Today’s small to medium sized enterprises (SMEs) are operating in a highly competitive landscape with a focus on maximising their profit margins. Therefore, it’s essential to provide SMEs with the right and clear information to achieve this aim. This article provides five solid steps to take in understanding various fees, the strategies to reduce merchant processing fees and how to best explore the market for payment partners. Armed with this knowledge, SMEs can optimise their payment processes and give themselves the best platform for greater financial success.
Understand the types of merchant processing fees
Without a clear comprehension of these fees, businesses may risk overpaying, miss potential cost-saving opportunities, or could encounter unexpected expenses that may affect profitability and financial stability.
First, there are Interchange fees that are charges imposed by card networks, such as Visa and Mastercard, for processing transactions. These fees can vary based on factors like the card type used, such as credit or debit, and the industry the business operates in. An assessment fee is imposed by card networks to cover their operational expenses and maintain the payment infrastructure. Card networks typically charge a percentage of the transaction amount as assessment fees. Finally, discount fees are the revenue earned by the payment processor or payment service provider (PSP) for their services. Payment processors charge these fees to cover their operating costs and generate profit. The fees are added on top of the interchange and assessment fees.
The next step is to understand the intricacies of payment processing fee structures – these include:
- Flat-rate pricing, which is a fixed fee for every transaction, regardless of the actual interchange cost, often leading to hidden and inflated fees.
- Tiered pricing, which offers an enticingly low rate for “qualified” transactions but significantly higher rates for “mid-qualified” and “non-qualified” transactions, with the processor determining the categorisation at their discretion.
- Interchange-plus pricing, which provides transparency by itemising fees, combining interchange fees with card network assessments, and providing a contracted markup that remains consistent for all payments.
Each fee structure has its advantages and disadvantages, but working with a processor that is transparent could offer simplified pricing models, eliminating hidden charges and providing cost visibility, as well as more value-added services.
Negotiate better rates from existing providers
SMEs can use their transaction volume and industry reputation as powerful bargaining tools to show value to their payment processor. By emphasising loyalty and desire to continue a mutually beneficial partnership, SMEs can foster a collaborative approach during negotiations.
Implement fraud prevention measures
High chargeback ratios indicate a higher risk of fraudulent transactions and customer disputes, which in turn leads a payment processor to classify the merchant as high-risk. As a result, payment processors may impose higher processing fees to compensate for potential losses. SMEs can mitigate these risks through robust fraud detection tools that can help identify suspicious transactions in real time.
Integrate payment gateways and shopping carts
This can lead to reduced merchant processing fees through increased efficiency and optimised transaction processes. By seamlessly integrating these systems, SMEs can eliminate the need for manual data entry and reduce the risk of errors, leading to quicker transaction processing and fewer chargebacks. With improved data security and reduced fraud risk, SMEs utilising tokenisation or point-to-point encryption (P2PE) may gain trust from customers and payment processors, potentially leading to negotiations for lower processing fees.
Explore the market for alternative PSPs
By venturing into the market, SMEs could achieve substantial benefits – including better pricing and improved services for businesses and customers. When researching and evaluating providers, it’s important to prioritise their reputation, track record, industry experience and service offerings. Additionally, SMEs should look for providers that offer valuable supplementary services such as fraud protection, subscription management, and robust international payment support, as these can significantly enhance business operations. One more step might be to consider a ‘specialist’ PSP that caters to a specific industry, sector or business. The reason for this is they could offer tailored solutions that address the unique needs and challenges of specific sectors, ensuring a more seamless and efficient payment process.
Achieving the aim
To achieve maximum profitability in a competitive environment, SMEs must review and optimise their merchant processing fees to ensure they are getting the best service. By following the 5 key steps recommended, it will help to ensure long-term cost savings and operational efficiency.
