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How to Pay Less for Payments

Online retailers can reduce payment-processing costs in many ways, and more cost-saving options are coming. But more alternatives means it’s more important than ever for retailers to know how to play the game.

Bob Dumont is shopping for a new payment processor, but that’s nothing new. The owner of online retailer The Bowl Co. says he’s changed processors at least three times in the last three years, taking advantage of the intense competition among processors to lower his rates each time.

“It’s a pretty aggressive market,” Dumont says. “If you can show them a low rate, they always seem to be able to go lower.”

There’s more to lowering the cost of accepting payments than comparing a single fee, as each online payment takes a circuitous path through a variety of data processors and networks that each charge a fee. The savvy retailer can save at several stops along the way.

And more cost-saving alternatives are on the way in coming months as new processors enter the e-commerce arena and companies offer online retailers new payment methods, seeking to take advantage of merchant unhappiness with the fees they pay for accepting cards with the Visa, MasterCard, American Express and Discover brands.

Shop around

To get the best deal, retailers must be prepared to go shopping among the many processors—or transaction acquirers in payments lingo—vying for their business, and to examine every rate and fee in the contract, says Allen Weinberg of payments consulting firm Glenbrook Partners.

“The guiding principle is that everything is negotiable,” Weinberg says. “But it’s important to keep in mind that every acquirer has a profitability target they feel they must meet. If you win on a couple of points, they will likely try to make it up in another area.”

The acquirer will likely emphasize the rate it charges on a standard Visa or MasterCard credit card purchase—2.2% of the transaction amount plus 30 cents is a typical charge for midsized online merchants. But that won’t be the rate on every transaction, because the Visa and MasterCard interchange rates—the fees acquiring banks pay to card-issuing banks—are higher on certain kinds of plastic, such as rewards cards and corporate cards. And some acquirers will add their own mark-up to the higher fees on those cards.

“You have to be very careful because the percentage a company will quote you is the lowest percentage, and unless you ask it won’t be until you receive your first bill that you’ll realize there are a lot of other categories you don’t control,” says Jon Kuhlmann, owner of online shoe retailer Grapevinehill.com. “If you accept Visa you must accept all Visa cards, and you pay a higher percentage on business and rewards cards than on personal cards.” The interchange on a standard Visa credit card is 1.85% plus 10 cents.

To understand what he’s really paying, Kuhlmann divides the fees he pays his processor each month by his net sales receipts, yielding a percentage that takes into account the mix of cards customers use. When considering a processor, a retailer should consider how often customers use each type of card, such as rewards cards or company purchasing cards, and apply the corresponding rate to those transactions to calculate what its processing bill will be.

It’s easier to evaluate processors who offer pass-through pricing, rather than a bundled price, Weinberg says. With pass-through pricing the processor shows the retailer what the interchange is on each transaction and the processor’s mark-up. That way price shopping becomes a matter of comparing the mark-up each acquirer is charging.

Stiff competition among processors is driving down those mark-ups even for midsized online retailers. For instance CompSource Inc., a web retailer of computer gear and consumer electronics that had 2007 online revenue of $12 million by Internet Retailer’s estimate, recently switched to RBS Lynk, which offered a mark-up equal to 0.04% of the transaction amount, says Dean Bellone, president of CompSource. That translates to 11 cents on a typical CompSource order of $280. Because the processor’s costs per transaction go down dramatically as volume increases, the largest online merchants can negotiate even better deals, often paying under a penny a transaction, Weinberg says.

But bundled pricing may work better for some retailers. For instance Kuhlmann uses the PayPal unit of eBay Inc. as its card processor, in part because the fee he’s charged on payment cards, 2.2% plus 30 cents, includes American Express, which typically charges higher fees than Visa and MasterCard. “We never got a rate on Amex lower than 3%,” he says. Although only 8% of purchases at Grapevinehill.com are with AmEx, Kuhlmann says the savings “put another $300 or $400 a month in our pocket.”

Making the switch

For many online retailers, switching processors is easy because they connect to the processors through gateways—VeriSign, Authorize.Net and USA ePay among others—that each have links to many processing companies. The processors in turn connect to the card networks for authorizations and to the banks that settle funds among card issuers and retailers.

