The Hidden Truth Behind Low Payment Processing Fees

If you’re like most decision-makers, you’ve made this one mistake at least once: opting for the cheapest offer without looking at the fine print.

Especially when it comes to payments. There are many other not-so-obvious numbers you should be looking at beyond the pricing.

If you don’t dig deep into the numbers and only look at fees superficially, you can make decisions that can cost you (a lot) instead of saving you money.

Although good deals might look appealing, have one thing in mind: in business, there’s no free lunch.

If you are paying cheap for payment processing, have no doubt that this might cost you elsewhere.

Say there’s a global processor that is proud of offering extremely low chargeback rates as well as a so-called “seller protection” that covers most (or all!) chargeback-related expenses.

Little do you know that having this granted protection comes with a high cost.

Nobody wants chargebacks, but there is a tiny detail most business people forget: false positives. You know, those transactions that look like a fraud but, in fact, are not.

When a company is willing to absorb the financial losses that a chargeback can cause, how much of these suspicious transactions that can lead to false positives do you think will be declined?

A lot or a little?

If you’ve thought ‘a lot’, you were right.

And here’s the worst thing: you won’t even know how much money was left on the table by keeping the strings too tight, as payment companies will most likely not share (or not even have) that sort of data.

Why you should think beyond pricing when choosing your payment processor

I’ve gathered some numbers that might give you a clue of the scope of unfulfilled sales.

Let’s look at the following scenarios:

Scenario 1: A conservative payment processor with a 2.5% fee and no-cost chargeback insurance, that has a conversion rate of around 40%.

Scenario 2: A pro-business payment processor with a 4.9% fee, and that charges for chargebacks, but has a 75% conversion rate.

The processing fee is almost the double and the chargeback cost looks scary, right? But let’s put it all on paper using as starting point an ecommerce business that has 500 monthly orders to see what we get.

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Let’s add now the fees, calculated under a 35% gross margin, in which is included the product and marketing costs (notably your customer acquisition cost, or CAC, — on average $20 per customer in ecommerce).

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And let’s add, at last, the chargeback costs: 

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Basically, in the second scenario you would still have 64% more profit.

All this without taking into consideration all the efforts you’ve put into attracting the customer just to have it backfired, as the customer ends up being declined by the payment processor, becoming a false positive.

Not to mention the extra efforts that will be required in order to recover that lost customer. Or the intangible losses, such as reputational damage, stress, unnecessary use of customer services and the list goes on.

If you don’t seek any business growth, a global processor might be just fine for you.

But if you are a go-getter that has actual plans to scale up, you must consider all these hidden numbers when building your business’ international payment strategy.

And we can go even deeper than that.

Payment processing factors you should consider when selling internationally

The situation worsens considerably when it comes to selling internationally, as local habits are different in each nation and global processors can hardly distinguish the good from the bad transactions. By modeling their fraud prevention in “global scale”, little of local fraud nuances are taken into consideration.

A solution for this would be partnering with a local processor that knows the market and can offer you better conversion rates. Yet, some local processors’ fees can be higher than global ones’.

However, if you pay attention only to this detail, your sales volume can take a hit.

By understanding how the market works and using local data intelligence to confirm the veracity of transactions, a local processor can offer you higher credit card conversion rates even with fraud-detection strings loosened.

In Latin America, for instance, you would need to play by the latinos’ game and offer local payment methods, such as cash or credit card installments. Or accept domestic cards. Things only a local processor can offer you with high quality service.

As I said before, there is no free lunch and a local payment processor fee is indeed higher, but when you look at all there’s to gain, oh boy, the difference becomes irrelevant.

Summing up

Numbers, numbers, numbers. You can’t accelerate your business growth if you’re stuck with a narrow mentality, particularly in regards to the numbers that can guide you towards the best decision.

I’m not saying that this is the ultimate, irrevocable truth. You can loosen or tighten strings according to your needs. You can use mechanisms to mitigate fraud. You can combine payment processors and decide whether or not you should offer local payment methods.

But, before anything you need to put it all down on paper and see what is really beneficial for your business in the long run. Paying less can look like a smart move now, but it might not be such a bright one in the future.

Bottom line it all comes to two things: knowing deeply your business’ needs and doing the math properly.