Cutting Costs, Not Corners: How Emeritus Drove Savings with Local Payment Methods
Our Emeritus team has received much adulation and congratulations from investors and industry folks for achieving profitability. But the path to profitability was not an easy one for us. Not only did it involve some hard decisions, but it also involved a well-thought-out cost-reduction strategy that would have the desired impact. Every penny saved is a penny earned; based on this age-old wisdom, we began analyzing our payment methods in 2022, when the market was undergoing a severe downturn. What we discovered left us shocked but opened up the opportunity to do something that can be called one of the best examples of cost reduction without compromising on quality.
At Emeritus, we believe in cost-cutting but never in cutting corners. This is the story of how we reduced payment processing costs through the adoption of local payment methods, achieving millions in savings.
Discovering That Card Payments are Expensive
The cost of processing card payments is high. For domestic transactions, it is easily 2.5 – 3%. For international/cross-border payments, this number goes up to 3.5-4%. This is a significant dent in the margins of any business. If you’re doing hundreds of millions of dollars in online payment volume, that’s five to ten million dollars in costs. That’s a five to ten-million-dollar hit to your profit margin.
When Emeritus started to focus on cost reduction and profitability (like many other companies in 2022), we did a calculation of how much we were losing on payment processing costs. The number was high enough to jolt us into an exploration of how to reduce these costs; enter local payment methods.
Moving to Local Payment Methods (LPMs)
Most local payment methods are specific to a country or region. Broadly, there are two types of local payment methods: bank transfers and digital wallets. Bank transfers are almost always significantly cheaper than card payments. Some examples include ACH Debit in the US, Pre-Authorized Debit (PAD) in Canada, and SEPA in Europe.
All these payment methods cost a fixed dollar amount per transaction (usually between $5 and $10). For us at Emeritus, selling premium online courses that are in the price range of thousands of dollars, the savings calculation here is a no-brainer.
The cost of processing a $3,000 payment by card would be around $80; the same payment via ACH costs a flat $5.
Implementing LPMs at Emeritus
The first local payment method considered was ACH Debit for our users in the US. We integrated Stripe’s Payment APIs into our payment portal. Eventually, we made ACH bank transfers the default payment method selection on our checkout page for our US-based customers. Through a combination of this default effect and incentives, over 30% of our US users are now paying via ACH. We launched this at the beginning of summer 2023, and it has already resulted in major cost savings.
ACH Payment Processing Time and Failure Rate
One potential concern with ACH Debit as a cost-reduction strategy is that it can take four business days for the payment to be completed. A natural question arises: Do you provide the user with the product or service when the user initiates/submits the ACH payment? Or when the funds transfer has been completed?
In theory, a payment could fail at any point between the user initiation and the actual debit of funds from their account. That said, the likelihood of an ACH payment failure is very low. This is further reduced if the bank account is verified at the time of payment initiation/submission.
Knowing this, at Emeritus, we enforced bank account verification at the time the user submitted the payment. Moreover, we decided to grant access to the course that the user is paying for immediately after payment submission, just like we would for a successful card payment. We also built a mechanism to send automated alerts to our internal teams in case an ACH payment failed, as well as automated emails to let the user know about payment failure, asking them to try again.
We have observed a transaction failure rate of less than 5% for ACH Debit transactions. Contrast this to card payments, where our average transaction failure rate is over 8%.
Going Beyond the US
We’ve been able to drive significant cost reduction in the US. However, more than 60% of our users are outside the US. Thus, naturally I asked the question: can we replicate this approach beyond the States and drive even more cost-cutting leading to savings?
And the answer is yes. Stripe already offers easy API integrations with several local payment methods. We are currently integrating Pre-Authorized Debits for Canadian users, PayNow for Singapore users, and SEPA for users in the European Union. With these new integrations, we would have covered a significant chunk of our international market and drive tremendous cost reduction.
Disclaimers
This article is intended for informational purposes only and should not be considered an official statement by the company.
Please note that the numbers and financial figures mentioned in this post are estimates and provided for illustrative purposes only. They should not be interpreted as exact data released by Emeritus.
