Achieving Payments Optimization Part III: Optimize Your Total Cost of Payment Acceptance

Welcome to part three of our ongoing series on the illusive but alluring concept of true payments optimization! In our previous posts, we defined the Pagos approach to optimized payments and explored strategies for maximizing revenue potential. Now, let's shift our focus to the second most crucial aspect of payment optimization: optimizing the total cost of accepting payments.

The True Cost of Payment Processing

You don’t need us to tell you how expensive payment processing is. With every transaction you process, you see the issuer, card brand, processor, and vendor fees leaving your pockets. It’s easy to feel like such fees are inevitable and completely out of your control—and in some ways, you’re not wrong. Fees come with the territory and go towards powering the infrastructure that makes ecommerce transactions possible and keeps customer data safe. 

But that doesn’t mean you’re powerless. In fact, the way your business operates directly impacts what fees you pay. Here are just a few of the payment processing decisions you make that shape what fees are levied against your business:

• The vendors you use

• The payment methods you accept

• The countries you sell in and currencies you accept

• What and how much data you pass with each transaction

• How you manage refunds and chargebacks

Understanding how your strategic business decisions impact applied fees is important, because it empowers you to take control of your total payments costs. In this post, we’ll outline the ways Pagos can help your business optimize payments by actively reducing costs.

Establish your Baseline Costs

Running a profitable and optimized business requires you to know your baseline payment processing costs, understand how what you do impacts them, and continuously monitor fees to determine when to make strategic changes. Pagos makes this easier than ever with powerful tools that help you not only monitor all fee types, but identify opportunities in your payment processing strategy to cut down on the total fees you face.

To first establish a cost baseline, start with Peacock by Pagos—our data aggregation and visualization tool. The Costs dashboard in Peacock is a collection of data visualizations demonstrating your fee data over time, aggregated across each payment processor from which you import data into Pagos via our no-code data connections or Data Ingest API. The Effective Rate chart specifically demonstrates your effective fee rate—your total fee amount divided by your total sale amount—for each of those processors. This is huge: with a single chart, you have a clearer picture than ever of how much your incoming dollars offset the simultaneous outpouring of fee payments, comparable across each of your payment service providers (PSPs), currencies, payment methods, and more.

Take Control of Your Processing

Now that you’ve established a cost baseline and understand the importance of tracking that value for each of your processors, let’s explore how you can directly impact your fee volume. You’ll notice your fees in Peacock are divided into categories—Interchange fees charged by card issuers, Assessments charged by card brands, and Processor fees—with each broken down further into subcategories.   Our approach to categorization makes it possible to track fees regardless of how they may be reported to you, and buckets them together in a way that can help you understand what steps you can take to impact them. Here are just a few of the subcategories of fees you can make immediate changes in your processing to directly address:

• Interchange_downgrades - Downgrades happen when a transaction doesn’t actually qualify for the best or optimal interchange rate possible, and instead is reclassified into a category with a higher fee rate. Transactions can be downgraded for various reasons, such as you didn’t pass the required cardholder data (e.g. AVS or CVV) or you took too long to settle the transaction.  As you run different cost-saving experiments, you’ll want to track fluctuations in this bucket over time—big increases or unexpected changes can highlight a problem, a code change, or a configuration change. .

• Processor_penalties - Networks incentivize behaviors that promote good experiences for card holders, issuers, and the overall network health. To encourage good behavior, the networks may levy penalty fees on your business for a variety of reasons, such as authorization misuse, delayed settlements, and excessive retries. If you are retrying declined transactions, avoid additional fees by confirming automatic retry behavior with your acquirer, and following basic rules like never retrying transactions in hard decline categories. Overall, we recommend reassessing your payment processing setup and your strategies for dealing with declines or churn to balance the cost of those strategies and the risk of chargebacks against the possible increase in revenue.

