The $6.3 trillion eCommerce market is growing significantly, with $199,771 USD spent online every second. Cash only accounts for 16% of POS payments globally, the remaining 84% (and 100% of eCommerce sales) of payments occur via digital methods, and the payee or payer may not even notice the numerous intermediaries that manage the process.
Many customers making payments may not be aware about what process goes on behind the scenes between the merchant and card payment network. However, merchants will be more cautious about the payment systems used. Having teams dedicated to optimising the payment process could allow merchants to save a few percentage points off each transaction, and potentially lead to hundreds or even thousands saved each year.
Should using third party payment companies that support this be viewed as an interchangeable commodity, or something far more sophisticated with many different services and prices? Let’s discuss…
Is PayTech too complex to be treated as an interchangeable commodity?
A commodity is a valuable thing to be sold and is purely interchangeable. For example, one barrel of Brent Crude is identical to every other barrel of Brent Crude and there is no ‘premium’ version that a business would be willing to pay more for – paying more for an identical product simply has no benefit.
Payment intermediaries such as card networks and payment service providers have been able to take a small chunk out of the profits of payments for some time due to a lack of alternatives. However, with the recent emergence of new payment providers and technologies like Open Banking there are alternatives for merchants to reduce the costs imposed on transactions. Merchants which operate within razor thin profit margins (such as those in online retail which operates with a net margin of 0.64%) would certainly have to look into this or they will face a lot of pressure. Businesses managing cross-border sales may also be affected with interchange fees imposed.
However, in this case, payment providers are not identical intermediaries and offer a huge diverse range of technology, so in my opinion these would not actually be considered a commodity. Moreover, we should not jump to the assumption that the lowest cost per transaction is necessarily the best and we would have to consider speed and security. If your payments partner cannot mitigate high levels of fraud, for example, then your costs will inevitably go up.
This would significantly differ to crude oil in which its price is simply based on the global forces of supply and demand. Merchants choosing their payments partners shouldn’t just focus on the cheapest option.
Treating payments a force multiplier instead
Now we’ve addressed that payment service costs are rarely simple, treating payments companies as force multipliers may be a more accurate analogy. A basic example would be an electric drill which allows someone to effortlessly complete the same task as a screwdriver. Payment providers can also fit into this category by making transactions simpler, more secure and faster for merchants.
A key factor for the quality of payments service is reduction in decline rates – 15% of recurring credit card transactions are declined, with even as many as 30% in some industries. While transactions can be declined for plenty of legitimate reasons, there can be many false declines among that number. This number needs to be reduced because the total cost of false declines is estimated to come at a cost of $443 billion every year – a detrimental figure. While customers will retry rejected transactions, falsely declined transactions could lead to a high level of customer abandonment and dent a company’s profits.
Mitigating fraud is also crucial since failing to do so would place your company as high risk and lead to higher fees. While there are tools and measures in place within the payments process, not all payments companies provide a firm safety net which could harm the customer experience. Therefore, a cheaper payment partner doesn’t necessarily mean profitability in the long term if fraud is not prevented.
Finally, data is a crucial factor for optimising the payments process as it allows companies to gain a deeper insight into customer behaviour and the quality of transactions. More data can also help acquirers, PSPs, merchants, and risk providers distinguish which suspicious transactions are legitimate or fraudulent more accurately. Since data is not readily available to all companies, payment providers which have access to this would be highly beneficial to merchants.
The new era of force multipliers for payments success
Technological innovation provides an abundance of opportunities for merchants to significantly improve the payments experience and boost profit margins. A fully modernised payment provider has so many advantages compared to a low-cost payment partner. However, the quality of a service isn’t always reflected in the price; not all high cost services deliver a premium service, and not all the less expensive companies offer low quality services. Therefore, businesses should scrutinise more closely which services meet their wants and needs. Many force multipliers have radically different uses – the same should apply to payments!
To learn more, visit: https://www.silverflow.com/
About the author
Robert Kraal, Co-founder and CBDO, Silverflow. He is one of the few people in the world with over 25 years of experience in online payments. After completing his degree in Geophysics, he started his career at Bibit, the first global Payment Service Provider (PSP) which was acquired by RBS/Worldpay. At RBS/Worldpay he went on to lead account management, before moving on to Google Netherlands. He joined Adyen in 2010 in the role of COO, where he was responsible for building and running the global acquiring and processing service. As Co-founder and Chief Business Development Officer of Silverflow, Robert is responsible for maintaining relationships with the card schemes, acquirers, PSPs and regulators.
About Silverflow
Silverflow is a new kind of payment processing platform designed for today’s payment needs and fit for the future. A cloud-native solution with a single API to the card networks. One platform with one connection. Reducing cost and complexity, easy to use, data-rich, Silverflow frees you to innovate. For more information contact Silverflow: https://www.silverflow.com/