The true cost of payment methods for retailers

Choosing the right payment method is becoming a strategic decision for retailers – not only because of customer satisfaction, but also due to significant cost differences. Two recent publications shed light on the direct and indirect costs of payment methods in brick-and-mortar and online retail.

Payment is expensive for retailers – but a look at the total costs reveals exactly how expensive. The ibi research institute at the University of Regensburg, together with the EHI Retail Institute, has examined the direct and indirect costs of various payment methods in German retail in a large-scale study. The study was based on over 350 retailers that operate both brick-and-mortar and online.

Key results: although cash payments are time-consuming to process, they are often cheaper than electronic methods – at least in brick-and-mortar retail. Only the Girocard can keep up as the cheapest card-based payment method. Debit cards and credit cards are at least twice as expensive.

Online payments are dominated by methods such as PayPal, Klarna or credit cards – albeit with considerable costs for retailers in some cases. The indirect ancillary costs of some payment methods are surprisingly high – especially for invoice payments.

In terms of direct costs, methods such as prepayment by bank transfer, payment on account, direct debit and instant bank transfer are the cheapest in the ibi study. The frontrunners are secured payment on account, PayPal and Amazon Pay.

If indirect costs such as manual checks, dunning procedures and payment disruptions are added, the study reveals a slightly different picture for total costs in online retail: the cheapest payment methods are still prepayment by bank transfer, instant bank transfer and direct debit. Amazon Pay hardly adds any indirect costs, with the payment method climbing from 7th to 4th place. Payment on account and secure payment on account top the list of total costs. They are followed by Visa and Mastercard as well as PayPal.

What is particularly interesting about the ibi study is that it also takes indirect costs into account, such as technical integration costs, cancellation processing, payment defaults and customer service. According to the authors of the study, these “hidden” costs can account for up to 50% of the total costs, depending on the method.

Example: Purchasing on account not only results in payment defaults, but also considerable administrative effort due to data verification, dunning and collection procedures and manual post-processing.

International retailers are also under pressure. In addition to the transaction fees, there are often monthly fixed costs, terminal fees and service fees - a cost level that is also becoming increasingly visible in Europe.

The type of payment method has a major influence on the transaction costs for retailers:

• Credit cards: Highest fees among the common payment methods, typically 2.0% to 3.5% per transaction.

• Debit cards: Cheaper than credit cards, fees between 0.5% and 2.0%. (In some countries (e.g. USA) PIN-based debit transactions are cheaper than those with a signature).
• Alternative payment methods: These include digital wallets such as Apple Pay or Google Pay, BNPL services (Buy Now, Pay Later) and bank transfers. They are generally cheaper at 1.0% to 2.0% per transaction.

According to Clearly Payments' statistics on how much retailers will pay for payment processing in 2024, the amount of transaction fees varies by industry – depending on risk profile, transaction volume and customer structure:

Brick-and-mortar retail:

• Average costs: 0 % to 2.5 % per transaction.
• Retailers with high transaction volumes tend to have better negotiating opportunities.
• The use of bonus credit cards by customers can increase the fees.

E-commerce:

• Higher fees: 5% to 3.0% on average.
• Reason: Increased risk of fraud and chargebacks for online payments.

For retailers, this means that those who want to protect their margins should not only look at customer preferences, but also analyze and actively manage the entire cost structure of payment methods. For smaller retailers in particular, a targeted selection and combination of payment methods can have a direct impact on profitability. Tip for retailers: Analyze costs regularly, compare service providers and also check the scope for negotiation with payment service providers. In many cases, targeted optimization can save several thousand euros per year.