The cost of payment processing

The cost of payment processing

Several factors influence the cost of processing payments, each of which directly affect your business’ unit economics. Understanding how each of these factors influence your cost of processing will safeguard your margins and mitigate the risk of unexpected increases.

Pro tip: Calculate your baseline payment costs, this is your threshold. Your pricing strategy should never dip below this level.

Understanding Card Mix

Card Mix refers to the variety of payment cards processed within your business over a specific period. 

Each card comes with its own processing cost, which can significantly impact your overall payment expenses. For instance, debit cards generally cost less to process than credit cards, meaning a business with a higher volume of credit card transactions will see increased processing costs.

Breaking down the factors that impact costs of your Card Mix

1. Card type

The card type is the most impactful variable within the overall cost of processing. If you see that one dimension varies significantly customer by customer you could set the blend structure to counteract it.

Pro tip: There has been an increasing number of online booking platforms that use Virtual Credit Cards (VCCs) to pay for bookings. These VCCs often come with a commercial interchange rate and as a result are expensive to accept. It’s important to review your percentage of commercial cards in the total card mix to ensure this is correctly accounted for within the cost of processing.

            Pro tip: Use the Blend Rate Calculator

2. Merchant Category Code

Every business has an MCC (Merchant Category Code) — it’s like an industry ID tied to your location, usually set up by the processor when you first onboard. For example, restaurants are MCC 5812, and retail clothing stores are MCC 5691.

Why does this matter? The MCC directly impacts the interchange rates you pay. Different industries get different rates. Supermarkets, for example, enjoy cheaper interchange programs compared to restaurants. If your supermarket is set up under the wrong MCC, you’ll pay higher interchange fees and lose out on margin.

Pro tip: Double-check your MCC for each location where you process payments. This ensures you’re getting the best possible interchange rates and not leaving money on the table.

3. Average Transaction Value (ATV)

The ATV or Average Transaction Value is crucial to understanding your processing costs. It impacts two main areas:

  1. Interchange fees

  2. Blend rates 

Interchange fees 

Interchange fees vary based on the transaction size. If your transaction falls within certain value ranges, you can unlock better (lower) interchange rates. For example, Visa transactions under $15 usually qualify for a cheaper interchange rate.

Blend rates 

A blend rate is made up of two parts: a percentage and a fixed amount (e.g., 2.5% + $0.10). This is important as this two-part fee structure will have a variable impact in margin as ATV changes.

4. Sales Channel

The Sales Channel (or entry mode) of the transaction refers to how the transaction was processed. There are two primary splits in the channel of a transaction: 

  1. Card Present

  2. Card Not Present

Card Present

These are transactions where the card is physically present, either as a plastic card or through an authenticated wallet like Apple Pay. Since the shopper is there in person, the risk of fraud is lower, making these transactions cheaper to process.

Card Not Present These transactions occur when the card is not physically presented, such as in online or digital transactions. This sales channel is more expensive to process due to there being a higher chance of risk of fraud without the shopper’s presence.

5. Transaction information

When it comes to processing costs, risk is a major factor.

The higher the risk of a transaction, the higher the processing cost. Issuers and card schemes offer lower fees when you provide more information with the transaction, as it helps reduce the chance of fraud. Key information:

  1. AVS (Zip code)

  2. L2/L3 Data 

AVS (Zip code)

When you provide the cardholder’s zip code with a transaction, it can prevent downgrades, which occur when a transaction is flagged due to a lack of information. 

This is especially important for Card Not Present and MOTO (Mail Order/Telephone) transactions. Collecting and matching the zip code can save you 0.30%-0.50% in fees.

L2/L3 Data

Level 2 or Level 3 data is a set of data outlined by the issuers and schemes that, if provided, will lower the risk of the transaction and the cost. 

This data includes additional information about the items sold and the customer. In order to avail of the cheaper L2/L3 rates, you will need to collect and pass this information to your processor. 

6. Processing rails

Each scheme maintains network rails to send transactions through, some are cheaper than others. For example, in the US, there are a number of US Debit rails.