• Value_added_services - Card networks have created some great products to help companies lower interchange costs and address churn: network tokenization and account updater. While you’ll pay fees to take advantage of these services, the overall cost can be controlled. For example, instead of tokenizing or updating all cards in your vault, you can choose to only keep cards associated with repeat buyers or subscriptions up to date.   As you tune your models for card updates, you’ll want to track this and other value added services to ensure they aren’t eating into your margin—unless the revenue is there to support it.

Take Control of Your Exceptions

Fighting fraud and managing the risks associated with an online, card not present (CNP) business can consume a lot of operational time and expenses. It takes constant vigilance to fight ever-evolving fraud tactics while also keeping the associated costs low. Measuring off the cost baselines you’ve established, the following fee subcategories are particularly important to monitor:

• Dispute - Chargebacks always come with fees, whether from your processor, the card brands, or the card issuers. The way you respond to or accept disputed transactions directly impacts how heavy these fees can be. You’ll want to also ensure that you are getting charged accurately for what you respond (“represent”) to.  Chargeback fees can add up quickly, and can result in further penalties if they get too high.

• Fraud_service - Stopping fraud protects your business and helps you avoid chargebacks. You’ll pay fraud service fees to your payment processors whenever you utilize their fraud protection services, but keeping track of the costs relative to revenue impact is important. As you adjust your fraud rules, always monitor fraud_services fees to ensure that it’s inline with your baseline.

• Refund - Like chargebacks, refunds face fees from processors and card brands. You’ll be charged for each refund and you should track whether the related transaction interchange is returned (subject to your acquiring agreement). You can even subvert some of these fees by returning customer funds to a store card or a stored value credit. 

Monitor Costly Transaction Events

Pagos can help you analyze more than just transactions and fees. We can also help you stay on top of transaction events, such as declines, refunds, and disputes. These events are important to keep an eye on because they come with their own associated direct and indirect costs. Tangible costs include the fees you pay to attempt transactions that fail, process refunds and chargebacks, and fight fraudulent transaction attempts. Other less direct costs include the time and resources spent internally to fight disputes, communicate with customers, and deliver on refunds. Similarly, any time your fraud rules stop legitimate transactions because they’re too restrictive, you pay fees for the fraud service and pay the opportunity cost of lost revenue. Ultimately, your cost burden can change significantly depending on how many declines, refunds, and chargebacks you see in any given month.

Using Peacock, you can monitor your declined, refunded, and disputed transaction volume and look for commonalities. For example, if you’re seeing the majority of your suspected fraud declines come from a particular region or are made with cards issued from a single issuing bank, you may design fraud rules to stop those transaction attempts in their tracks. Alternatively, you may determine that chargebacks are more common for one of your accepted payment methods, so you offer a different product or service offering to ensure revenue generated is enough to offset expected costs. 

Canary, our data anomaly detection service, monitors your payments data and alerts you in real time when something warrants your attention. Canary comes with a set of turnkey triggers that, when set, monitor your refund and chargeback volume for any deviations from the historical norm. Early detection of spikes in these transaction events is fundamental to keeping associated costs in check.

Advanced Cost Reduction Techniques

How you process and route individual transactions should be an adaptable and strategic decision-making process, backed by your own historical cost and general payments performance data. Here are just a few of examples of how you can use your aggregated payments data in Peacock to make routing decisions in the name of cost reduction:

• Take advantage of alternate debit routing: As of July 2023, issuing banks must ensure all card-not-present debit transactions can be processed by at least two non-affiliated networks (learn more in our blog post on the Durbin Clarification). This change created more competition among debit networks, leading to them offering reduced interchange rates by up to 30% to merchants who route debit transactions through their network. By analyzing your historical debit card transaction volume, you can design a debit routing strategy centered around cost reduction.

