Transaction Processing Cost Reduction: Smart Negotiations

on May20

From this article you will learn:

  • what high transaction processing cost actually means
  • what approaches are commonly used by companies for transaction processing cost reduction
  • why commonly used cost reduction strategies are not always effective
  • how to approach the cost reduction problem in a smarter and more efficient way

Many companies of different types and categories, including small size-merchants, payment facilitators, and large corporations, have a common problem: they are wondering if their transaction processing terms can be improved, i.e. if they can reduce processing costs. The following article is intended to help a business, whose most relevant current problem is transaction processing cost reduction. It should be particularly helpful for companies with large transaction processing volumes.

High credit card transaction processing cost: what it means for you

Let us assume, you are more or less satisfied by your current processing partnership. But after having a closer look at the latest merchant statements received from the processor, you understand that processing fees (taken as percentage of revenues) are a bit too high. Even if merchant statements are not that bad, when you add gateway fees, tokenization fees, and/or fees charged by some other vendors involved, to processing fees, and see the total fees amount, the situation looks somewhat frustrating.

In fact, such a situation is rather common among large-size businesses. Often their management comes up with several instinctive solutions, outlined below.

Obvious ways to reduce transaction processing cost

The most instinctive approaches are as follows:

  • try to negotiate better transaction processing terms with the current processor, i.e. re-negotiate transaction pricing based on the current high processing volume
  • start “shopping around” to see if anybody can beat the price offered by the current processing partner, and, again, provide the cheapest alternative to the current solution

Drawbacks of the intuitive solutions

The above-listed intuitive strategies have several common drawbacks.

Negotiating better terms with the current processor

Keep in mind, that your current processor might be reluctant to improve your processing terms, i.e., reduce costs and fees. One of the reasons processors are not willing reduce fees they charge from their customers is because if they offer better terms to some particular client and the information starts spreading, other clients will demand better terms for themselves as well. Even if your negotiations are successful and the current processing partner agrees to reduce the price you are currently paying for transaction processing, this concession can lead to general worsening of the service quality.

Searching for a new processor

First, experience indicates that if you decide to switch to a new processor, it is not that easy to find a new processor offering better terms.

Second, if you do find a new partner, in some cases the cost of migration from the current merchant service provider to the new one can offset the savings for many years ahead (especially if you haven’t carefully planned all the aspects of transition in advance). This process of migration to the new processor might turn out to be longer and more resource-consuming in comparison to all the forecasts made by your team of experts. A detailed description of migration to a new processor can be found in our respective article.

Third (as many of our customers report), once you start working with the new processor, you realize that not all the functions you expected it to provide are available. Some of the important features, such as support of particular geographies, currencies, report categories (for instance, reports on processing costs, chargebacks, etc), specific merchant onboarding or remittance mechanisms, either do not meet your original expectations (or simply are not supported within the new processing solution). But why is it so difficult to notice such disadvantages at once? Well, generally, because of the nature of the companies that provide the service (i.e. large processors): there is a substantial difference between what salespeople tell you and what turns out to be the reality when you do the certification.

As a result, you are loosing even more resources, because you still need to keep processing transactions through your original partner, according to original terms, and, at the same time, spend considerable amounts on the new initiative.

The common reason for most of the listed problems is that many businesses do not embrace and apply the “smart negotiations” concept. They focus on searching for the lowest processing cost they can find among the offerings currently available at the market. They select transaction processing cost as the only meaningful criterion of optimal processing solution selection.

Example

For instance you are processing transactions and paying 2.9% per-transaction fee. Then you are getting an offer from another processor: the new terms envision 2.5% per-transaction fee. You decide to give it a try and switch (migrate) to the new processing partner. But migration to the new platform offsets all the savings for many months to come, and the features that are not critical, but, nevertheless, important, are not implemented within the new platform in the most efficient way. So, while saving on the processing, you will now be incurring new expenses around merchant onboarding or reconciliation. For example, the monthly savings under new processing costs will amount to $15,000. This seems like a reasonable saving, especially, in the long run. But if migration-related expenditures include $100,000 of real costs and another $150,000 of opportunity costs (see below), then they will offset all the savings for a year and a half.

Conclusion

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. If you want to save on transaction processing, it is necessary to analyze all components of costs, related to this process, including not only transaction pricing, but indirect costs and opportunity costs as well.

Feel free to consult our payment experts at UniPay Gateway and get more information on the subject in the context of your particular situation.

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