadly classified into B2B, B2C, C2B, C2C(P2P) and Cross-Border segments. The intermediaries that move money and value between the two sides of the transaction are very essential. These intermediaries however are complex, have a wide range of business models and pricing that while providing value to the payments ecosystem, are also the cause of rising payment processing costs that are sometimes passed on to the end customers. In most cases, the pricing and the costs are opaque which leads to the choice of choosing the payment processing ecosystem very critical. This is especially important for Businesses who bear the cost of accepting and disbursing payments.
Cost of Payments (Business) = Cost of Accepting Payments (CAP) + Cost of Disbursing Payments (CDP)
In this article, let's try to understand the various actors, business models and pricing that one may want to understand to optimize and reduce the costs of accepting payments in their businesses.
Consumer to Business (C2B) Payments
In particular, let us explore the cost of payments specifically to the Card Payment Methods highlighted in the table above. When you use a card to make a payment, several parties and processes work together to complete the transaction securely and efficiently. Here's a breakdown of the key steps:
1. Authorization:
You swipe, insert, or tap your card at the merchant's terminal.
The terminal captures your card information (card number, expiry date, etc.).
This information is securely transmitted to the payment processor, typically through a network like Visa or Mastercard.
The processor sends an authorization request to the issuing bank (the bank that issued your card).
2. Verification and Approval:
The issuing bank verifies your card details and checks if you have sufficient funds available.
They may also perform additional security checks, like using PIN verification or 3D Secure.
If everything checks out, the bank sends an approval message back to the processor.
3. Network Processing:
The processor transmits the approval message to the acquiring bank (the bank that works with the merchant).
The message authorizes the transaction and allows the funds to be transferred.
4. Fund Transfer:
The issuing bank transfers the authorized amount to the acquiring bank.
The acquiring bank deposits the funds into the merchant's account, minus any processing fees.
5. Settlement:
The transaction details and fees are reconciled between the card networks, issuing bank, and acquiring bank.
This process usually takes 1-3 business days.
Additional notes:
Contactless payments use similar steps, but utilize Near Field Communication (NFC) technology for secure data transmission.
Online payments might involve additional steps, like entering card details and shipping information on a website.
Security measures are in place throughout the process to protect your card information and prevent fraud.
Benefits of card payments:
Convenience: Quick and easy way to pay without carrying cash.
Security: Protected by various security measures and fraud prevention tools.
Record-keeping: Transactions are easily tracked and recorded.
Rewards: Many cards offer rewards programs and cashback incentives.
Overall, card payments offer a secure and convenient way to make purchases, with multiple parties working together to ensure a smooth and efficient transaction. As such, all these parties add up to the cost of accepting a card payment.
The cost of accepting a card payment isn't a fixed amount, but rather depends on a few factors:
1. Interchange fee: This is the fee charged by the card network (e.g., Visa, Mastercard) to the merchant's bank for processing the transaction. It varies based on factors like the type of card (debit, credit, premium), card network, and merchant category code (MCC). Typically, it ranges from 1.5% to 3.5% of the transaction amount.
2. Assessment fee: This is a flat fee charged by the card network on top of the interchange fee. It's usually a smaller percentage, often around 0.13% to 0.17%.
3. Payment processor fee: This is the fee charged by the payment processor for their services of facilitating the transaction (e.g., authorizing payments, handling data security). This can be a flat fee per transaction, a percentage of the transaction amount, or a combination of both. Prices can vary depending on the processor and your negotiated rates. Payment processor fees can be structured in several ways:
Flat fee per transaction: Often seen with smaller businesses or low-volume merchants.
Percentage of the transaction amount: More common with larger businesses or higher-volume merchants.
Combination of both: This offers some predictability with a base fee while also reflecting transaction size.
Subscription fee: Some processors charge a monthly subscription fee on top of other fees.
4. Gateway fee(optional): If you use a payment gateway (a service that connects your website or app to the payment processor), there might be an additional fee charged by the gateway provider.
Calculating the total cost of accepting Card Payments:
Adding up all these fees will give you the total cost of processing a card payment. It's not a fixed amount and can vary greatly depending on the factors mentioned above.
We summarized the cost of accepting card payments that are typically observed in and the range of costs per transaction that one might expect:
*Analysis based on publicly available data
Here are some ways that Katalyst Street uses Transactional data insights and Artificial Intelligence/Machine Learning tools to minimize credit card processing fees:
Reduce Fraudulent Transactions: Payment processors and networks evaluate the card transaction risk based on the fraud rates by Merchant Category Codes (MCC). Reducing overall fraud rates in your business using advanced AI/ML tools will reduce the overall risk profile of the business, thereby leading to better and lower cost of accepting payments.
Negotiate with your payment processor: You may be able to negotiate lower fees based on your transaction volume and history.
Choose the right pricing model: Some processors offer interchange-plus pricing, which can be cheaper for certain types of transactions.
Offer incentives for alternative payment methods: Consider offering discounts or rewards for using debit cards or ACH transfers or Cash, which generally have lower/no fees.
Pass on fees to customers (depending on regulations and feasibility): In some cases, you may be able to pass on a portion of the processing fees to your customers but do so transparently and comply with local regulations.
Remember, it's crucial to compare rates and understand the fee structure of different payment processors before choosing one. Consider factors like your business size, transaction volume, and budget when making your decision.
If you need any further help on a strategy to reduce your cost of payments, reach out to us at contact@katalyststreet.com