Smart Processing Cost Reduction Strategies

on Jun19

From this article you will learn:

  • why intuitive processing cost reduction strategies do not always work
  • how to approach transaction processing cost reduction problem in a smart way
  • what key components transaction processing related costs include
  • how to save on each cost component

In our previous article we analyzed the problem of transaction processing cost reduction, faced by most merchants and payment facilitators. It turns out that most businesses are resorting to common intuitive solutions, trying to either negotiate better processing terms with a current processing partner or find a new partner offering better terms. Somehow, these intuitive strategies often do not produce the desired effect. In this article we are going to list the components of costs, associated with transaction processing, and explain how you can reduce each of them

Processing cost reduction: what should be done

In order to avoid the described problems, you need to negotiate and approach the situation in a smart way, and more carefully reconsider your current and prospective processing partnerships.

The first thing you should understand is the particular set of components that processing-related costs include.

Transaction processing and other cost items

In a broad sense in your particular case the costs related to processing, probably, consist of the following items.

  • Transaction processing costs. These include merchant services processing fees, gateway fees, and, often, additional tokenization fees.
  • Indirect infrastructure costs (including salaries of tech support personnel, staff responsible for data reconciliation, merchant onboarding, integrations with existing and new clients, and, potentially, wages paid to developers that support the currently applied in-house or third-party gateway solution).
  • Opportunity costs. These costs emerge when your team is occupied sorting out routine problems with your current solution instead of creating new progressive ways of increasing revenues. Or, perhaps, due to problems with your current solution you are loosing potential and existing customers (because their needs cannot be properly and effectively addressed) and/or projects that you could work on otherwise. For example, some transactions are lost, or “double settlement” takes place, and you have to make refunds for respective purchases. In other words, the time you spend solving routine problems costs you money.

The most effective transition (i.e. negotiation with the current processor or migration to the new one) strategy for you might be to consider all above-listed cost categories. And keep in mind: these are not necessarily just processing costs themselves.

How to save on particular cost items, related to transaction processing

Transaction processing costs

The ways to decrease transaction processing costs are, again, negotiations, and elimination of the need for gateway service.

  • Direct processor integration and in-house solutions. You can eliminate the need for the third-party gateway service usage through either direct integration with the processor, or through licensing a gateway solution. Tokenization fees can be eliminated through implementation of a licensed tokenization appliance. So, when it comes to transaction processing costs, though it may not always be possible to reduce merchant services processing fees, you might be able to reduce or even eliminate gateway fees and/or tokenization fees through implementation of some alternative in-house solutions. True, some of the listed solutions will only be applicable if your processing volumes are significant enough.
  • Processing volume consolidation. An effective strategy to reduce merchant services processing fees might be to consolidate your processing volume. Maybe, some part of your business uses the services of one processing platform/bank, while some other part processes transactions through another (due to historically established pattern, for example). If you manage to consolidate your processing volume, i.e. direct it to a single processing platform, then you have good chances to negotiate reduction of the costs because of substantial volume increase (from the platform provider’s viewpoint).
  • Service consolidation. This particular approach concerns gateway and tokenization fees. If all three categories of transaction processing costs apply to your case, and merchant, gateway, and tokenization services are provided by three different entities, it might be reasonable to find a payment gateway provider that offers gateway and tokenization services as one package at a lower price. Moreover, in some cases, processors themselves have their own payment gateways and act as gateway service providers as well. If you find such a processor, then you can save even more if you purchase the unified package of services (merchant/processing, gateway, and tokenization) “all-in-one”, and, thus, again, eliminate the need for separate integrations with some gateway and tokenization partner(s).

Indirect costs

Instinctively, most people think that it is the processing costs that are the highest. However, judging from our experience, in some instances, indirect costs can be of comparable magnitude. So, it might be more beneficial to go with a platform that is actually going to cost more in terms of processing cost, but will allow to significantly reduce indirect costs (particularly, gateway fees).

It is also possible that you are paying for some “premium” offer, but when you analyze it with the industry experts, it turns out to be not as “premium” as you think, while only a slight increase of indirect costs might allow you to switch to a basic (less expensive) processing offer without loosing much. For instance, you might be overpaying for a data center, for some sophisticated tokenization service, or other features that you do not actually need. Or, perhaps, PCI audit costs you more than it should due to peculiarities of your system’s architecture, but this situation can be improved relatively easily.

Opportunity costs

The best way to avoid opportunity costs is to partner with the most technically advanced, flexible, and robust processing platform. However, even under the best scenario it might be difficult to predict everything that can happen to the platform. The concept of opportunity costs is similar to indirect expenses concept. So, at the very least, you have to understand that it might be beneficial to pay a little more for processing, but decrease opportunity costs through partnership with a “technically smarter” platform. On the other hand, if you are partnering with a
technically advanced platform, but your actual needs are very basic, then you might be incurring larger indirect and opportunity costs than you should.

Conclusion

If you represent a large corporation that wants to reduce its processing costs, the optimal overall solution for you might be to

  • find a processing platform that solves most of the problems inducing all types of costs, not just those immediately related to transaction processing
  • consult the experts that are familiar with most platform providers whose offerings are available at the market
  • combine the two above-listed steps

Whatever strategy you choose try to be smart, creative, and flexible in negotiation process; do not be afraid to lose less on processing and save more on reduction of other costs (related to migration, certification, merchant lifecycle etc).

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