The Bowl Co., for instance, has integrated its back-office system with Authorize.Net and other gateways. Changing from one processor to any other connected to those gateways just means changing the account number the retailer uses, Dumont says. “For me, it’s a matter of changing a few lines of code.”

Once set up with a processor, a retailer wants to get the best possible rate on each transaction. A transaction can be downgraded from the least expensive rate for many reasons, such as not including a purchase order number on a corporate card transaction. Downgrades can mean paying another 0.15% to 0.3% per transaction, or 15 to 30 basis points, says payments consultant Steve Mott of BetterBuyDesign.

A transaction will also be downgraded if the retailer does not settle the transaction—which typically means shipping the goods and reporting that to the processor—within seven days. That can be a problem when an item is not in stock. CompSource e-mails the customer to get an approval to bill on a back order so that it can make the settlement deadline, Bellone says.

If the customer orders several items and one cannot be shipped, the retailer must obtain another authorization for the new purchase amount, as a mis-match between the authorization and settlement amounts also will cause a downgrade, says Doug Schwegman, director of market intelligence at payment gateway CyberSource Corp.

Cost vs. benefit

Retailers can obtain discounts on interchange by providing information that helps prevent fraud. For instance, participating in the online authentication systems Verified by Visa and MasterCard SecureCode lowers interchange by an average of 21 basis points, or 0.21%, according to CardinalCommerce Corp., whose Centinel service connects e-retailers to these security systems and to alternative payment providers.

Some processors charge more if the retailer does not provide the 3- or 4-digit security code on the back of payment cards with the authorization request. Ask questions and shop for the best deal, Mott advises retailers.

Paying more might make sense if it keeps a customer from abandoning a transaction when asked for an additional piece of data, some retailers have decided.

Abandonment went up more than 10% when SureSource LLC began asking for the security code on one high-volume web site last year, leading the company, which operates e-commerce sites for such branded manufacturers as Black & Decker and Crayola, to stop requesting the data. With low fraud losses, SureSource was not willing to trade sales for processing savings, says Mike Mullen, director of e-commerce. To minimize both abandonment and risk, some retailers request the security code only from new customers, figuring those are riskier transactions.

There can be many other fees in a processing contract, such as for processing refunds or orders taken by a call center agent. Mullen looks at each fee and calculates how it would affect his business.

For instance, some processors waive fees on refunds while others do not, which could be important for a retailer with a lot of refunds. “There may be a 5-cent charge that will add up or a 30-cent charge you’ll never see,” he says. “You have to look at the deal and apply it across your order history.”

Chargebacks

Among the banes of a retailer’s existence are chargebacks, reversals of payments that typically are the result of fraud, customer dissatisfaction or merchant error. Processors usually charge a fee, ranging from a few dollars for larger retailers to $15 or more for smaller ones, for processing a chargeback. But processors can also offer valuable expertise in helping retailers fight chargebacks.

Processor Litle & Co. provides Jewelry Television and its e-commerce site JTV.com with a dedicated expert who has provided tips on when it’s worth fighting a chargeback, says Lisa Tennant, the retailer’s vice president of cash management and merchant services. For instance, a retailer has a better chance of winning when it delivered the product to the billing address and obtained a signature, Tennant says. She says the Litle representative “has gotten to know our business and helped us identify when we can dispute a chargeback and when it’s not worth applying resources to a dispute.”

Retailers can prevent chargebacks in many ways, including by informing a customer when issuing a refund, says Gene Hoffman, CEO of payments processor Vindicia Inc. That likely will prevent the consumers from calling his credit card company to reverse the original charge, generating a chargeback. “Often merchants who don’t communicate well will issue the refund and then get a chargeback, so they’re doubly out,” Hoffman says.

Retailers can also cut costs by using gateways like CardinalCommerce and Certegy’s ClearCommerce that facilitate acceptance of non-card payments like PayPal and Bill Me Later that typically charge lower fees than Visa and MasterCard. Bill Me Later’s fee varies between 1.5% and 3% of the transaction amount, depending on the retailer’s volume, and averages about 0.7% less than credit card fees, says Vince Talbert, vice president of marketing.

