How to reduce card payment fees

Merchants spend hundreds of billions of dollars every year to process payments. The latest Nilsen Report on merchant payment processing fees in the US found processing fees topped $160 billion in 2022. In the UK, a British Retail Consortium survey over the same period found UK retailers alone paid over £1 billion in fees to accept card payments online.

While these payment fees are part of the cost of doing business, that doesn’t stop the CFO or Finance Director from asking if there’s a way to lower payment processing costs. 

If that’s a question you’ve faced recently, or if reducing the cost of payment acceptance has become a key KPI, then this article is for you. We’ll be exploring the:

• Different types of payment fees
• Various fee structures you may encounter
• Strategies and tactics you can deploy to reduce your payment costs

Unpacking the cost of a card payment

The cost to process a typical payment is broken down into three categories. While these fees compromise the bulk of what merchants pay to process a payment, other costs may also exist. 

• Interchange Fees are typically the largest line item of the invoice you’ll receive. They are charged by the bank issuing the customer’s card, which amounts to a percentage of the transaction value (sometimes, there may also be a fixed fee). The actual rate charged depends on various factors, including the card type, where the payment is made, and the business Merchant Category Code (MCC), but typically, they sit between 0.3% and 2% of the total transaction cost. 
• Assessment fees are what you pay to the card networks for using their service. They are usually around 0.12-0.15% of the total transaction value. 
• Processor fees are charged by the Payment Service Provider (PSP) you use. Each PSP will have distinct fee structures and will likely adjust these based on your business, average order value, and risk profile. Some processors charge a minimum monthly fee and may charge additional fees for additional services like fraud checks.
• Chargeback fees are a cost of accepting card payments. They occur when a customer successfully disputes a transaction. Depending on your agreement with your acquirer, the cost of chargebacks can range between $20 and $100.

As you can see, many variables are involved in the cost of processing a payment, and it’s critical to understand the amount you’re paying and what the payment is for. For this reason, many businesses have moved to an Interchange++ (IC++)pricing model. Unlike its alternative ‘blended pricing’ model, IC++ pricing gives merchants a complete breakdown of costs and the ability to reduce these by changing how they process their payments.

Blended pricing versus ICC++ 

Let's take a look at the pros and cons of the two pricing models that exist in payments.

‍Blended advantages:

• Simplified payment processing because there is no need to track and analyse complex interchange fees
• Predictable costs and budgeting because merchants can forecast processing fees 
• Potential savings for merchants with a consistent card mix or low transaction volumes

‍Blended disadvantages:

• Less flexibility to negotiate fee structures or respond to changes in interchange fees
• Potentially higher fees for merchants with large transaction volumes
• Poor transparency as merchants cannot see the interchange fees   

IC++ advantages:

• Transparency as merchants can see a complete breakdown of costs 
• Potential savings for merchants with high transaction volumes
• More flexibility for merchants to negotiate individual fees

‍IC++ disadvantages:

• More complexity as merchants may need to track and manage interchange fees individually
• Settlements can be slow as it may take two to three days for a payment processor to receive the fee data from card networks and issuing banks
• Transaction rates can vary

Seven ways to reduce the cost of payments

Let's take a look at some steps you can take to reduce your payment fees.

Develop a multi-acquirer strategy

This entails collaborating with multiple payment service providers to avoid reliance on a single pricing model. This approach affords you enhanced flexibility and autonomy, enabling you to select the most cost-effective payment route while ensuring consistent authorization rates. Additionally, operating within a competitive landscape empowers you to negotiate more advantageous terms with providers.

Learn more about the benefits of developing a multi-acquirer payment strategy.‍

Use the most cost-effective routing and domestic payment rails

Fees vary between different payment rails, and by selecting the most suitable payment route for your business and markets, mainly to avoid cross-border charges, you can minimize costs and improve overall financial efficiency. You may also operate in markets where domestic card schemes exist. For example, payments made using Cartes Bancaires are significantly cheaper than those made with Visa or Mastercard. So, if it’s an option, you’ll want to encourage customers to use these schemes as they’re more cost-effective.  

Learn more about how Primer enable you to accept domestic card payments.

Provide cheaper payment options and encourage customers to use them

The payment landscape constantly evolves, with an expanding array of options available. Account-to-account (A2A) payments represent a prime example of this evolution. ACH in the US, SEPA Instant in Europe, Pix in Brazil, and iDEAL in The Netherlands have lower transaction costs due to fewer intermediaries involved. Incorporating A2A payment options and encouraging customer adoption can deliver substantial cost savings, especially on large-ticket transactions. 

Include sufficient data to qualify for lower interchange rates in unregulated markets

Transactions sent to issuers that include additional data are seen by issuers as less risky and can qualify for lower interchange fees. In the US, for example, collecting a customer's ZIP code and passing this on to an issuer can reduce interchange fees by 1% or even more. Level II and Level III data is another option for businesses selling to other businesses. 

Optimize fraud prevention and reduce chargebacks

Fraud poses a significant direct expense for merchants, amplifying payment fees as an indirect consequence. Payment service providers (PSPs) and issuers view merchants with high fraud rates unfavorably, often imposing premium charges for accepting payments. Thus, mitigating fraud and chargebacks emerges as a strategic avenue for curbing the expenses associated with payment acceptance.

Use the correct Merchant Category Code (MCC)

MCCs are four-digit numbers that classify the type of goods or services a business offers. This data helps to determine the relevant interchange fee and other related charges. A business in a less risky category with lower fraud rates and fewer chargebacks might qualify for a lower rate. Merchants must ensure they have the correct codes for accurate transaction accounting and to gain the most favorable rates if they have low-risk businesses.  

Use Network Tokens  

Using network tokens has been shown to reduce fraud and boost authorization rates. Even better is that Visa and Mastercard offer better pricing for payments made with these tokens since last year. So, not only do you get better security, but you also save money on processing fees as a merchant.

Payments aren't a cost centre 

While working to reduce the cost of accepting payments is worthwhile, it’s important to remember that payments aren’t a cost center; they’re a strategic asset. It’s often the case that the revenue gains merchants get from optimizing their payment processing outweigh the cost savings they’d make. 

Take a look at our ROI Calculator to see for yourself.