24 MAY 2017

Hidden costs of payment processing

POSTED UNDER Direct Carrier Billing Payments
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Andrea Boetti

Director of Strategic Partnerships, Fortumo

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Card-based payments are still the primary method of collecting revenue from virtual and digital content. SuperDataResearch indicates that credit cards and digital wallets account for 56% of transactions done in digital gaming.

But the importance of carrier billing has grown as well. From 2013 to 2015, carrier billing’s share in digital gaming grew by 20%, from 12% up to 14.4%. In Asia Pacific, Latin America and Eastern Europe, its market share even more substantial (17.1%, 21% and 20.9%, respectively). As overall transaction volumes have also gone up, this indicates a growing interest from merchants in adopting the payment method.

When considering integrating new payment solutions, an important thing for merchants to keep in mind is payment processing costs. When we talk about microtransactions, card fees are substantial: out of each $1 transaction, over 30% goes to the payment processor (~3% fee of the transaction value and the ~$0.3 transaction fee). But what other costs are related to card-based payments and how does carrier billing compare?


Chargebacks occur when a consumer disputes a payment they have made and demand to get their money back. This happens either if there has been a technical issue with the payment (charged without receiving purchased good, duplicate charges), the customer is not satisfied with the quality of the purchase or when the payment has not been authorized by the consumer themselves.

Credit card chargebacks are a nightmare for merchants because a high chargeback rate puts the merchant at risk of having their account closed. This usually occurs when the chargeback and refund rate goes above 1%. The second problem with chargebacks is that they cost money: PayPal takes $20 for each chargeback, bank fees often go higher than that.

What makes credit card chargebacks especially problematic is the fact that online identity theft impacts a substantial amount of people. In the United States, about 6.5% of credit card owners fall victim to identity theft each year. Even if the user has made a legitimate purchase for your service, in case of identity theft they might also claim back legitimate purchases. Beside identity theft, “friendly fraud” is also a common case merchants have to deal with. This is especially painful in markets where regulations allow card holders to very easily reject or dispute the charges even a long period after the transaction.

So what is the situation with carrier billing? Since every carrier billing purchase requires physical access to the device, identity theft is significantly more difficult. As carrier billing is used for the sale of virtual and digital goods which the merchant can take back from the consumer in case of a chargeback, there is also less motivation for friendly fraud. Numerous disputes on charges from one consumer also raise alarms with mobile operators, which might lead to their mobile account being blocked.

With carrier billing, a comparable statistic to card chargebacks are refunds issued by Fortumo. And these are substantially lower: Fortumo’s payment data from the past 6 months indicates that consumers requested refunds for only 0.02% out of all transactions.

Bad debt

Bad debt occurs when customers purchase something with a credit line. This can either happen with credit cards and with carrier billing with postpaid SIM cards.

With credit cards, issuing banks take the risk of bad debt. If the consumer has purchased something and does not pay back their credit card loan, the merchant still gets to keep the money they have collected. Roughly 7% of credit card users in the US have a balance overdue for more than 90 days and 3% of debts are completely written off by the banks.

With carrier billing, should bad debt occur, most mobile operators do not reflect it to merchants while some do. This is often linked directly with the commercial and technical capabilities of the carrier. The more advanced the carrier is, the less likely they are to mirror bad debt to merchants. Another thing to keep in mind is that bad debt can only occur with postpaid accounts, while 80% of mobile users in the world are prepaid SIM users with whom bad debt can not occur.

Fortunately, data shows that people are more responsible in paying their phone bills than their credit cards. Depending on the month, in 60% to 70% of the markets where Fortumo operates, bad debt does not occur at all. In markets where it does happen, the data for last 6 months shows that bad debt is below 1% of the overall transaction volume.

Other fees

Beside chargebacks and bad debt, other more minor fees should be considered by merchants as well. With credit cards, you should keep in mind PCI DSS compliance and costs related to obtaining and sustaining the licenses; in case of outsourcing this compliance (i.e. using payment service providers, PSPs) and not touching customers’ personal data, that cost will be reflected in the fees of the service provider. To avoid fraud and chargebacks, investment in fraud prevention is also required, either to be developed in-house or outsourced to PSPs for additional fees.

Neither of the above are relevant for carrier billing as PCI compliance is applicable only for card-based payments and fraud management comes together with a carrier billing provider’s service. Since Fortumo operates on a revenue share basis, any extra fees would be impossible for us to hide anyway.

For carrier billing, the biggest hidden costs are related to taxation and who pays for payment-related notifications. For more on this, we have written a separate blog post on how to assess carrier billing providers which you can check out here.

With both credit cards and carrier billing, two additional costs can occur if you do not pay close enough attention. Firstly, for subscription-based payments, service providers may charge a fee even for attempted but failed payments. Secondly, when collecting payments on a global level exchange rates and bank transfer fees can have a substantial impact on revenue.

Make sure to clarify all the points and related fees described above with your payment providers before starting to work with them!

Intangible fees

Above we have described the most common fees related to payment processing that payment service providers usually prefer to avoid talking about with merchants. But in addition to the hidden fees, there are intangible costs related to using (or not using) various payment methods. Only using card-based payments for your digital business brings about fees which you might never realize are there.

Firstly, bank-based payments have lower conversion online compared to carrier billing. This means that for every card payment you are processing, there can be 5-10 people who are not paying you because the checkout process is inconvenient or they do not have a credit card.

Secondly, the nature of credit cards and how easy they are to commit fraud with mean many people still fear making payments with them online. Providing carrier billing as an alternative, secure solution (only the phone number is transmitted during the checkout process) means more people are likely to become a paying user.

Merchants do not need to use only one payment method in their checkout flow, but can use carrier billing and other alternative payment methods in parallel. Looking at SuperDataResearch information on the market share of payment types, adding carrier billing next to bank cards and digital wallets can bring a 25% increase in transaction volumes: up from 56% to 70%.

If you’re interested in learning more about carrier billing, download our global report on the payment method by filling out the form below.

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