Optimizing your Payment Gateway costs

In today’s digital age, online transactions have become an integral part of businesses across all industries. And payment gateways are the backbone of any online transaction that involves monetary transactions.

The payment gateways are entities which act as intermediaries in the transaction that facilitate the secure transfer of funds between customers, merchants, and financial institutions. When a customer makes a purchase online, the payment gateway securely processes the payment information, and ensures that the funds are transferred from the customer’s account to the merchant’s account.

Understanding Payment Gateway charges

Now it is obvious that these Payment gateways typically charge a certain commission from the merchants in order to facilitate the entire flow. There can be many components to these charges, namely -

• One time setup charges
• Annual maintenance charges
• Merchant Discount Rate (MDR)

Now One time setup charges and annual maintenance charges are generally waived off in most scenarios and what matters is the most important and significant component which is the MDR. MDR is a fraction of the transaction value which is charged by the PGs for every successful payment collected. Eg — The MDR typically can range from 1% to 3% depending on the country, payment instrument, card network, card type, etc.

A big tradeoff — Challenge faced by merchants

While selecting a PG for your business, there are multiple factors which can influence your decision but out of all the factors, the two main factors that directly impact your revenue and profits -

1. MDR — payment commission charged by the PG (as discussed above)
2. Transactions Success rate — This metric reflects the quality and performance of the PG and impacts your conversion rate. It is defined as the percentage of attempted payments which are successfully completed by the PG and amount received by the merchant.

It is usually the case that the PG charging higher MDR also provides a higher Transaction Success rate as well. This is because the PG uses a better performing and expensive payment processor in the backend. It is obvious that the better the payment processor is, the more expensive it is, guaranteeing a higher success rate.

Here comes the tradeoff for the merchants -

1. Choose a lower cost PG, but compromise on the lower Success rate (which has a direct impact on conversion rate and overall revenue loss)
2. Choose a higher Success rate PG, but compromise on the higher PG costs (which has a direct impact on profits due to increased costs).

Solution

We implemented a solution at redBus specifically to address this problem but the caveat is this approach works only for geographies and payment instruments where there is no two-factor authentication or any customer input required post payment initiation. Let’s take the example of Latin America (Peru, Colombia, etc.) where there is no second factor authentication for online card transactions (Credit / Debit cards). Once the user enters the card details and submits, the transaction is processed without any additional user intervention.

For the simplicity of illustration, let’s assume we have two PGs available -

• PG1 — Lower MDR PG
• PG2 — Higher Success Rate PG

Approach -

We have a now built a PG auto retry mechanism internally which works in the following way -

1. Every time user submits the card details, we first hit the PG having lower cost, i.e. PG1 in order to convert as many transactions as possible at the lowest cost.
2. For all the failed transactions in step 1, we then automatically make a payment retry by hitting the higher SR PG, i.e. PG2 with the same card details submitted by the customer in Step 1, without any user input. This helps us convert as many remaining transactions as possible (though at a higher cost)

This approach has helped us optimize for both the Success rates and the PG costs (MDR) at the same time for all geographies where there is no second factor authentication on the payment instruments.

Impact

As a result of the above approach that we implemented, we have observed a significant improvement on the below metrics -

1. PG cost (MDR) — Our PG costs for geographies like Peru and Colombia have gone down by ~25%, owing to the fact that ~70% of card transactions are now processed successfully via a much cheaper PG.
2. Success rate (SR) — Our overall effective card SRs in Peru and Colombia have gone up by ~1–2%age points, owing to the fact that we now make multiple attempts in the backend with multiple PGs in order to convert as many transactions as possible and hence the effective conversion rate has gone up.

Ending thoughts

Payment gateways, which are interfaces used to collect consumer payment, are an important feature of the digital economy and the significance of payment gateways in e-commerce cannot be overstated.

While it might look that the payment gateway charges are not really significant, or the difference among various payment gateways is not much, it stands out when looked through the lens of a bigger business establishment. In these cases, a small change in the payment fees can significantly impact their profits. Hence, one should always look for avenues to optimize costs wherever possible as it has a direct impact on the bottom line.