Recurring payment processing for many subscription businesses is a “behind the curtains” part of their business that some assume is a fixed cost of doing business. But that simply isn’t true. There are many elements of payment processing that could cost your business more money than it should!
When your subscriber pays you, that payment touches different parts of the payment processing system as that payment makes its way from their bank to your merchant account, from initial authorization to ongoing renewal payments.
Payment processing fees vary, and your ability to manage them depends on your subscription management and billing technology partners. Some platforms offer all-in-one solutions with fixed processing solutions while others offer many payment processing options.
Understanding interchange fees
There are multiple categories of processing costs that you should be aware of. When working with an acquirer directly, they might offer you a bundled discount, which essentially means they provide you with a single number. Typically, this consists of a percentage and a transactional fee. For instance, let’s say it’s 2.9% plus 30 cents per transaction. This fee covers your processing costs.
On the other hand, there’s the concept of interchange pass-through. This refers to the amount that goes to the card networks such as Visa and MasterCard, as well as the issuers. When you opt for a bundled discount, these fees are combined, and you don’t see the breakdown of each fee.
However, if you choose interchange plus pricing or interchange plus pass-through, you’ll see separate line items for the processor fee and the interchange costs. In this case, your processor will charge you a small amount per authorization, a few pennies or basis points per deposit, a couple of dollars per chargeback, and a fee for every account updater match. Your processor will have a range of different line item fees.
In addition, interchange fees are what they are. Debit cards typically have lower interchange rates because they’re regulated, unlike credit cards, especially rewards credit cards. If you have a bundled discount and primarily process debit cards, your acquirer benefits from the lower interchange rates of those cards.
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Merchant Category Code – make sure you’re using the right one!
Your merchant category code (MCC) and the amount of data you transmit can also influence your interchange rates. It’s generally advisable to opt for an interchange pass-through model as it provides you with detailed information about what you’re actually paying and where the fees are going. Double-check what your MCC code is. High-risk categories are charged higher fees than lower-risk categories.
Your MCC data and whether you operate cross-border or locally can impact your interchange fees as well. It’s worth examining your interchange detail line items to determine if there’s an increase in customers from international regions. Shifting to a local focus may result in cost savings for those specific geographic areas.
Subscription billing platforms
Outsourced billing systems will also contribute to your overall processing costs. They usually charge a percentage of sales or a transactional fee, or sometimes both. Some cover all costs, and some cover some of the processing costs. Furthermore, there might be value-added services offered by the acquirer or billing system. When reviewing contracts, take note of whether account updater, recovery, chargeback management, or other services are included or require additional fees.
Payment cards
The type of card used by the cardholder also affects your fees. When aiming to reduce fees, negotiating a lower authorization fee is beneficial. If you require multiple authorizations to complete a single deposit, it’s acceptable as long as the authorization fee is minimal. By trading a low authorization fee for a higher deposit fee, you can optimize your auth-to-deposit ratio. Analyzing the data and analytics will help you establish your optimal rate, indicating how many authorizations are needed to generate a deposit.
Reporting costs
It’s important to inquire about any additional charges for detailed reporting beyond basic reporting. Some merchants may need to pay extra for enhanced reporting capabilities or even develop their own reporting tool and import the data. Also, be aware of the costs associated with additional services like account updater and chargeback fees. Certain acquirers may refund chargeback fees if you successfully dispute and win the chargeback.
Typically, in a fee breakdown, acquirer fees comprise less than 20% of the total, while the majority, 80% or more, is allocated to interchange and assessments. The lion’s share of your fees goes to the card networks and issuers rather than the processor itself. Therefore, your best opportunity for fee reduction lies in minimizing interchange fees.
Learn more about current payment and profitability trends to watch here.
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