Payment Gateway Choice Can Shift Margins by 5%
Your choice of payment gateway can swing net margins by 2-5%, according to a new review. The analysis warns startups about hidden FX markups, settlement delays, and compliance issues that erode tight unit economics. The report highlights the need to scrutinize Merchant Discount Rates (MDR) and prioritize gateways with strong UPI integrations and transparent fee structures.
The Reserve Bank of India (RBI) mandates that payment aggregators must be companies incorporated in India. They are required to have a minimum net worth of ₹15 crores at the time of application, which must increase to ₹25 crores by the third financial year of operation. This regulation ensures that only financially sound players handle the flow of funds between customers and merchants. Beyond the headline MDR, gateways often include other fees that impact a merchant's net revenue. These can include setup fees, annual maintenance charges, and costs for processing refunds or handling chargebacks. For international transactions, costs like forex markups of 1.5% to 3%, wire fees, and cross-border charges can further diminish profits. The settlement cycle, or the time it takes for funds to move from the gateway to a merchant's bank account, is a critical factor for working capital. While standard settlements might take T+2 or T+3 days, some gateways offer instant or T+0 settlements for an additional fee. Faster access to funds can significantly improve a small business's ability to manage day-to-day expenses. To operate, payment gateways must adhere to strict security and compliance standards set by the RBI. This includes Payment Card Industry Data Security Standard (PCI DSS) compliance to protect cardholder data and implementing robust Know Your Customer (KYC) processes to prevent fraud. All payment system data for Indian transactions must also be stored exclusively within India. While bank-to-bank UPI transactions carry zero MDR for merchants, this doesn't mean they are entirely free. Payment gateways may still apply a standard platform or technology fee, often around 2%, for providing the secure infrastructure, dashboard, and reporting tools that facilitate these transactions. Additionally, using a credit card on UPI can still attract MDR.
