In a recent webinar hosted by The Soltesz Institute, we took a closer look at why card payments are often much more costly than businesses might initially realize.
Fees can be up to 70% of your profits
Many are unaware that card processing fees can quietly consume up to 70% of profits, significantly impacting overall business earnings. By breaking down the calculation, understanding each layer of fees, and identifying hidden costs, business owners can take charge of these expenses.
For instance, if a product is sold for $100 and local taxes like VAT or GST are applied, the actual charge to the customer might be around $120. Processing fees, often assumed to be around 2.5%, are actually based on this gross amount, not just the original sale price.
For businesses with tight profit margins, for example if the cost $80, the profit is only $20, so the 2,5% on the $120 is $3, but compared to the $20 profit is 15% of the profit already.
And if we consider lower margins or higher GST/VAT or processing fees, this amount quickly becomes a large slice of the profit, especially when additional charges, such as transaction fees, compliance expenses, and processing delays, are considered. This is the reality for many merchants who feel the weight of these “small” percentages but rarely see them in this perspective.
Participants
To better understand these expenses, the webinar covered the primary participants in a card transaction: the customer, the issuing bank, the card network (like Visa or MasterCard), the acquiring bank, and finally, the merchant.
Each of these parties has a role in securely transferring funds, but each also incurs costs, from data protection to fraud prevention, which inevitably trickle down to the merchant. It’s also critical to understand different card types—credit, debit, prepaid, or virtual—each carrying different risks and compliance requirements, which further influence the fees a business pays.
Terminology
One of the key points of the discussion was the terminology and concepts in card processing, as knowing the difference between terms like MDR (Merchant Discount Rate), interchange fees, and acquirer fees can make a big difference in understanding and negotiating fees. Additionally, factors like settlement time, transaction fees, and reserve requirements can dramatically influence cash flow, making it essential for merchants to have a strong grasp on these processes.
Card networks
While card networks like Visa and MasterCard are universally recognized, other networks are more popular in specific regions—UnionPay in China, JCB in Japan, RuPay in India, and Elo in Brazil. If a business plans to expand globally, it must consider which cards its customers use and prefer, as failing to accommodate local payment options could mean losing business in key markets. This requires an active approach with payment providers to ensure that the right card types are accepted, enhancing customer convenience and trust.
Alternatives
The webinar also highlighted the potential of alternative payment methods, like open banking and digital wallets, which can sometimes reduce costs and eliminate the need for chargebacks. However, alternative payments come with their own limitations, such as the lack of chargeback protections, making them a mixed bag for both merchants and consumers depending on the scenario.
Hidden costs
A major theme of the discussion was the hidden costs that can escalate expenses beyond the visible fees. These include FX rate margins when settling in different currencies, compliance and fraud protection measures, downtime costs if the provider’s systems are unreliable, and integration costs for linking a payment provider’s systems to a business’s CRM or ERP. These costs often fly under the radar, and only by regularly revisiting contracts and reviewing statements can businesses see how much of their revenue is really going to cover card-related expenses.
Payment and banking strategy
The session underscored the importance of a comprehensive payment and banking strategy, which includes not only understanding costs but also optimizing them by evaluating providers, reviewing contract terms, and staying informed of new options and technologies in the market. PSP Angels, through the Soltesz Payment Framework, offers a structured, easy to implement eight-step approach to any business to streamline payment processes, negotiate terms, and manage cash flow efficiently.
The goal for any business should be to reduce unnecessary costs and risks, while maintaining a smooth customer experience. Card payments may come with unavoidable fees, but by understanding where the money goes, merchants can make informed choices and negotiate better deals that support their overall financial health.
For more insights and future events, visit The Soltesz Institute website, where educational content is regularly updated, helping businesses build real life knowledge around payment and banking practices.
To re-watch the webinar visit The Soltesz Institute website.