Send me the bill

Bill Me Later is a little less expensive than credit cards for ShoeMall.com, says Internet director Jodi Bresina. But the big win has been in higher sales since the e-commerce site introduced the payment method in February. Bill Me Later accounted for 6% of transactions in March, those orders averaged 13% more than the site’s norm and 75% of Bill Me Later customers were new, Bresina says.

Bill Me Later also guarantees payment as long as the retailer verifies the billing address and fulfills the order, says Mullen of SureSource, which has accepted Bill Me Later for three years. However, Bill Me Later, which runs an instant credit check on a customer applying to use the service, declines more than a quarter of his customers, Mullen says. To keep from losing sales, Mullen says his sites present a message saying that Bill Me Later was unable to process the transaction; most customers then pay with credit cards.

Another deal for online merchants has been Google Inc.’s Google Checkout service, introduced two years ago. Google provided free processing on transactions until this year and now charges 2% plus 20 cents per transaction. But it’s still an attractive offer because Google will apply those transaction fees to a retailer’s spending on Google AdWords search page ads, crediting $1 for every $10 processed.

That persuaded Bellone to begin offering Google Checkout as a payment option this spring at CompSource.com. “They’re handing it to you on a silver platter, so you might as well use it,” he says.

One issue: Google only guarantees payment if the retailer obtains a signature upon delivery. Delivery services charge from $2.50 to $3.50 extra to guarantee a signature, and CompSource is passing that surcharge on to customers who pay with Google Checkout, Bellone says.

More to come

The payment options available to e-retailers have grown in recent years with the arrival of alternatives like Bill Me Later and Google Checkout and the entry into e-commerce processing of RBS Lynk, a subsidiary of Royal Bank of Scotland that is a significant e-commerce processor in Europe.

More payment alternatives are coming, including Bill Me Later testing the waters of offering its service to smaller retailers. It currently targets online merchants with at least $10 million in annual sales, but hopes to lower that threshold to either $1 million or $5 million by providing more automated service tools, Talbert says.

CardinalCommerce expects to offer this summer a payment method called eLayaway that lets consumers pay over time, receiving the goods once full payment is received. Merchants pay nothing, while consumers pay a fee of 1.9% of the purchase amount. About 700 mostly small retailers already offer the service, and eLayaway is hoping for greater acceptance once Cardinal offers the option to the 33,000 merchants that use its Centinel payment platform.

Online retailer Buy.com has been testing a new credit card called RevolutionCard, which only charges merchants 0.5% of the transaction amount, roughly a fourth of Visa and MasterCard rates. The company behind the card, Revolution LLC, backed by AOL founder Steve Case, is working on deals with payment processors that will make the payment option available to more online retailers in coming months, the company says.

There are more processors specialized in certain kinds of online payments, such as Vindicia, which focuses on payments for digital goods, such as music downloads, and on subscriptions and other recurring payments. One client is online art community and retailer DeviantArt.com, which gets 23 million unique visitors per month and sells a premium service starting at $4.95 per month that lets customers customize their home pages, browse without ads and add content, says Steve Gonzalez, vice president of business development.

In the past, DeviantArt.com did not offer customers the option of automatically renewing their subscriptions because it did not want to store credit card numbers and have to comply with card industry data security rules. Now Vindicia holds the card numbers and handles recurring billing, persuading the average customer to sign up for an additional two or three billing cycles, Gonzalez says. Vindicia charges a 2% fee on those renewals.

And a much larger new vendor could emerge if Chase Paymentech—a joint venture between the country’s largest card processor, First Data Corp., and major bank J.P. Morgan Chase & Co.—breaks up as a result of First Data’s sale last year to a private equity firm. That sale gives Chase the right to end the joint venture, which could result in First Data offering its own e-commerce payments service, says Mott, the consultant.

“This could be a once in a lifetime opportunity for merchants if First Data offers equivalent platform capabilities to Paymentech,” Mott says. “Imagine having two Paymentechs, one brand new and hungry for business.”

It’s by no means clear that scenario will play out. But it is clear that well-informed merchants already have plenty of options for reducing the cost of accepting payments, with more to come.

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