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Not so long ago, the term 'payment optimisation' barely rang a bell in most corporations, let alone formed any part of their strategy.
However, with consumer purchase habits still changing, companies are now starting to appreciate that payment optimisation is critical for ensuring cost-effective operations as well as a great customer experience.
What is payment optimisation?
Payment optimisation is tweaking your company's payments strategy, their technology stack, or business strategy in an effort to cut down on costs, maximise authorisation rates, cut fraud, and provide frictionless and delightful customer experiences.
These may range from minor improvements to more significant ones like the localisation of new payment processors and further development of complex strategies.
With this degree of complexity and diversity in any payments ecosystem, there can easily be a million different ways you could take your journey to payment optimisation. The trick lies in understanding your goals and then crafting optimisation strategies that dovetail with them.
Payment optimisation strategies
1. Analyse your payment costs
The cost of each transaction is a critical metric for any digital business. It encompasses all expenses incurred in processing payments, such as transaction fees and charges for various payment services.
To manage and reduce these costs effectively, you must understand each component and its impact on your bottom line.
Start by examining the number of parties involved in your payment process. Enterprises can often engage more than ten intermediaries in processing their payments, a number that increases significantly when expanding into new markets.
Each intermediary, from payment gateways to payment processors, adds to the overall cost. Streamlining this process by eliminating unnecessary intermediaries can help retain more revenue and reduce complexity.
Breaking down your monthly expenses for processing payments is crucial. This includes costs associated with gateways, Payment Service Provider (PSP) services, Payment Brand network fees, interchange, foreign exchange (FX), and authentication costs.
Drilling into each component that contributes to your total cost of acceptance is a good starting point. Understand the value each party brings to your payment flow.
Often, a merchant’s payment ecosystem was cobbled together by various stakeholders to solve specific needs at a moment in time. Evaluate what each respective provider offers and whether another provider in the value chain can offer a similar and consolidated service.
Working with transparent partners who provide comprehensive analytics tools can ease this exercise, offering a clear understanding of where expenses occur and how they can be managed more efficiently.
Use the analytics provided by your payments partner to understand what the cost drivers are for your business and address these in order of greatest need.
2. Manage your fees
Interchange fees are often overlooked yet lie at the core of digital payment costs. While it may seem impossible to influence these costs, with the right expertise and strategy, it's possible to reduce them significantly.
Interchange is a large share of the cost of your payment and is the amount the issuing bank charges to offset the handling costs and risk of issuing the card and approving a payment. They vary greatly, making transparency crucial for merchants to avoid extra costs. IC++ pricing is the most transparent option, contrasting with blended pricing.
Your PSP should provide granularity in your reports, breaking down interchange costs at the transaction level. This will enable you to identify how transactions are qualifying and at what costs.
Many uncontrollable factors impact interchange, like the card type a cardholder uses. However, there are many things that you as a merchant can do to help bring down the cost of interchange.
Additional data points like invoice-level detail in the US market or settlement timing have a material impact on interchange costs. Certain programs help improve interchange. Work with your PSP to ensure that you’re taking advantage of special programs and that your transactions are qualifying correctly.
In addition to detailed reporting, be aware that Payment Brand/scheme and interchange fees are reviewed and updated two to three times per year, often with updates in April and October. Work with your PSP to stay abreast of these changes and understand their impact on your processing costs or updates you may need to mitigate new fees.
For businesses operating across borders, managing currency conversion efficiently is key to reducing costs. Opt for smart FX solutions that help you avoid unnecessary FX charges—check what your PSP’s FX costs are compared to their competitors and how granular their reporting is.
A like-for-like settlement, where the transaction currency equals the merchant settlement currency, can prevent conversions and associated costs. Furthermore, local processing in foreign jurisdictions can be a significant step in a merchant’s evolution. By processing locally, you reduce cross-border fees, improve authorisation rates, and gain access to new local payment methods in many cases.
3. Optimise your payment offerings
As mentioned with local processing, review your payment methods to include more cost-effective alternatives to traditional card payments. This doesn't mean compromising customer experience or approval rates.
Integrating a variety of payment methods improves the customer experience and conversion, as many markets have preferred forms of payment outside of standard cards.
However, managing various payment systems can often result in unforeseen expenses and complexities. Understand the rules for each payment method and opt for a unified platform that offers streamlined integration processes, effectively minimising hidden costs.
Offering improved security and higher authorisation rates, network tokens can also help reduce fees. Fraud, disputes, and chargebacks need particular attention when it comes to optimisation. They can be significant drivers of payment costs both in terms of operational time and fees.
Ensuring you have a robust fraud management system and automating the disputes process can improve fraud losses and reduce operational costs.
4. Regularly review and adjust strategies
Technology plays a pivotal role in optimising payment processes. Leveraging advanced analytics and machine learning can provide insights into managing fraud, improving authorisation rates, identifying cost-saving opportunities, and enhancing your payment processing.
Additionally, partnering with a payment service provider that offers a comprehensive suite of services can simplify the payment process, reduce the number of intermediaries, and lower overall costs.