• Localize to avoid cross-border fees: When you accept transactions from customers in countries other than the one your business is domiciled in, you’re going to face cross-border fees. These processing fees are non-negotiable and charged by the card brands to cover the costs of international commerce. Analyzing your aggregated payments data broken down by presentment currency, you can determine where you can reduce cross-border costs by setting up local processors to route foreign transaction volume through a new local subsidiary.

• Pass Level II and III Data: If you pass Level II and III card data when processing qualifying card transactions, you can obtain lower interchange rates. The Level 2 and Level 3 Eligible Transactions chart in your Card Brand dashboard in Peacock identifies the portion of your transaction volume eligible for Level II and III processing (and associated cost savings).

Check out our product documentation to learn more about the different dashboards and charts available to you in Peacock.

Let Pagos Carry the Burden

In addition to implementing manual cost-saving strategies, businesses can simply leverage Pagos’ technology to automate and streamline their payment operations, further reducing costs and enhancing efficiency. Here are some ways Pago’s products can support cost optimization:

• Automated Data Monitoring: As the sections above demonstrate, Peacock and Canary’s automated data monitoring help you track and analyze your transaction volume, processing fees, and other key metrics in real time. With these powerful tools, you can identify potential cost-saving opportunities and take corrective action as needed. Even more, by letting us do the work for you, you save your payments team from manually aggregating data across processors and generating visuals that go out of date as soon as they’re made. Simply log into Peacock and Canary, connect your processors with our no-code data connections, and see real-time data in seconds.

• Network Tokenization Made Easy: Utilizing network tokens will save your business money by increasing security, decreasing involuntary churn, and attracting lower interchange and network fees. That being said, traditional network tokenization strategies require you to generate tokens through each of your processors individually and manage relationships with card brands. Save yourself even more with Toucan, Pagos’ network tokenization service. Toucan provides you with processor-agnostic network tokens, meaning you can generate a single network token for each customer’s primary account number (PAN) and use it to process transactions through any processor you use. Pagos also manages any ongoing maintenance with the card brands and allows you to keep your credentials up to date, helping you fight involuntary churn from reissuance and other card life cycle events.

• Global Account Updater Services: Keeping stored payment credentials up to date saves you from wasting money by attempting transactions with expired or replaced card credentials. If you’re looking to use account updater services for all your vaulted cards, globally and across all major card brands, look no further than Loon by Pagos. Pay for only the updates you want and leave the card brand management to us, and rake in the benefits of increased approval rates, reduced churn, and improved customer satisfaction.

• Manage Vendors With Aggregated Fee Data:  If you want to regularly review and negotiate rates with payment processors, card brands, and other vendors, you need a single source of fee data to work off. Puffin, the Pagos aggregated data exporter, allows you to download all the details of your harmonized transaction and cost data to do with as you please. Instead of spending time and money downloading invoices and mapping specific fees over time to use in negotiations for better rates, you can download exactly what you need using Puffin!

Payments Optimization Continued

Optimizing payment processing doesn’t just mean raking in more money. In fact, more often than not, it means stopping your business from hemorrhaging funds due to the complex landscape of payment processing fees. By harnessing the power of Pagos, you can not only gain deep insights into these seemingly nonstop costs, but also proactively strategize to minimize them. From intelligent fee categorization with Peacock to real-time anomaly detection with Canary, Pagos offers a comprehensive solution for businesses seeking to optimize their payment operations.

Moreover, by embracing automation through Pagos' technology, businesses can further streamline their processes, reduce manual labor, and achieve greater efficiency. Whether it's leveraging network tokenization with Toucan or benefiting from global account updater services with Loon, Pagos provides the tools necessary to alleviate the burdens of payment management. With Pagos at your side, you can navigate the intricacies of payment optimization with confidence, ensuring that every transaction contributes to your bottom line while keeping costs in check.

In our next installment, we explore strategies for minimizing fraud risk in payment processing! If you’re new to this series, be sure to catch up on our first and second installments:

• Achieving Payments Optimization

• Achieving Payments Optimization Part II: Unlocking Revenue Potential