Estimating Cost-Saving Opportunities

​​If you're the CFO or head of payments, it's your job to look for opportunities to optimize business costs. This probably includes audits of total expenses and identifying any services or purchases that weren't worth the expense. Did you need to buy X? Did you use Y enough to offset the price? Did you actually think you stopped spending on Z months ago, but you were wrong? Audits of this kind may be time consuming and require some tough conversations, but they're fairly cut and dry.

When it comes to the cost of payments acceptance, however, identifying cost saving opportunities can feel impossible. Your payment processing setup is comprised of many complex details, so it’s not always clear when or where you’re paying too much for different aspects of your strategy. How do you identify cost-saving measures within your current setup? Did you even realize that the way you process payments has an impact on costs?

You know with an introduction like that, we’re about to change your life with a new Pagos feature. Buckle up, folks, it’s time to cut some costs—all with the power of payments data.

Peacock: Opportunities

You know and love Peacock for the countless data visualizations it contains, giving you a well-rounded view of your comprehensive payments operations. Where else can you see all your transactions, declines, chargebacks, refunds, and more, aggregated across multiple processors and data sources with this level of granularity and insight? But while it’s pure magic to see your approval rate broken down by payment method and processor or chargeback count broken down by card brand and type, you might not know right off the bat where the actionable insights are in your data. Or maybe you’ve taken action to improve customer experiences and increase revenue (two of the cornerstones of payments optimization), but you don’t know how to tackle the elusive beast that is optimal cost management.

Last week, we launched a new page in Peacock called Opportunities. Opportunities is the place to start when you want to answer that ever-present payment industry question of “Where can I find 1% in savings?” 

We designed Opportunities to break out the segments of your payments data where true opportunities exist to increase your revenue and/or lower your overall costs without making massive changes to your payments set up. Specifically tied to cost, we’ve identified cost-saving opportunities in three categories to start: enhanced data, network tokenization, and alternative debit routing. In this blog post, we’ll walk through the data you’ll find in each category, how to take advantage of it, and how to estimate the actual cost savings associated with each.

Enhanced Data

When you hear the term “enhanced data” in reference to payment card processing, it refers to the practice of collecting and passing Level 2 and Level 3 data with transactions. Depending on your business and the card used, this higher level data includes information like the sales tax amount, order number, and/or product description. If a card qualifies for Level 2 or Level 3 processing and you pass this enhanced data with associated transactions, the undeniable benefit is lower interchange rates. In other words, when you can pass more information with a transaction and you opt to do so, you can cut down on your fees!

The first tab in the new Peacock Opportunities page breaks down your approved card transaction volume into three categories: Level 2, Level 3, and Not Eligible. Using the data in this chart, you can identify the total amount of approved transaction revenue you could have realized cost savings for had you passed enhanced data. You can even go a step further and estimate the actual cost savings you could have realized; multiply your Level 2 and Level 3-eligible transaction amounts by 0.50% (the typical interchange cost savings for transactions with enhanced data). This is the amount that you can expect to reduce your interchange expenses by!

Something to keep in mind about this tab: at this time, Peacock doesn’t account for the transactions you may have already passed Level 2 or Level 3 data for. We use BIN data to identify which cards are eligible for enhanced data, and then filter for only the approved transaction volume associated with those cards. If you’re already passing enhanced data for some transactions, you’ll need to take that into account when reviewing the opportunities identified in this chart.

Network Tokenization

Network tokenization is the process through which card brands substitute a cardholder’s primary account number (PAN) and other card details with a secure, unique value known as a network token. There are many benefits to network tokenization, including increased data security, improved customer experiences, and increased approval rates. When it comes to cost savings in particular, transactions processed with network tokens face significantly lower interchange rates than PAN transactions.

Using the Network Tokenization Opportunities tab, you can quantify the cost-saving opportunity of employing a network tokenization strategy. Specifically, you’ll find the total value of your approved, merchant-initiated card transactions broken down by whether they were processed with a PAN or a network token. Multiply the PAN amount by the lower interchange rate—usually 0.10% in the US—to identify the lower fee amount you could have paid if you’d used a token for these eligible instead. Keep in mind, this will actually be a conservative estimate of your potential cost savings, because this data doesn’t take into account the higher approval rates also associated with network tokenized transactions.

Keep in mind, this chart specifically includes data for merchant-initiated transactions made with the major four card brands: Visa, Mastercard, Amex, and Discover. Merchant-initiated transactions are those with the stored credential values of recurring, installment, or card-on-file-repeat. Lastly, we identify transactions as having been made with a network token or PAN using a flag passed alongside the transaction by the processor; at this time, only Braintree/PayPal, Stripe, Adyen, Fiserv, and Chase use this flag across our no-code integrations. As such, merchant-initiated card transactions processed through any other payment processor will be categorized as No Value Provided in this chart.

Alternative Debit Networks

The United States Congress passed a clarification to the Durbin Amendment in July of last year, specifying that issuing banks must ensure all card-not-present debit transactions can be processed by at least two non-affiliated networks. This change makes it possible for merchants to design flexible routing strategies based around which network offers lower fees to process affiliated debit cards in the US. Such competition then caused debit networks to slash interchange rates by up to 30% as a means of enticing merchants to route debit transactions through their networks. These are cost savings your business shouldn’t overlook!

The Debit Routing Opportunities tab provides a clear breakdown of your approved debit card transactions by whether or not they were eligible for alternate debit routing. Any transactions you did process through a secondary network will appear in the Not Eligible category, ensuring the Eligible amount accurately reflects the missed opportunity. Multiply the combined value of the transactions that were eligible for alternative debit routing by the possible savings of 0.20% - 0.50% to determine the potential cost savings. 

Taking Advantage of Cost-Saving Opportunities

Our intention here at Pagos is to arm every business with the payments data they need to make informed decisions around an intentional processing strategy. Our CEO, Klas Bäck, was interviewed earlier this week for an article in Forbes titled The Rise of the Chief Payments Officer. In this interview, he identified payment acceptance costs as “now being the second largest expense line item (behind only employee costs) for most organizations.” More often than not, these costs grow to unacceptable numbers only because merchants are flying blind without the data necessary to identify strategic changes that can keep fees in check. Don’t let this be you!

Contact us today to gain access to Peacock and get started taking action on the cost-saving opportunities available in your payments data! And keep in mind: this is only the beginning! Our roadmap for 2024 includes further enhancements to the Opportunities data in Peacock, including incorporating reconciliation methods into the Enhanced Data tab and even adding savings opportunities by card brand to the Alternative Debit Networks tab. Follow Pagos on LinkedIn to keep updated on our latest developments.