In our previous article, we gave you an overview of card transaction fees, their costs’ breakdown, and how the different pricing models can influence these costs. As a recap, we will consider a transaction fee as the total cost that a business pays to their payment provider for each payment.

This article introduces the top parameters that cause fluctuations in transaction fees and what you can do to keep them in check and ultimately reduce them.

If you're a payment manager or work in a financial department in a company that processes card payments, understanding why transaction fees vary is the first step you should take to start optimizing your payment performance and the company’s revenue.

Why Do Transaction Fees Vary?

The amount your payment provider charges you per transaction can be determined by several factors, from your ability to negotiate prices to the transaction environment. These variables might not be correlated, and identifying them allows you to make improvements in distinct areas.

Negotiation Power

Merchants with higher transaction volumes can better negotiate prices with their payment providers to set lower transaction fees. But that doesn’t mean that smaller businesses can’t do so as well.

Merchants' knowledge of the market can foster competition among stakeholders. Whether they’re big or small businesses, those who are more educated about the payment industry and the various stakeholders that offer payment services worldwide can choose the alternatives that will provide the lowest costs.

Payment Methods

Different payment methods have different prices. For example, a credit card payment can cost merchants 1.5% per transaction in a typical e-commerce sale. Still, the same transaction can cost 10% if the customer uses Paysafecard, a prepaid online payment method based on vouchers.

Merchant Category Code and Chargeback Ratio

The Merchant Category Code (MCC) is a four-digit number, distinctly defined by each principal card network (Visa, Mastercard, Discover, and American Express) and used to classify the business goods and services.

Some MCCs are traditionally associated with higher dispute rates and fraud. Therefore, merchants configured with these MCC can be considered as high risk by acquirers and payment providers. To cover the risks per transaction, acquirers might charge higher markup fees to these merchant accounts.

Even if your merchant account isn’t considered high-risk, you’ll still be charged additional fees by your acquirer to cover the administrative costs associated with each chargeback your business incurs.

Cross-border Processing and Value-Added Services

PSPs might charge extra fees to merchants that want to operate internationally.

Merchants that use international PSPs to perform funds’ collection abroad—instead of connecting with local financial institutions—usually pay additional exchange and settlement fees, adding to the merchant’s existing payment cost structure.

Any other value-added service provided by PSPs can impact transaction costs. These could be payouts, split payments, Merchant of Record (MOR) setups, authentication services (e.g., 3DS), risk services, or analytics tools.

Issuer and Merchant’s Geographic Location

Transaction fees vary depending on geographic transaction patterns.

Card networks like Visa and Mastercard will set distinct costs per transaction depending on the issuer and merchant’s location and the possibilities of transactional flows created among different locations. These extra costs are mostly reflected in interchange fees.

Transaction Environment and Risk Parameters

In an e-commerce environment where the payment instrument is not present (card-not-present), the authentication method is weaker than in in-store transactions (card present). So, there’s a higher probability of fraudulent events, leading to higher costs per transaction set by card schemes through interchange fees and acquirers through the acquirer markup.

Payment providers can set lower prices to customers that add security layers for authentication. For example, transactions authenticated using 3DS, or the more recent EMV Tokenization standard used by mobile wallets such as Apple Pay, Google Pay, and Samsung Pay, might offer cheaper transaction costs.

How can you start cutting back on transaction fees?

If you're well informed on the payment industry intricacies and what leads to variations in transaction fees, you’re a step closer to taking action and reducing payment fees. Here are some principles you should consider for minimizing your transaction costs.

Keep your chargeback ratio low and your payments secure.

By now, you know that if you want to negotiate transaction fees, card networks will consider your chargeback ratio, and payment providers will take your transactions' legitimacy into account.

In the article Chargebacks: How to Stop Them From Killing Your Business, we give you some examples of what you can do to decrease your chargeback ratio.

To ensure purchase legitimacy and negotiate prices with payment processors, consider adding security layers for authentication like 3D Secure, or Address Verification System (AVS) if you’re either selling in the UK, US, Canada, New Zealand, or Australia.

Work with multiple payment providers.

As the complexity of payments continues to grow, businesses that rely on a single payment provider are restricted in their power to negotiate transaction fees. For being technically locked-in with one provider, you're flipping the negotiation power to the provider side because there’s no other alternative for price comparison.

Once you have zero switching costs it becomes economically viable to invest in a multi-provider strategy for your payment operations. When businesses have flexible payment structures that allow for multiple connections, negotiating fees between the different providers becomes more accessible.

Besides, each merchant has specific payment needs based on their industry, locations, or customer preferences. The more they grow, the more sophisticated these needs become. It’s hard to imagine a single provider that practices competitive prices for all of your existing and upcoming business needs.

Work with local acquirers.

If you have a large client base in specific countries, you will probably benefit from working with local acquirers. Using local acquiring means that you will connect with local financial institutions to accept payments in a specific region rather than using a cross-border approach where a single acquirer accepts payments in different countries.

By adopting a local approach, you save on cross-border fees and added exchange fees that international payment providers charge for transactions between two countries.

Besides, local acquirers are better adapted to local market needs, conditions, and regulations and can access more client information. They usually practice more competitive prices, and final customers are more likely to purchase.

For example, in Latin America, most merchants only support domestic card schemes provided by local acquirers. If you’re using an international acquirer, you’ll be limited to a smaller percentage of the population that uses and accepts international cards.

Enable smart routing capabilities for transactions.

Working with multiple payment providers and local acquirers helps in reducing transaction fees but using a smart, multi-provider routing strategy ensures that the transactions are routed to the most cost-effective provider.

Smart routing capabilities help you determine which of the payment providers you're connected to is ideal for handling a transaction given specific parameters.

For example, if you’re processing in three different countries and receive a transaction in one of them — let’s say Brazil — the transaction can be routed to the provider that ensures the lowest fees in this country. Ideally, this would be a local provider helping you cut on cross-border costs.

Here are two payment routing rules that can help you optimize transaction costs:

• Split rules allow merchants to divert a percentage of their transaction volume to specific providers. This feature enables them to maintain minimum amounts per fee to access special rates. Another advantage for businesses is the ability to rapidly switch transaction traffic to another payment provider as a means to gain negotiation power.

• Filter Rules allow merchants to consider particular pricing structures and route transactions based on specific transaction parameters like the transaction currency, risk level, or issuing country.

According to data collected from clients at Switch, these two rule types have proved to decrease transaction costs by 17%.

Optimizing Transaction Fees with Switch

Connecting with multiple providers and building smart routing capabilities in-house costs you time, effort, and money. In most situations, all this work hardly pays off your initial goal of reducing transaction fees.

That’s why at Switch we’ve built an orchestration platform that helps merchants to avoid technical lock-ins and reduce transaction fees by accessing multiple providers and payment methods through a single API integration.

By integrating with Switch, businesses can leverage this multi-connection setup through Dynamic Routing for a truly flexible payment infrastructure.

Want to know more about reducing transaction costs and optimizing payments? Reach out to us.