Saturday, July 10, 2010

High cost of credit card transactions frustrate online retailers

Online payments based on credit cards or PayPal are charged to merchants based on a percentage of gross sales plus a fixed fee portion. In the case of PayEasy and Asiapay, the fee is 4.5% + PHP 6.00. With PayPal, the percentage fee can vary from 2% to 3.75% depending on the volume. The fixed fee portion for Philippine-based merchants, however, is PHP 15.00.

Merchants often neglect the fixed fee portion and just concern themselves with the variable, percentage-based portion. But the two when taken together, can actually come out to be significant especially if the gross value of the item being purchases is small. Take for example, an item worth PHP 200. If you apply PayPal's default rate of 3.75% percentage fee; add the PHP 15.00 fixed transaction fee; add another 2% that PayPal charges for withdrawal to cover their foreign exchange exposure; you actually end up paying PHP 26.50 in fees, which is 13.25% of the total amount!

There are several types of merchants where a percentage fee is not acceptable or palatable:
  1. For merchant selling luxury goods, even a 2% or a 3% fee is already considered very large because the value of the transaction is also large.
  2. Merchants selling products with razor-thin margins such as consumer electronics often make only 1% or 2% and rely on volume. So if the payment system charges 3% or more, there will not be enough left to turn a profit.
  3. Service providers such as schools and hospitals, where the amount billed is large, also do not find percentage-based commissions attractive.
It is common for retailers to get charged 2.5% to 3% for physical swiping of credit cards at their brick-and-mortar retail store. Online fees, however, are usually higher because of the higher risk involved in card-not-present scenarios. The usual justification of banks is the merchant also have lower cost of operations with online retailing. So this just compensates for the higher bank fees. Here's a recent news in UK where online retailers are also frustrated with high rates of credit cards.

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