Consequences of the wrong payments strategy
Payments strategy decisions are complex. Some options need more resources and more time to implement. The more functions you perform internally the more resources required.
Do you take on responsibility for security? Do you take on risk? How do you handle compliance? You need to balance between controlling the customer’s payment experience and payment responsibility, and having more control will increase your operating costs. On the other hand, it may also provide a strategic advantage and a better customer experience!
So, you see, a payments strategy is integral to your business plan. It impacts your cost structure and may require expertise to understand security, compliance and risk issues.
- Taking on too much responsibility can be as detrimental as leaving revenue on the table.
- Using a third party must be an educated decision. You need to understand the details of your agreement.
Strategy never launches
This is the worst outcome. Know what part you play. For example, if you imbed payments in your software, expect an increase in labor costs for data security. This is because you must establish security before transactions begin.
Are you taking on the risk and moving transaction information? You will need to register with the acquiring bank. This includes:
- Technology to securely move credit card data. (tokenization, risk monitoring software, fraud detection software)
- Payment Card Industry Data Security Standard (PCI DSS) PCI Compliance
- Integrate technology with sponsoring bank
Fees are higher than you expected
How can the prices you receive be higher than you expected? There are two common reasons:
- You did not understand the industry pricing
- You did not understand the contract
Did you plan on paying 1.5% and find you are paying 3%?
Did you know that the rate you pay may fluctuate depending on the type of card used? This is because the cost from Visa or Mastercard varies depending on the type of card used. (The cost from Visa or Mastercard is the interchange rate.) Cards that carry a benefit to the cardholder (like frequent flyer miles or cash back) and corporate cards are more expensive to process.
Understanding interchange rates can be complicated because the card brands do not have one set rate that applies to every industry or every transaction. Additionally, rates are adjusted throughout the year. Specifics are found on the card brand’s interchange table. But there’s more to it than that- when the interchange rate fluctuates the processor passes the increase on to its merchants.
Did you set-up a merchant account through a financial institution?
If so, merchants do not pay interchange reimbursement fees. Merchants pay a “merchant discount” to their financial institution. This is because merchants are buying a variety of processing services from the financial institution. This cost is stated; this is a percentage rate per transaction.
Are you making a volume commitment?
The volume commitment states that you will process a minimum amount of dollars per month. If the commitment is not satisfied, the discount rate can be increased or other financial penalties can be applied. Such volume commitments are logical when applied to larger accounts, but not with small and mid-sized businesses.
Know which fees are from the card network and which are from the processor. You can negotiate the price from the processor, but not the fees from the card network.
By understanding the industry pricing models you can avoid the consequences of “hidden fees”.
By understanding your role in payment processing you can integrate a successful payments strategy with your business plan.
One approach does not fit all. See how to approach payments for your business.