With the economy in a fragile state, operating costs rising, and revenues trailing behind, businesses are forced to make some tough decisions on pricing strategy. Payments are one of the few business costs merchants pay that can be quickly amplified by inflation – making it imperative for merchants to control in times of potential financial crisis. Payments can be controlled with proper guidance and tools and can even be used as a way to attract new customers. Using CMSPI’s unique data-driven analysis, market benchmarks, and industry expertise, merchants have been able to identify areas of negotiation, mischarges, routing strategy, and customer conversion. Optimizing your payments now means tackling costs at the root of the issue and, for many, the difference between staying afloat or falling behind.Get in touch
This year has seen the highest inflation rates in Australia in 22 years¹ and businesses are paying for higher costs as a result – the cost of raw goods, materials, rent, fuel and energy, and other operating expenses all rising to boundless heights. The Merchant Service Fee (MSF), a fee charged for accepting card payments, is no exception to this trend as the gross MSF paid by merchants climbs steeply month by month.
Australian businesses are reeling under the pressure of soaring inflation and operating costs and to stay market competitive as a realisation begins to set in – merchants need to adapt their payments strategies in the face of exceptional economic adversity.
The Cost of Doing Business Rises
Figure 1. Businesses that Experienced an Increased Cost of Doing Business from February to April²
Businesses are noticeably shouldering the effects of inflation rising. According to the Australian Bureau of Statistics, more than half of Australian businesses (57%) reported an increase in the cost of doing business in the past three months, with retail and energy businesses being hit the hardest at 73% and 61% respectively (Figure 1).
In addition to costs rising, revenues are not increasing at the same rate over time. Merchants consistently see operating costs increasing at a faster rate than increases in revenue as seen in Figure 2, putting businesses at risk of dropping to negative profit margins. Merchants searching for solutions to stay competitive with others in the industry must identify what operating expenses make up the bulk of their general costs and which ones may be enhanced by rising inflationary trends.
Figure 2. Business Revenues vs. Operating Expenses Over Time³
How Card Fees Can Play a Role
One of the hidden contributors to the rising cost of doing business is the cost of Merchant Service Fees (MSFs), a category that is often a merchant’s second or third most expensive business cost.⁴ MSFs are levied as either a percentage or per item fee on all card transactions a merchant makes. Percentage-based fees, which are more commonly used by global schemes, can grow nominally along with a merchant’s transaction value and accelerate inflation, creating a vicious feeding cycle between gross MSFs and inflation. Unlike per-item fees, percentage-based fees suggest a charging structure that is directly tied to a merchant’s revenue rather than the potential cost of service provided by a payment supplier. Even without schemes changing fees, a merchant’s gross MSF can still inadvertently magnify month-on-month from inflation.
To make matters worse, in the past three months, the average MSF per transaction in Australia grew 3 basis points from the previous quarter (Figure 3), especially on credit card products. CMSPI estimates that merchants paid A$4 billion in merchant fees last year. However, the increase in the average MSF from this period may cost an additional A$180 million in fees for merchants in the new year.⁵
Figure 3. Average Merchant Fees Per Transaction Rise by Quarter⁶
For some merchants, immediately identifying cost increases in card fees can be tricky since these fees generally include all interchange, scheme, acquirer, terminal, and Buy Now, Pay Later fees a merchant is paying. These fees can be invoiced as a blended fee with little transparency into line-item costs or split across multiple different suppliers, making it extremely difficult for merchants to consolidate, break down, and audit these fees themselves.
Without regular auditing and proactive monitoring, many merchants’ MSFs may continue to rise uncontrollably. CMSPI found that 50% of merchant invoices contained errors, signaling that despite these economic trends, there are still ways for merchants to control costs.
Inflation Can Impact Customer Conversion
A streamlined customer check-out experience is essential for a business’s most important consideration – their customer. Raising prices due to card fees or other underlying costs can severely impact the checkout flow and make a business more susceptible to low customer conversion rates. Even though 43% of businesses reported an increase in operating expenses this past month⁷, more than half of retail and energy businesses (51%) stated that they would not increase their prices, citing customer retention as the main contributing factor. When a business’s average transaction value increases, more transactions are likely flagged for additional fraud controls and not approved for final sale, giving customers the opportunity to browse a business’s competitors.
Managing a successful check out flow requires a delicate balance between fraud prevention and customer conversion which, if done correctly, can make a business more competitive compared to industry peers and retain or even grow a customer base. Businesses are not only limited to using payments optimization to reduce underlying costs but also to expand their top line.
Adapting Your Payments Strategy
See Figure 1.
Electricity, Gas, Water and Waste Services has been renamed to “Fuel and Energy Services”. See ABS Business and Conditions Sentiment April 2022.
ABS Business and Conditions Sentiment May 2022.
CMSPI estimates and analysis
CMSPI estimates and analysis; raw data from the ABS, RBA, and Euromonitor International
ABS Business and Conditions Sentiment May 2022.