It’s a global trend that has persisted uninterrupted for years: the volume of cashless payments is growing in retail. According to a Germany-wide study by EHI, 78.7% of consumers paid cash in retail stores (in relation to total sales) in 1994. By 2019 this share had already decreased to 46.5%, and in 2021 only 38.5%(!) of consumers paid cash. This proportion is even lower in other countries.
Along with the proportion of electronic payments, retail companies are also incurring higher costs for these payment types. Optimising these costs is thus becoming a significant strategic issue for companies. Before you can optimise, though, you first need a clear understanding: how are these costs incurred? What do they consist of? And what adjustments can be made? This article answers these important questions.
How are costs for cashless payments incurred?
Each cashless payment requires the services of a whole array of different market players: it starts with the till system manufacturers and the payment terminal providers, then the card issuers, the card systems (schemes), the payment service providers (PSPs) and the acquirers, and ends with the banks that hold the accounts from which the respective payment is debited (also called the issuing bank).
In this article we explain how cashless payments actually work.
While till system manufacturers and payment terminal providers sell or lease the necessary infrastructure, card issuers, card systems, payment service providers and acquirers charge a fee for each completed payment.
The total fee that has to be paid generally consists of the interchange fee (IC), the scheme fee (SF) and the acquirer’s margin (AM).
What fee models are there?
There are various models for calculating these fees. The most common models are Fixed Rate, Blended Rate, Interchange+ (IC+), and Interchange++ (IC++).
Why is it important to know the fee model?
Fee models have a direct impact on the costs incurred for cashless payments. Additionally, the Interchange++ model, for example, can improve understanding of cost composition and the development of individual components.
It is important to know the different models in any case, so that you can make an informed choice of the best model for your own requirements. The «Swiss EFT Insights» study, which treibauf conducted in 2021 with Arkwright, revealed that almost 39%(!) of those asked did not know which fee model was used in their company.
Please note that this study primarily involved small and medium-sized businesses in Switzerland. Nonetheless, this figure shows the enormous potential for the professionalisation and optimisation of EFT costs.
Why is it important to know the payment composition?
Which cards are customers using most frequently? Which cardless payment systems are being used – and how often? In other words: what is the exact composition of cashless payments (also referred to as the payment mix)?
If you can answer these questions, then you also know the significance of difference cards or cardless payment systems for your sales. In turn, this knowledge is essential when it comes to choosing the right payment service provider or acquirer, as well as for price negotiations and subsequent selection of the fee model.
The easiest way to gain these insights is to use payment-analysis software, such as the Matchbox payment analytics centre. The software automatically analyses sales, matching rates and the composition of transactions and converts the flood of payment data into meaningful diagrams, enabling companies to make well-founded decisions.
Does the EFT market need more transparency?
Do you know how your scheme fees and acquirer’s margins are calculated? Or where you sit with your fees in an industry comparison? Do you know the impact of total turnover on the fees per payment?
We can only provide a partial answer too, unfortunately. When it comes to how fees are incurred and calculated, there is still a lack of transparency in the EFT market. To change this, treibauf initiated its own series of studies last year.
The «Swiss EFT Insights 2021» study has already yielded some interesting insights. In 2022 we are continuing and expanding the series of studies with ZHAW (Zurich University of Applied Sciences) under a different name.
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