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Optimizing Payment Gateways Costs in Ecommerce Startups

One of the major head of expense 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 through use of instruments such as Credit Cards, Debit Cards, Net banking and Wallets. This costs escapes scrutiny as it is assumed that these rates are standard charge fixed by banks in association with payment exchanges like Mastercard, Visa & American Express.  Nothing could be farther from the truth.  As a Treasury Manager of a Large Global Organization, I have very correctly learned that everything is “Negotiable” with a Bank. 

These costs are very significant and can significantly influence gross margins (i.e. Gross Revenues – All Direct Costs – All Promotion Discounts) of an ecommerce platform. Typically average gross revenues (i.e. Gross Merchandise Value Less Cost of Sales/ Service) of an ecommerce portal in India ranges between 6% and 12% of GMV.

So, if we assume Blended Payment Gateway Costs (“PG Costs”) @ 1.5%, an Ecommerce Portal has to shell out between 12% and 25% of Gross Revenues towards PG Costs.  

The following are few interventions which we attempted at Redbus to influence payment gateway costs (“PG Costs”) / Transaction Discount Rates (“TDR”):

  • Leverage Floats – Banks derive interest income on the day end balances which we maintain with banks. It is not very uncommon for scaled ecommerce platforms to maintain on an average daily float of INR 80 Mn- INR 150 Mn across different banks. As a CFO, all we need to do is to pool majority of this balance in one or two banks and categorize them as our Strategic Bankers. These strategic bankers in turn, for our transactions & float, should be willing to negotiate PG costs with us. As a general rule, Large Indian Private Sectors Banks are more amenable to negotiate lower PG costs in lieu of interest income from float balances.  Additionally, strategic bankers can be very competitive on net banking costs. I have had situations where banks have offered discounts of 70 bps compared to what was being charged by the PSPs. 
  • Negotiate Different Rates for Onus & Offus Transactions – Onus Transactions are those Transaction where a Card Payment is processed by the same bank which has issued that 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 transaction in banking parlance. Now to understand credit card commercials, let us understand the components of cost for the credit card issuing banks. The cost to process a credit card transaction include:
  1. Fee to issuing bank – Towards interest on the credit card balance & for assuming credit risk of borrower
  2. Fee to processing bank – Towards use of its payment platform
  3. Interchange fees –Fees payable to Visa/ Mastercard to act as settlement platforms

On onus transactions, the third component of the costing is not chargeable, hence Banks are willing to offer lower TDR on Onus Transactions. A large startup can save 10 bps – 15 bps by negotiating Onus rates separately with banks.  This exercise can be then duplicated across multiple bank who have their own payment gateway in India. 

  • Work closely with the technology & product to develop dynamic switching engines in your payment platform –To route Onus transaction to that bank payment gateway, we developed a Payment Engine which distinctly recognizes a bank’s card and routes that card’s authorization to the relevant payment gateway. We did this through Bin based routing, i.e. by recognizing the card antecedents from the first four digit of the credit card. Your technology team can easily code this feature. Alternatively, there are SAAS vendors like Juspay who would do the same for you at a nominal cost. 
  • Negotiate with multiple payment service provider (PSP) – Each PSP typically has an anchor bank with whom it has a very close operational relationship, hence it is very important for an Ecommerce Platform to work very closely with all large PSPs (along with maintaining direct relationships with banks as explained above). PSPs add significant value for transactions on PSU Banks as independent contracting with PSU Banks is tedious & direct integration a logistical nightmare. CFO of an ecommerce portal has an important task to allocate his transactions amongst different Banks/ PSPs so as to ensure everybody has a pie to aspire and fight for. 
  • Negotiation with Wallets – In India, due to the dual factor authorization compulsion, wallets are gaining traction by the day. Typically, while negotiating for TDRs with wallet, I have observed that their rack rates are close to credit card TDRs. At times, few wallets even charge higher than credit cards, sighting additional customer traction from wallet’s captive customer base. However, I believe is not the most optimal method to negotiate wallet TDR. A platform should first compute its blended TDR (average of credit card, debit card & netbanking) and then add a premium of 15-20 bps to arrive at the wallet TDR.  This has worked for me in negotiation with multiple wallets and I am sure this framework should work for you as well. 
  • Co-Promotions with PSPs/Wallets – Customer acquisition is something for which every E-Commerce enterprise is willing to spend marketing monies on. PSPs/ Wallets are no different. Depending on the use-cases & the quantum of funding, a PSP/ Wallet could spend between INR 100- INR 250 to acquire a new customer.  As the Finance Business Partner, you can pick & choose which partners you would want to partner with based on the marketing monies which the wallet is willing to offer to your customers and the TDR they would charge. In return for the marketing investment, your ecommerce portal becomes a customer acquisition engine for the PSP/ Wallet for specified period of time. For the platform, this helps in subsidizing the promotion costs and ensuring price competitiveness.  

 

Vikas Rathi

VP Finance at Kalaari Capital

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