Getting rid of payment system fees and charges in online business
Payment processing is something we cannot imagine an online business without. Nowadays, our lives are simply impossible without fast and convenient payments for desired goods and services and also quick delivery to the consumer. For online entrepreneurs in any field, especially in gaming and gambling segments, it is essential to deeply study fees that merchant pays to payment system so you can optimize them correctly.
Not wise to rely on the matter of case, it’s better to be particularly informed in this topic. The more detailed information you obtained, the more balanced decision on cooperation you can make. Do not be deceived by the low MDR percentage (merchant discount rate) when there may be fixed fees, far above the market exchange rates, or delays in payouts of funds.
Let's examine which types of fees payment systems charge and the situations in which they may arise.
Standard payment system fees
If to consider the general payment system flow and agreement we would distinguish a set of fees you most likely to encounter in the process of collaboration. Let’s consider payment system processing fees you going to pay more closely:
- Fee for incoming and outgoing transaction or MDR (merchant discount rate) — this is the most common type of fee charged by payment systems and is a percentage-based. This one directly relates to the transaction amount. For example, 5.5% per transaction.
This means that the same 5.5% will be charged from each transaction, and the monetary expression of this fee will depend on the amount of the transaction itself. This type of fee is simple and understandable to everyone and is often the subject of discussions and negotiations with payment systems. Which payment system fees are considered normal, and which are excessive? This is another research question that Monoup can help with. We conduct a full market analysis, including merchant fees rates. Having such details on hand makes it much easier to negotiate or plan your entry into new markets.
- Fixed transaction fee (fixed fee) — very often it is applied together with MDR in the processing currency. For example, the most common way to apply fixed fee is 0.50 per transaction.
This means that regardless of the amount of transaction, payment system will charge 0.50 cents for each of them. Why might this be not beneficial? For small payments and products with a low price, such a commission can become quite significant and relatively increase the MDR. For example, if the average payment on your website is 5 euros, then 0.50 euros cents fixed commission is already 10% of the amount! And at the same time, payment system usually charges mentioned above percentage of MDR for each payment. For example, 2% + 0.50 cents look like usual fee schedule. Thus, a payment of 5 euros will cost the merchant not 2%, as it may seem at first glance (since we often notice only the percentage), but a full 12%. And this is a very significant point. If the average transaction you process is much higher, for example, 100 euros, then the increase in fee costs due to the fixed commission is much smaller and not that noticeable.
- Minimum fee per transaction (minimum fixed fee) — charge that directly connected to the payment amount.
Most often this fee type is applied in combination with two above discussed fees or just with an MDR. This can sound like minimum fee 2 EUR per transaction, for example. If to consider this fee in combination with MDR 5.5% you can expect it to be set as “fee of 5.5% from each transaction but no less than 2 EUR”. Then you get the outcome, if monetary value of MDR 5.5% is less then 2 EUR, then fixed fee will prevail and you will be charged that fee which is higher.
This situation is most important if your payments are relatively small. For example, payment in amount of 10 EUR with MDR 5% should cost you 0.50 cent. But if got minimum fixed fee in place, then it will cost you 2 EUR. In this case you can see that it’s not quite a good option to process such a small payment via this payment gateway. The trick is that payment system usually introduces this fixed fee for exactly same reason — just to reduce the number of small payments it processes.
- Rolling reserve — is not a fee in fact, but you need to keep it in mind, as some part of your processed funds will not be readily available on balance for quite a long period of time. Usually for 180 days after payment occurs. More detailed information about rolling reserve and its functions we discussed in the previous article. In short, it is some kind of insurance against of fraud resulting from the merchant’s and its user’s actions. Most often it serves as funds to cover potential fines and penalties from Visa/Mastercard or chargeback losses. The most popular amount of rolling reserve is 10% from the total processing volume, but sometimes can be set to 5%. This can assure that payment system is safe and will not bear the financial loss on behalf of merchant using own funds.
- Refund fee — is a payment for refund transaction to the initial payment method of the payer. The meaning of this transaction is a full or partial refund of payment to the same bank details it came from. If there’s any need to perform a refund to different bank details — this cannot be deemed as refund and is otherwise a payout. In case of refund, you can expect relatively low fees but just to keep in mind that they are present. Especially, if your business is in the risk to produce a lot of refunds.
- Chargeback fee may arise when you get a chargeback on your merchant account. In case you decide to dispute or even refund the amount in full, payment processing provider may charge you with a fee associated to this case. In some cases, the fee for chargeback can be up to 100 EUR and this is a serious expense you should keep in mind. Because, you are not just refunding your client, you also pay extra fees per each case, which means that chargeback is even more harmful for you then it seems.
- Fee for a payout to merchant bank account (settlement fee) — this is basically a payment that covers expenses for fund transfer from payment system to the merchant bank account or wallet in another payment system. This applies almost every time, which means you have to count on this fee when calculating your budget and doing financial planning.
- Setup fee or payment for the account opening can be applied when you open a PSP account for high-risk business. Payment systems can charge setup fee in front of any compliance takes place or after the account is approved. But in both cases the basic essence of this fee stays the same — merchant pays for opening an account for him and any other fees and charges will be applied as well once account is set up and payment methods are integrated.
Other charges
In addition to above fees, when transacting money through a payment system, wallets or banks, additional costs may also take place. Since the financial system does not work by itself, every movement of funds is not free of charge, most often exactly business pays for it.
Currency exchange can become a significant expense in international processing. Although exchange rates themselves are not fees, they permanently take place in international transactions and therefore worth of special attention. If you accept payments from Latin America or Asia and receive accumulated funds in USD or EUR, you will need to exchange currencies. In this case, exchange rates used by payment systems or banks may not always be based on market rates. The reason for this situation lies in different factors.
Additional costs may arise depending on the type of payment solutions you use for incoming and outgoing payments. For example, if the accumulation of funds from payers takes place on one payment account, and payouts on another, the transfer of funds between accounts may not be free of charge. These costs eventually arise from the payment infrastructure itself. Although they are also not basic fees of payment systems, they are sometimes covered by the merchant, which is important to consider when starting cooperation with any payment system.
In conclusion, it’s worth to emphasize the importance of a detailed study of payment system fees that you will need to pay even before the actual start of cooperation with payment provider. At this stage, chances of successful negotiations and reducing fees are the highest. Moreover, for financial planning, it is always necessary to know in advance what income and expenses business will have to understand its ROI and profit.
If you constantly encounter "surprises" in the form of additional fees that were not known before the start of cooperation with payment system, this cannot be considered a stable business model. After all, your forecasts will be incorrect due to such gaps in knowledge. Monoup conducts consultations for business and payment managers, where we discuss matters of fees and other potential costs that are important to ask payment systems. Contact us to discuss in more detail and know how this can help your business.
