September 1, 2016
By Karisse Hendrick, Editor-at-Large, CardNotPresent.com
As card-not-present commerce has grown over the last two decades, having at least one fraud-prevention expert on staff has become standard best practice for a majority of CNP companies. These positions provide substantial cost savings to merchants by protecting the bottom line. But an equally important role remains unfilled by many companies. Dedicated payments professionals can provide cost savings and also can increase sales for card-not-present companies. Many successful CNP companies have seen the value of hiring payments experts and building payments teams proven by the effect on their bottom line. Several key areas will benefit from their presence. While the opportunities within each organization vary, there are four basic areas in which payments professionals can provide value consistently.
Optimizing Payment-Related Costs
One top-100 retailer recently confided that the single largest line item on its books was payment processing costs. These costs exceeded the total cost of labor, goods, real estate and taxes. What many CNP merchants do not realize is that these costs can be reduced, either through negotiation or optimization. Payments costs can be divided into three buckets: discount fees, interchange and everything else.
You may wonder why the first bucket is called “discount fees.” They certainly don’t feel like a discount. This is the amount paid to a payment processor for the service of processing payments. There is a standard rate for each transaction plus additional fees like chargeback notifications, FX charges (for international transactions), deposit fees, etc. These rates depend on volume, cost per ticket and the perceived risk of a specific business model, but also vary between providers and many times can be negotiated lower. The second type of fee is interchange. This is the fee provided to issuers and card brands in exchange for the privilege of charging their clients’ cards. The rates vary based on how the payment was processed and the type of card (debit, credit, credit w/ rewards, etc.). While these rates cannot be negotiated, they can be optimized through an analysis of the rates currently being assessed and applying specific ways to qualify for lower rates. The third type of fee pertains to all other associated costs including gateway fees, shopping cart costs, etc. Most of these can be negotiated or can be eradicated by consolidating providers of these services.
While most anyone within a company can negotiate lower rates, a payments professional will know industry standards, typically reducing fees lower than standard negotiation processes. In the case of the aforementioned retailer, once the company brought in someone who understood pricing and what some of their competitors were paying for similar services, it was able to negotiate substantially lower rates. Similarly, a dedicated payments expert should be knowledgeable about interchange rates, knowing which transactions could qualify for a lower rate and how that rate can be achieved. They also may have an understanding of which additional fees such as shopping cart and gateway costs can be reduced or eradicated and the best way of achieving this without it negatively impacting the business.
Increasing Authorization Rates
When a purchase is made at a card-present location and the card is swiped, there are very few reasons for which the transaction can be declined. Most likely the card has been shut down, is expired or the cardholder is over the credit limit. When a purchase is attempted at a card-not-present location, however, the reasons for declines can vary wildly. Some card issuers evaluate risk on card-not-present transactions, in addition to the merchant (post authorization). Issuers may decline transactions due to various risk factors such as risky MCC (Merchant Category Code), history of high chargebacks, a lack of additional information in the transaction data or a variety of other factors.
Many payments professionals are able to analyze and create strategies to increase authorizations based on decline reason codes. Also, if a merchant has recurring sales as part of a subscription service, many payments professionals can provide expertise that greatly reduces churn due to card declines. Retrying declined transactions in a strategic way and creating a communication process for updating a method of payment can be integral in retaining many subscription accounts without a significant number of failed authorizations. A strategy that increases authorization rates by only 1 percent can have a significant impact to the bottom line. For a billion dollar company, that would add $10 million in additional sales, without any additional marketing spend or customer acquisition costs.
Selecting and Managing Cross-Border Payments
Once a company decides to accept payments from a region outside its base, there is a series of payments-specific questions that must be answered. Which PSP (Payment Service Provider) is best for the region? Should payments be processed locally or cross-border? Should the currency be native to the region or to the company? Which payment methods should be selected? What is the best strategy to repatriate the funds? The answers to these questions are specific to the region as well as the average order size and business model of the company. How these questions are answered can have a direct impact on the bottom line in several ways including fees, taxes and the authorization rate. While most PSPs have in-house experts that can assist in the decision making, no one knows the specific needs of your business more than someone within your company.
An in-house payments person can manage expansion into another market, provide subject matter expertise in the selection of a PSP and can be a liaison between all teams involved in the process including (but not limited to) accounting and development. Such a person will also track and measure the purchase success rate of each payment method and currency throughout the launch and in an ongoing manner to ensure that the authorizations are successful, money is being deposited in the right bank and there are no major issues. Setting up a payment-acceptance strategy in a new country also has several variable costs. Having an expert be a part of this process can mean a significant cost savings, as well as increase in sales.
Subject Matter Expertise for Payments-Related Decisions
In the last few years, fintech start-ups and established companies alike have demonstrated that innovation can be achieved through payments (bitcoin acceptance, in-app payments, mobile wallets, pay-by-selfie, etc.). It’s not uncommon for marketing departments to be offered incentives to add a new method of payment to the checkout page. Having an expert in the space who understands your company culture, goals and technological capabilities as well as the risks and benefits of each payment option will help you make the right decisions for your business. If a company added every new payment method available on their checkout page, it would appear cluttered and confusing. If you add a payment method that is not attractive to your demographic, it simply won’t be used and will take up valuable real estate on the checkout page. Sometimes contracts are signed without considering the demographic of the payment method, the way repayment to the merchant is handled or if it will be difficult to implement internally. A payment expert on staff will be available instantly to review the contracts, bring cross-functional teams together to assess the viability of implementation and assist in selecting a payment method that will add sales while being the best fit for your company’s needs.
A payments expert will also provide expertise and ownership (if desired) for managing and updating PCI compliance, acting as a liaison between development and the acquirer. Additionally, they should be up to speed on new and updated rules and regulations the card brands release regularly. Not adhering to these rules and updates can result in steep non-compliance fees. One merchant recently said that they never realized how many questions they had about payments until they had someone to ask them to.
Having a payments expert available can significantly add to the bottom line through both cost savings and increased sales. Industry leaders like Apple, Facebook, Amazon and Netflix all have invested in at least one payments team to focus on the tasks described here. It is an industry that is growing, with the demand sometimes exceeding the supply of qualified candidates looking for full-time positions. If adding headcount or finding a qualified individual proves challenging, hiring a payments consultant may be worth considering. Many offer the services described above, and could result in significant cost savings and an increase in authorizations without adding a full time employee.
Whether hiring an in-house or external payments expert, it is important to have someone knowledgeable in these areas to reduce fees, optimize authorization rates, make important cross-border processing decisions and provide subject matter expertise when needed. One well known merchant recently compared online payment acceptance to a cash register in a physical location. When asked about the importance of a payments expert he said, “It’s like having someone protect the cash register. Once a company gets a certain size, if you don’t have someone manage it, it will cost you money.”