6 Things to Watch Out for When Negotiating a Payments Service Provider Contract

For the last 16 years, I have worked in Payments working with the biggest Payments Service Providers (PSP) and Merchants in the world. One of the most important things I have learned is how important it is to negotiate your PSP contract, even if you think you don’t have any leverage. In this post, I will discuss the 6 things you have to watch out for when negotiating a PSP contract. 

To get straight to the point, the 6 things you have to watch out for when negotiation a PSP contract are:

  1. Blended vs. ‘Interchange plus’ Pricing
  2. Transaction and Volume Tiers and Fees
  3. Chargeback Levels and Fees
  4. Fraud Prevention
  5. Deposits and Settlement
  6. Forex

If you are reading the above and have no idea what I am talking about, don’t worry, I will walk you through each topic, why it is important, and how to handle it.

What should you exactly be looking out for?

1. Blended vs. ‘Interchange plus’ Pricing

One of the most important aspects of opening up a store, either e-commerce or physical location, is finding a Payments Service Provider, to process credit and debit card transactions and/or alternative payments.

With a lot of popular platforms, payments are automatically offered with “simple” pricing. It is within this simple pricing model, that you have your first opportunity to save significant costs.

Most PSPs offering their service offer pricing that is based on a Blended model. The pricing mostly consists of two components, a fixed fee, and a variable fee. The fixed component is often described as a Gateway Fee, dependent on the PSP this can range between $0.30 per transaction till about $0.01. The variable component often described as the Processing Fee, can range from 0.5% all the way up to 5%, dependent on a number of factors including card types (MasterCard, Visa, Amex, etc.), regionality (Europe, USA, etc.), funding (credit or debit) and other criteria.

With the advancement of some new PSPs, ‘Interchange plus’ has become more popular, especially for large merchants who want to better understand how they are being charged for a card-based transaction. ‘Interchange plus’ is based on the fee structure within card payments. Besides the Gateway Fee, the ‘Interchange plus’ model consists of an Interchange Fee, Scheme Fee, and Acquirer Mark-up Fee. With card processing, each participant in the transaction takes a fee for their services, better known as the Four Party Model. The Interchange Fee is the fee that the merchant pays to the Issuer of the card being processed. The Scheme Fee is the fee that the merchant pays to the Scheme (MasterCard, Visa, etc.) for processing the transaction and maintaining the platform. The Acquirer Mark-up Fee is the fee that the merchant pays to the Acquirer (the Merchant’s Bank) for processing the transaction and facilitating the rails and pay-out facilities.

If you are starting out, the Blended rate sounds ideal, however, this is the way that the PSP manages their portfolio risk, meaning they have a lot of merchants who all have different customers, who use different cards from different regions. The average cost of these transactions (Interchange, Scheme Fee, and Acquirer Mark-Up Fee) is lower than the Blended Rate they offer, the difference is an additional revenue stream for the PSP.

As your company’s revenue increases, your company could either be a merchant that overpaid or underpaid on their payment processing. Having transparency in the processing of your payments, you can ensure that you understand what you are paying per transaction and have the ability to negotiate the Acquirer Mark-Up fee.

2. Transaction and Volume Tiers and Fees

In the last 10 years, we have seen some amazing E-Commerce success, from mattress companies like Casper to success stories like Airbnb, Uber, Spotify, and many others. If your company is on a similar trajectory, ensuring that you have negotiated your transaction and volume tiers and fees is crucial.

At the beginning stage of a company, we all fantasize about doing millions of transactions and revenues in the hundreds of millions, unfortunately, most PSPs don’t think you will do more than a couple of hundred transactions a month. This is why they price processing transactions based on tiers.

Price Tier (Transactions/month)0–10.00010.001–25.00025.001–50.00050.001–125.000125.001–250.000250.000+ 
Processing Fee (per Transaction in relevant Price Tier) €0.10 €0.09 €0.07 €0.06 €0.05 €0.04
Fixed Pricing Tier based on Transaction Volume

Example 1: Tier Based Processing Fee

Based on the contract negotiations you have with your PSP, the Processing Fee can range anywhere between €0.30 if you are just starting out, all the way down to €0.001 (a tenth of a cent), if you are an enterprise company doing billions of transactions a year.

Price TierMonthly Turnover FromMonthly Turnover ToApplicable Mark-up per Transaction in relevant Price Tier (calculated over Payment amount) Credit/Debit card
1€ 0€ 00.60% / EUR 0.20
2€ 250,000€ 500,0000.55% / EUR 0.20
3€ 500,000€ 2,500,0000.50% / EUR 0.20
4€ 2,500,000€ 7,500,0000.45% / EUR 0.20
5€ 7,500,000+0.40% / EUR 0.20
Valuable Pricing Tier based on Volume

Example 2: Tier Based Mark-Up Fee

In the case of the ‘Interchange plus’ model, the Acquirer can also charge a tiered-based pricing component called the Acquirer Mark-up Fee, as can be seen above. Just like the Processing Fee, negotiating on the turnover for each Tier and the applicable mark-up fee can result in millions of savings over the years.

When negotiating with your PSP, they might want to lock you down on a minimum transaction volume or turnover per month, to justify lowering your fee. The more locked in you are to a PSP, the more leverage they have to charge you a higher Processing Fee and Mark-up Fee. So make sure you have a good understanding of the number of transactions and volume you process per month/year, don’t commit to minimums you can’t produce and always make sure you can switch platforms if you want to let them know that you are serious about reducing your processing costs.