Four key areas of payment optimisation
1. Optimising for conversion
The primary goal of your checkout page is to ensure customers complete their transactions. Achieving this is both an art and a science.
The artistic aspect involves making sure that the checkout page aligns with your brand's aesthetics. It should give trust and provide a seamless experience across all devices. This is important because if you miss the mark here, potential customers could abandon their carts and look for other places.
The scientific part involves understanding your customers, their locations, and their preferences. For example, if you’re selling a watch to a customer in Hong Kong, it’s essential to offer a mix of cards and mobile wallets as payment options and display prices in HKD.
Conversely, for a customer in Germany, providing payment options like SOFORT and GiroPay and displaying prices in EUR is advisable. These examples illustrate some initial steps to optimise your checkout process.
2. Optimising for authentication
In the age of Strong Customer Authentication in Europe and the rising adoption of 3D Secure globally, authentication has become a big aspect of enhancing the overall safety and security of online commerce.
However, this additional security measure has the potential downside of increased customer friction, leading to cart abandonment.
Optimising authentication is a balancing act. There isn't a one-size-fits-all approach to strike that balance; merchants must optimise based on their unique risk appetite and business objectives. Fortunately, merchants have a variety of tools at their disposal to strike this balance effectively.
For instance, SCA regulations provide merchants with the ability to apply "exemptions," allowing certain payments to be processed without customer authentication while still benefiting from the liability shift mandated by SCA.
Outside of Europe, the latest 3D Secure protocols have introduced frictionless authentication. By utilising additional customer information within the 3DS2 flow, merchants can identify situations where no extra customer input is needed to authenticate a payment.
3. Optimising for authorisation
Now things get a bit tricky. Just because a customer has clicked 'pay'—and possibly even authenticated themselves—doesn’t guarantee the payment will go through.
There could be a glitch with your PSP. The issuing bank might flag and stop the transaction. Or perhaps the customer simply doesn't have sufficient funds in their account. All these scenarios are possible.
While it’s impossible to completely eliminate these issues, you can take proactive steps to minimise their impact. Here are some strategies for each scenario:
- PSP Outages: Protect your revenue by implementing a backup or "fallback" processor. This ensures that if your primary processor experiences issues, transactions can automatically switch to an alternate processor without disruption.
- Issuing Bank Declines: When an issuing bank declines a transaction due to suspected fraud, you can try to recover the payment by requesting the customer to authenticate using 3D Secure (3DS). This additional layer of authentication can reassure the bank and increase the chances of transaction approval.
Declines Due to Expired Cards: Expired cards are a common reason for payment declines, especially for businesses with recurring revenue models and those that store cards on file for quicker checkouts. If your business encounters issues with declined payments due to expired card credentials, consider using network tokens or an account updater solution.
4. Optimising for cost
Reducing the cost of accepting payments is a key performance indicator for many payment teams. To achieve this goal, there are several effective strategies:
Meeting Minimum Volume Requirements: Achieving and then maintaining the transaction volume thresholds that are set by payment service providers (PSPs) can help unlock valuable discounts for payment teams. This results in volume-based pricing, which can ultimately help lower the overall cost per transaction.
Fraud and Chargeback Reduction: The reduction of fraud and chargebacks is very important in bringing down processing costs, fines, and fees. Robust fraud prevention measures, along with new technologies like 3D Secure, significantly reduce the risk—and related costs—of business operations.
- Internal Process Streamlining: Automating internal operations for activities like reconciliation helps in simplifying the process and is instrumental in reducing workload while enhancing accuracy and efficiency. In due time, automated systems can help generate huge cost savings by improving operational efficiency.
While cost reduction remains a key focus for merchants, it's essential not to view payments merely as a cost centre.
The most successful and innovative businesses understand that payments can serve as a powerful business enabler. By implementing effective payment strategies, you can unlock additional financial benefits that extend beyond simple cost savings.
Barriers to payment optimisation success
Focusing on just one of these areas of optimisation can unlock significant benefits for your organisation. However, some blockers may hold your business back from realising these benefits.
No access to consistent and reliable data
Starting a payment optimisation project needs a solid foundation, which involves benchmarking current performance and assessing the impact of any changes.
Having consistent and reliable data across your payment processes is crucial. However, this can be difficult when working with multiple providers that organise data in different ways.
Technical debt and resource constraints
Payment optimisation usually involves running many small tests to get incremental improvements. However, this approach can become problematic when your business carries a heavy burden of legacy technical architecture, requiring significant resource investments even for minor changes.
If your organisation faces such constraints, assess how to unlock flexibility in your payments stack before diving into any optimisation initiatives.
Final thoughts
The payment landscape is evolving rapidly, with increasing complexity and opportunities for businesses to enhance their operations.
Payment optimisation isn't just about cutting costs—it's about creating a more efficient, secure, and customer-centric experience that drives revenue and loyalty.
At Planet, we empower businesses to navigate these complexities with confidence. Our integrated payments solutions simplify processes, reduce costs, and unlock the full potential of your payment ecosystem.
Whether you're looking to streamline operations, improve authorisation rates, or adopt new payment methods, Planet’s tools and expertise are tailored to meet the unique needs of your industry.
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