In this article we will explore Payments Steering – a set of levers any merchant can pull to help reduce (and even eliminate) their cost of payment acceptance and drive top-line revenue.
Payment Steering – What is it?
In short, payment steering involves providing customers with incentives to use lower cost methods of payment and/or to absorb all or a portion of payment costs.
There are three common methods of steering and one less common method.
- Discounting – Discounting involves pricing your goods/services to incentivize customers to use a less expensive form of payment. One strategy you can employ is to include your most expensive payment cost in your pricing and then reducing / discounting when customers use a lesser cost payment method. For example, if you have an item that you sell at $100 and if your payment cost is 3% you might adjust the price to $103 and offer a 3% discount for using a payment method other than credit cards. A complete description can be found in our prior edition of Payments Roundup – Why Merchants are Rethinking Payment-Based Discounts
- Surcharging – Surcharging is essentially the reverse of discounting. Your “regular” prices remain the same and you add an additional fee (surcharge) for purchases made with a credit card. For example, a customer purchasing a $100 item with cash would pay $100 and a customer making the same purchase with a credit card would pay $100 + a $3 surcharge for a total of $103 to cover your payments cost. Note that surcharging is prohibited or restricted in several states and that there are other rules to follow. See our earlier article on this topic HERE
- Pay-by-Bank – In the US, pay-by-bank typically involves customers linking their checking account to a merchant’s app or wallet, but there are emerging pay-by-bank methods which can involve little or no integration at a merchant’s point of sale. Additionally, both the Federal Reserve and The Clearing House offer real-time payments through their FedNow and RTP networks. All pay-by-bank methods involve significantly less payment costs than credit cards. Integration ranges from zero to a heavy lift depending on the particular use case.
- Alternative Payments – There are several other payment options with lower costs – such as cryptocurrency, but for smaller merchants the effort to enable their systems to accept such payments is often simply not worth the effort.
NOTE: For Pay-by-Bank and Alternative Payments, recent changes (e.g. CFPB – whose role has been dramatically altered under the current administration, rule 1033 which requires financial institutions to make consumer data accessible to the consumers themselves and to authorized third parties, effectively mandating the use of open banking APIs. the associated increased fees for API access, and stablecoins authorized under the GENIUS act) have raised questions about the future of these methods. Nothing is settled, but these are worth watching before committing to such methods.
Payment Steering – Why You Want To!
The cost of payment card acceptance in the US is one of the highest in the world. With payments costs often being merchants’ second highest operating expense (after payroll/benefits), we need to find ways to reduce our costs or pass them on to consumers who are benefiting from Visa / Mastercard credit card rewards programs at our expense.
You should own the relationship with your customers and provide incentives for reducing the cost of payments for them and for you while gaining more loyal customers who buy more and buy more often.
Payment Steering – Key Considerations.
As you think about Payment Steering, here are some high-level considerations:
- Is your payment processor program a “blended rate” or an Interchange ++ program? Can you processor accommodate the payment strategy that is best for your business? Will an increase in your pricing affect your sales?
- How will customers view discounting?
- Is surcharging permissible in your state(s)?
- How will customers paying with credit cards view surcharging?
- What sales channels does your business utilize
- What loyalty/rewards programs do you have? How hard would it be to enable payment method-based rewards?
- What is your competition doing to reduce payment costs and drive sales?
- How will you monitor evolving regulatory, access, and pricing issues?
Exactly what payment steering features are right for your business can be complicated – we’re here to help. We are happy to have a half-hour free consultation to learn your business and provide feedback on the steps required to enable payment steering for you.
Contact us at info@payments-roundup.com or +1 484-269-1719
By: Dean Sheaffer, CEO and Founder of TeamPaytech
With thanks to David True and Lou Morsberger for their input.