Miscellaneous Fees

For most E-Commerce companies selecting the right Pricing Model and negotiating the transaction and volume-based fees, will make the most impact. However, there are still a number of fees that you need to look out for, depending on your business model and operating regions. Below we have summarised the most important ones:

  • Management Fee for directly contracted Payment Methods – As a merchant you can have a direct relationship with a third-party Acquirer or Scheme Owner, most PSPs will charge a management fee over the value of the transactions that they need to route to such an Acquirer or Scheme Owner on your behalf.
  • Alternative Payment Methods – In many countries across the world, alternative payment methods have a larger market share than card-based payments. Most PSPs will offer a “standard” pricing, however, based on your volumes these can always be negotiated.
  • Refund Fees – Fashion companies deal with some of the highest refund rates in E-Commerce. For card-based payments, your PSP can charge you a Processing Fee for each transaction plus additional Interchange and Scheme Fees. For Alternative Payment Methods, your PSP can charge a Refund Fee that might be as high as the original Processing Fee. If Refunds are a big part of your business, ensure that you negotiated on this part, but avoid being penalized when your refund rates are higher due to seasonality or special events like Black Friday or Christmas.
  • Chargeback Fees – A large annoyance can be Chargebacks, and if that wasn’t enough, your PSP can charge you a fee for processing this. On top of that, they also pass through the scheme fees associated with the Chargeback.
  • Merchant Accounts – As your business grows, you might want to add additional merchant accounts for specific countries or currencies. Your PSP can charge you additional fees for setting up and maintaining these accounts.
  • Subscription and Settlement Fees – A number of PSPs charge monthly subscription fees for access to portals, invoices, and data, as well as a Settlement Fee for each time they transfer funds to your bank account. Like all fees, this adds up and should always be part of the negotiation.

3. Fraud Prevention

If you deal with a large number of Chargebacks, enabling a Fraud Prevention tool can help reduce them. Most PSPs will offer their own in-house Fraud Prevention tool, which like Processing Fees is often based on a Tier Based pricing model. Knowing that you have no control or access to the underlying data, PSPs tend to charge high per transaction fraud prevention fees. With a wide-range of third-party fraud prevention tools available, merchants have more leverage to negotiate their fees than ever before.

4. Chargebacks Levels

Another Chargeback related topic is Chargeback Levels. Per Card Scheme, Acquirers are continuously focusing on keeping their Chargeback Levels under control. If more than 1% of a merchant’s transactions turn into a chargeback, acquirers can charge merchants additional penalty fees or even go as far as suspending your merchant account. By setting up Fraud Prevention and Strong User Authentication features, a merchant can easily control their Chargeback levels, which helps in negotiating any penalty fees in case you do go over the threshold.

5. Deposits and Settlement

If you are running a fast-growing E-Commerce business that sells physical goods, you need to have control over your cash as fast as possible. As you are shipping orders, you need to order new products, invest in marketing, and pay and hire new staff. That is why negotiating a Settlement Frequency that works for your business can be the difference between running a smooth operation or always feeling like you are coming up short.

PSPs who tend to work with start-ups, ensure that their Settlement Frequency benefits their interest more than the start-up they work with. From pay-outs that happen once a week, for the previous weeks processed payments to next-day pay-out. Try to understand what is acceptable for your business and negotiate that with your PSP.

Another important part is your Initial Deposit, depending on your transaction volume and risk profile, a PSP can assess that they will without holding a number of funds, to ensure that incoming Chargebacks and Refunds can be covered, without having to go into their own pocket. The higher the associated risk and transaction volume in your business, the higher the initial deposit a PSP can demand. Like everything else, this can be negotiated.

6. Forex

When you start your store, you might not think about Forex, as you expect your first customers to be local. But with the internet and social media, any business is automatically an internationally operating business. This means being able to accept different currencies becomes a must, this is especially important because customers like to know what they are paying for in their own currency. Luckily, most PSP’s give you the ability to accept transactions in a wide range of currencies.

It is in the easy setup, where a lot of merchants lose a lot of money, and most PSPs have built their business on. Unlike gateway and processing fees, forex is a hidden cost that most merchants are not aware of, which can easily add up to 5% of your revenue!

For example, a UK-based merchant, who decides to ship to Europe and the USA, gives their customers the ability to select the currency of their choice. Where transactions in GBP are processed and settled like-for-like (processed in GBP, and paid out in GBP), transactions processed in Euro’s and Dollars are converted to GBP. It is in the conversion that the PSP adds their hidden fees. By using a rate that is favorable to the PSP and adding a mark-up on top of the applicable rate, the PSP can collect an additional fee, which it does not have to report to you. In the case of “Exotic” currencies (currencies, which are not internationally stable), the PSP adds a higher mark-up and benefits from a double conversion (Exotic to Non-Exotic to Settlement Currency i.e. THB -> USD -> GBP)

Not Taking No for an Answer

When you are just starting out, most PSPs will refer to their standard pricing and won’t even take the time to discuss making changes to the contract. But as you may have big plans for your company, selecting a PSP that doesn’t lock you into a platform or requires you to process Billions before you can get a customized offer, can be one of the best decisions you can make.

If you are starting out or have been operating for a little while, you should reach out to your PSP or other PSPs, to see if you can negotiate your merchant contract. Like any other vendor you are dealing with, pricing and terms are always negotiable.

If you need help

Having worked a large number of enterprise, medium-sized, and startup companies, as well as worked in a number of international payments companies, I have a unique insight in both sides, which could potentially help you and your business if you are evaluating the cost of the processing of your payments. Feel free to reach out to me via Linkedin, my contact form, or book a call, and let us discuss how I might help you.

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