From this article you will learn:
- which fees merchants have to pay for third-party and open source payment gateway usage;
- why switching from a third-party gateway to an open source payment gateway (or your own product) is not always a beneficial option;
- in what cases it makes sense to license an open source payment gateway product, take it in-house, or develop customized gateway software on your own.
Many people think that one of the most effective ways to save on credit card processing fees is to have a payment gateway of their own (license an open source payment gateway or develop the product from scratch). Recently we have been getting a lot of questions related to this subject. In this article we are going to describe the pros and cons of having a payment gateway of your own in terms of cost reduction.
Fees paid by a merchant for payment gateway usage
The total amount paid by a merchant to the payment gateway provider, usually, includes three major components (fee types):
- The fees imposed by the gateway itself (for instance, per-transaction charges)
- The fees imposed by the acquiring bank that partners with the gateway (the so-called surcharges added to actual processing cost)
- The processing cost itself (paid to card brands e.g. Visa/MasterCard for usage of their card networks)
Let us take a closer look at some particular cost items.
- Interchange and settlement costs (see respective article on transaction processing cost structure) can be eliminated only through direct integrations with Visa and/or MasterCard. However, judging from our experience and research, such direct integrations make sense only when very large processing volumes are involved. Some of our customers with annual turnover of as much as several billion dollars do not find direct integration with the associations financially feasible. So, in most cases it is more suitable to sign a contract with some acquiring bank, rather than try to become an acquirer yourself.
- Surcharges can be reduced (good news!). The amount of surcharges you pay to an acquirer depends on your processing volume and on your particular agreement with the acquirer. If merchant statements list the amounts of interchange and assessments, you can check these amounts and calculate the actual surcharge you pay to the acquirer and the amount of gateway fees charged “on top” of them. If you cannot perform these calculations, you can use some average amount as basis (for example 1.8%, although the actual amount will vary across different types of transactions and payment cards) and check, how much you are paying over this basis. It is this additional amount that you can, actually, reduce if you are using your own brand-new or open source payment gateway. We should stress again, however, that particular savings will depend on your volumes and the terms of your agreement with the acquiring bank.
- Processing cost paid to card brands (Visa, MasterCard, and others) for network usage has to be paid anyway, and this particular cost item will be very problematic to reduce.
Here is an example of a typical erroneous perception of gateway-related fees.
Let us assume, you are paying 2.9% fees for transaction processing. It seems like if you start using an open source payment gateway or develop a gateway product from scratch, your business will be paying 0% of fees and only pay for the server usage (that is, actually, how e-mail services and web-servers work). The new costs will include the cost of a data center, software, and PCI audit. However, payment processing does not work exactly like that.
If you are paying 2.9% and switch to usage of your own server, you will still have to pay, say, 1.9% to card brands for network usage. So, you are likely to be saving only 1% and not 2.9% as expected. Plus, you need to keep in mind the cost of hardware, license etc. The question is how much this 1% of savings actually means in real money. The open source payment gateway solution (or a gateway product developed from scratch) is beneficial if and only if it allows you to offset the aforementioned new costs.
New fees, induced by an open source payment gateway of your own
Although some fees can be eliminated, new fees and costs will emerge if you start owning a payment gateway (develop the software from scratch or take some open source payment gateway product in-house). Particularly, you will have to go through costly annual PCI audit procedures, pay for certifications with acquirers, invest money into development and support efforts (pay salaries to developers and support personnel), as well as into server hosting. These costs can easily reach $100,000 a year.
So, taking an open source payment gateway product in-house (or developing a product on your own) is worth only if the savings resulting from elimination of some gateway-related fees offset the annual costs of gateway maintenance, PCI audit, certifications etc. This is only achievable if your processing volumes are large enough. If reality checks and estimates indicate that potential savings amount to $200,000 annually, then the option of having a payment gateway of your own is quite relevant.
Specific cost items related to transaction processing are described in detail in our recently published cost reduction guidelines.
Having an open source payment gateway product of your own or development of payment gateway software from scratch is financially feasible only if your processing volumes are significant enough, and gateway maintenance costs do not exceed the savings offered by elimination and reduction of particular fees.