Are Payments A Commodity or Force Multiplier?

By Robert Kraal

In just a single second, $199,771 USD was spent online which adds up to the $6.3 trillion eCommerce market. While cash accounts for 16% of POS payments globally, the remaining 84% (and 100% of eCommerce sales) takes place over a variety of digital networks, often proceeding through a number of intermediary companies that are invisible to the payer and payee. 

Clearly the average customer purchasing a cup of coffee will not have strong opinions on which acquirer acts as the intermediary between the merchant and card payment network. However, If the coffee shop in question is independent, then a savvy owner may have looked at their payments system to optimize it, shaving a few percentage points off each transaction, which may save them hundreds or even thousands each year. 

A major chain may have whole teams of people whose role it is to optimize the payment flow of each coffee sale to ensure maximum profitability. Let’s dive in to the two ways that businesses today view payments.

Viewing payments as a commodity

A business with this mindset will focus primarily on price – the small percentage each part of the payment process takes from each transaction. These are hugely variable, but ever-present. Therefore, it is important to get this aspect of the payment process right. Some of the biggest industries have razor thin profit margins. For example, online retail operates with a net margin of 0.64%, so the loss of a few percentage points on each transaction could be devastating. They become particularly hard to control when companies are doing business internationally: selling to one country may have a negative economic impact on a company when interchange fees are factored in.

Clearly, it’s vital that businesses keep costs low, so there could be a compelling argument for treating payments as a commodity. A commodity is defined as something that is purely interchangeable, for example one barrel of Brent Crude is identical to every other barrel of Brent Crude – there is no ‘premium’ barrel of Brent Crude that you would be willing to pay more for. So that begs the question, can payments be a commodity? 

Taking the metaphor of barrels of oil, somewhere in the world there is someone selling a barrel of Brent Crude at the lowest price, and this is objectively who you should buy that commodity from – again, there is no benefit to paying more for an identical product. Is this the case in payments? There are a lot of payments companies out there, a huge range of technology, and the one that has the lowest cost per transaction is not necessarily the best.

Thinking of payments as a force multiplier

Unlike commodity prices, payment service costs are rarely simple. The current price of a barrel of Brent Crude is the price you’ll pay no matter who you are, whereas payments companies frequently distinguish between companies and individual payments based on the nature of the business (such as its risk type) and the nature of the payment (such as international payments). This complicates the process of finding the objectively lowest priced payments provider – even if they offer the best price for a domestic payment today, if your company is subject to high levels of fraud or excessive chargebacks then your low price is going to go up.

Therefore, we may need to put aside the idea of payments as commodities and start looking at them as tools that may be better or worse suited to a particular job – or ‘force multipliers’. Just as an electric drill is built to be a force multiplier when compared to trying to screw by hand, a payments company might have the right combination of features to be a force multiplier to your company.

The next question to uncover is how a company can enhance their business through their payments partners instead of just opting for whatever’s cheapest? A major differentiator is decline rates – 15% of recurring credit card transactions are declined, sometimes as many as 30% in some industries. There are plenty of legitimate reasons for declines, but no system is perfect so there are likely to be false declines among that 15%. It is estimated that the total cost of false declines comes to $443 billion every year. Some customers who receive a false decline will retry the transaction, but some will go elsewhere, and the money your company will lose from them doing so is worth far more than a few percentage points on each transaction. Then there is fraud. 

Just about every part of the payments process contains some kind of anti-fraud element, such as implementing 3DS checks, and if they are too lax or too stringent then your company stands to lose money and customer goodwill. As stated above, if enough fraud happens then you face being classed as high risk and paying higher fees, so opting for a less expensive payment partner who lets through too much fraud could have long-running consequences.

Finally, payment companies are often unable to share the full amount of data that each transaction generates because of outdated systems made for 20+ year-old networks that had limited bandwidth. This means the amount of data that could be transmitted in each transaction had to be small. Data is, as they say, the new oil, and innovative companies need that data to optimize their processes, discover where things are going wrong and ultimately make more money.

Modern payments for modern businesses

I believe that they last point is where companies have a real opportunity to turn their payments systems into a force multiplier. The potential for innovation when working with a fully modernized payment provider is limitless compared to a no-frills, low-cost company. As with any product, not all companies who charge higher prices deliver a premium service, and not all the less expensive companies are offering a budget service. Therefore, it’s down to businesses to understand that payments companies aren’t interchangeable commodities, and that they offer radically different services, some with transformative potential for them to grow their brands.

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About the author

Robert Kraal, Co-founder and CBDO, Silverflow.

Robert Kraal is one of the few people in the world with over 25 years of experience in online payments.

After completing his degree in Geophysics, he started his career at Bibit, the first global Payment Service Provider (PSP) which was acquired by RBS/Worldpay. At RBS/Worldpay he went on to lead account management, before moving on to Google Netherlands. He joined Adyen in 2010 in the role of COO, where he was responsible for building and running the global acquiring and processing service.

As Co-founder and Chief Business Development Officer of Silverflow, Robert is responsible for maintaining relationships with the card schemes, acquirers, PSPs and regulators.

About Silverflow

Silverflow is a new kind of payment processing platform designed for today’s payment needs and fit for the future. A cloud-native solution with a single API to the card networks. One platform with one connection. Reducing cost and complexity, easy to use, data-rich, Silverflow frees you to innovate.
For more information contact Silverflow:

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