Processing Fees: How Low Can We Go?

Understanding Processing Fees

Understanding Pricing and The Top Three Things that Impact Cost

My favorite client, who does a considerable amount of volume with us, always comes back to me at the end of the year looking to be rewarded for its increase in volume.  While I’d love to help them because of the client’s size and volume, I have hit the wall on rate reductions.  There no longer is any wiggle room for a price break even though there is a continued increase to its volume.  So, my annual rate reduction call, was not going to be exactly as they had hoped for, and I needed to have a heart to heart where we could discuss the cost of processing rates and the value of the Segpay service.   Our call went well, and my merchant now has a good understanding of rate structure and the costs associated with processing a transaction.

This process made me realize a lot of people are confused about rates. For example, the difference in the cost of processing regionally (EU, UK, and U.S.) and with whom you’re processing with.  How do you know if you’re being treated fairly by your provider?  This month we break down different pricing structures to help you be better prepared to discuss rates with your provider. 

What is Interchange Plus Plus (IC++) Pricing?

Many acquirers like to present interchange ++ pricing, which stands for interchange + card scheme fees + acquirers’ markup.  What does this mean exactly?  An interchange fee is a fee charged by the consumer’s issuing bank to accept a credit or debit transaction.  Card scheme fees are the cost to process the transaction on the card brand’s networks.  The final plus is the acquires’ mark up. 

Banks like to charge Interchange ++ pricing because it protects their margin.  Interchange rates can vary depending on the business category or the merchant category code (MCC) your business is assigned to, the type of card used and even the geographic location the consumer and acquirer are located in.  These MCC codes are broken out into categories such as grocery, charities, gas stations, fast food restaurants, travel, and mail order telephone order (MOTO)- which is where all high-risk transaction fall, and the type of credit card used – for example a credit card, rewards card or debit card can have different interchange rates.  Also, both Visa and MasterCard have different interchange fees and they update these twice a year. 

Because there are so many factors determining interchange, banks prefer to present an IC++ pricing model to merchants.  Until a merchant really starts processing, the acquirer won’t have a feel for the margin on the account.  For example, a merchant will tell me they are getting a four percent rate from the bank for adult transactions in the U.S. but when you dig down into the proposal, it’s a four percent markup on top of the interchange plus card scheme fees. In the U.S. this would have an adult merchant closer to seven percent and that’s before all the bank’s miscellaneous fees. Usually, merchants don’t know what they’re going to be charged under the IC ++ model until they receive their first statement. 

Tiered Pricing

U.S. acquirers will also offer tiered pricing. This pricing structure is similar to the flat rate pricing structure, but instead of one rate, there are a few. Your acquirer will bundle 300+ possible interchange rates into three buckets: qualified, mid-qualified, and non-qualified.  Each transaction will then be priced based on the rate bucket it falls into.  This is another way for the acquirer to protect their margin and offers a more simplified rate structure for their merchant.

Location, Location, Location

Where you live and where you’re doing business can impact rates.  In 2015, the European Commission began limiting the amount of interchange fees that can be charged on transactions that are processed by an EU consumer through an EU acquirer.  These same interchange fees are now capped at .20% on consumer debit cards and .30% on commercial debit cards.  In addition, the regulation requires the acquirer to detail the cost associated with each transaction for full transparency.  For this subset of traffic, the cost associated with processing transactions can be two to three percent less than acquiring costs in the United States or transactions processed through an EU acquirer even though the consumer resides outside of the UE. 

Payment Facilitator Pricing Packages

When you work with a payment facilitator pricing is typically presented as a single bundled rate that accounts for the bank cost of Interchange ++, gateway fees and premium for auxiliary services offered such as customer service, risk management, PCI compliance and marketing tools.  Your payment facilitator also carries the burden of taking the risk on the account with the bank and is accountable to the regulatory bodies that oversee consumer protection such as the Federal Trade Commission and, in our case, the Central Bank of Ireland for Europe business and the UK Financial Conduct Authority for our UK business.  This model allows a merchant to know exactly what their pricing is and what features they will receive so they can focus on their content and technology platform.

When it comes down to it, there’s more to our business than just rates.  My favorite acquirers to work with do not offer us the lowest rate.  They do provide us with the benefits of quick turn around on approvals, availability for calls and the sense that they genuinely care about our business which helps us grow.  They make us feel like they have our back.  When you’re looking at your processing costs, a good idea is to step back and look at the bigger picture.  Do you have the support of your provider and are they on top of looming issues that could impact your business?  This level of customer service cannot be measured in basis points. But from experience, I can tell you that the feeling of security is priceless.

Need more help navigating your rates? We’re here to help.  Contact your sales representative or email us at [email protected].

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