(June 10, 2008) Internet merchants looking to cut their acceptance costs may have more control over this expense than they believe, according to Jon Kuhlmann, managing partner at Grapevinehill Inc., a Danvers, Mass.-based online seller of footwear with $13 million in annual sales. Though all merchants have complained increasingly about the cost of card payments, the subject is especially nettlesome these days for online merchants, since, unlike point-of-sale retailers, they must pay a premium for card-not-present transactions and also bear the liability for fraud.

Speaking at the Internet Retailer Conference & Exhibition in Chicago on Monday, Kuhlmann outlined six ways online merchants can get a handle on their payment costs. Grapevinehill, which also does business on eBay, accepts about 80% of its payments through PayPal, with nearly all of the balance coming through the traditional card brands. For these transactions, the merchant uses PayPal Inc.’s 3-year-old Website Payments Pro service, which allows online retailers to accept Visa, MasterCard, American Express, and Discover on PayPal’s merchant account. The merchant also started accepting payments through Google Inc.’s Checkout service last year, though “this is not a huge part of our business,” Kuhlmann told the audience.

Kuhlmann’s six steps are:

1. Understand how the industry works. This includes knowing that acquirers will levy a markup on interchange, that certain types of cards, such as rewards and commercial cards, carry a hefty cost premium, and that acquirers will assess a downgrade—hike the fee—for transactions not meeting card association rules.

2. Know what you’re paying. Though, as Kuhlmann says, acquirer statements are “almost mind-numbing,” he says costs can be tracked by adding up all fees each month and dividing them by total sales to derive a percentage. He tells Digital Transactions News he monitors Grapevinehill’s overall acceptance cost this way and has found it a convenient way to stay on top of what card payments are really costing.

3. Ask the right questions. Find out from any acquirer whether there are application fees and whether there will be a contract. Is there a termination fee? Above all, he says, do the math on all proposals.

4. Diversify payment sources. While merchants get better cost breaks when they push more volume through any single channel, Kuhlmann says they may benefit more in the long run by adding more payment types. Google Checkout, he told the audience, may not be generating big numbers yet but it is bringing incremental business to Grapevinehill. “It’s amazing how many new customers it brought in,” he said, adding it is attracting Google search customers to go along with the merchant’s traditional eBay base.

5. Identify your risk areas. Though online merchants must take responsibility for managing fraud, Kuhlmann told the audience merchants can save by adding fraud screens and challenging chargebacks. “We probably catch one to two transactions a day that are fraudulent that the credit card company passed through,” he said. One simple screen Grapevinehill applies is to review all expedited shipping requests, since fraudsters typically use overnight shipping to minimize their exposure, he said. “By reducing fraud, it’s amazing how much you can reduce the cost of credit card processing,” Kuhlmann said.

6. Use alternative processors. Grapevinehill switched from Nova Information Systems (a U.S. Bancorp unit that changed its name to Elavon in April) to PayPal’s Website Payments Pro service for card processing in 2006 because Kuhlmann figured it offered lower acceptance costs. Card transactions—including those of the usually premium-priced AmEx brand—run 2.2% plus 30 cents to 2.9% plus 30 cents on Payments Pro, depending on volume. Grapevinehill is paying the 2.2% plus 30 cents rate, which is delivering especially big savings on the approximately 5% of its transactions that are on AmEx. “At the end of the day, it comes down to price,” Kuhlmann tells Digital Transactions News.

Above all, Kuhlmann counseled his audience, is the importance of tracking what he called “actual cost per dollar kept.” Evaluate your acquirer frequently, he said, but make sure “you know what you’re paying.”