One of the major expenses, which typically escapes scrutiny by executive leadership in e-commerce organizations, is the ‘Payment Gateway Cost’, i.e. the cost charged by banks/ payment solution providers (PSPs) to process electronic payments via credit cards, debit cards, net banking, or wallets. These costs are generally overlooked as they are assumed to be standard charges, fixed by banks in association with payment exchanges such as MasterCard, Visa & American Express. Nothing could be farther from the truth as everything is negotiable with a bank.
Payment Gateway Costs (‘PG Costs’) are very significant, and can drastically influence gross margins of an e-commerce platform. Typically, average gross revenues of an e-commerce portal in India range between 6% and 12% of GMV. So, if we assume blended PG costs (average of credit card, debit card & net banking) at 1.5%, an e-commerce portal has to shell out between 12% and 25% of gross revenue towards PG Costs.
The following are a few interventions that can be attempted to influence PG Costs (also termed as Transaction Discount Rates (‘TDR’):
Leverage Floats – Banks derive interest on the current account floats that companies maintain with them. It is not uncommon for scaled e-commerce platforms to maintain an average daily float of INR 80 Mn- INR 150 Mn across different banks. The startup can attempt to pool majority of these balances with one or two banks, and categorize them as their strategic bankers. These strategic bankers, in turn, should be willing to negotiate PG costs for the enterprise’s transactions & float. As a general rule, large Indian private sectors banks are more amenable to negotiate lower PG costs in lieu of income from float balances. Additionally, strategic bankers can be very competitive on net banking costs for transaction routed through their banks.
Different negotiations for Onus & Off-us Transactions – Onus Transactions are those where a card payment is processed by the same bank that issued the card. For example, if a payment made through ICICI bank credit card is processed through ICICI bank’s payment gateway, the transaction would be termed as Onus Transaction. All other transactions are termed as Off-Us transactions in banking parlance. Now to understand credit card commercials, it is important for us to understand the components of costs for banks issuing these credit cards. The cost to process a credit card transaction include:
Fee to issuing bank – Towards interest on the credit card balance, and for assuming credit risk of the borrower.
Fee to processing bank – Towards use of its payment platform.
Interchange fees – Fees payable to Visa/ MasterCard to act as settlement platforms.
For onus transactions, the third component of the costing is not chargeable; hence banks are willing to offer lower TDR on Onus transactions. A startup can save 10 bps – 15 bps by negotiating Onus rates separately with their banks. This exercise can then be duplicated across multiple banks that have their own payment gateways in India.
Work closely with the technology & product to develop dynamic switching engines in your payment platform –To route Onus transaction to originating bank’s payment gateway, enterprises need to develop a payment engine which distinctly recognizes a bank’s card and routes transactions originating from a particular card to the relevant payment gateway. It can be done through Bin Based Routing, i.e. by recognizing the card antecedents from the first four digits of the credit card. This feature can also be purchased off the shelf from various payment SAAS vendors.
Negotiate with multiple payment service providers (‘PSP’) – Each PSP typically has an anchor bank, with which they have a close operational relationship. Hence it is very important for an e-commerce platform to work very closely with all large PSPs that have a strong tech stack (which would determine transaction success rates). PSPs add significant value for transactions on PSU banks, as independent contracting with PSU Banks is tedious, and direct integration a logistical nightmare. The CPO or CFO of an e-commerce startup should carefully allocate their transactions amongst different banks/ PSPs so as to ensure all PSPs and banks have a pie to aspire to and fight for.
Negotiation with Wallets – In India, due to the dual-factor authorization compulsion, wallets are gaining traction day by day. Typically, while negotiating for TDRs with wallets, it is observed that their rack rates are close to credit card TDRs. At times, few wallets even charge higher than credit cards, citing additional customer traction from the wallet’s captive customer base. However, we believe this is not the most optimal method to negotiate wallet TDR. A platform should first compute its blended TDR, and then add a premium of 15-20 bps to arrive at the wallet TDR.
Co-Promotions with PSPs/Wallets – Customer acquisition is something that every e-commerce enterprise is willing to spend their marketing monies on. PSPs/ Wallets are no different. Depending on the use-cases and the quantum of funding, a PSP/ Wallet could spend between INR 100- INR 250 to acquire a new customer. Thus, it is important to choose partnerships based on the marketing monies which the wallet is willing to offer to the enterprise’s customers (apart from tech stack and TDRs). In return for the marketing investment, the e-commerce portal becomes a customer acquisition engine for the PSP/ Wallet for a specified period of time. For the platform, this helps to subsidize promotion costs, and ensures price competitiveness.