Back to School: Payment Pricing 101
In most cases, merchants simply accept the fees their processor is charging and offset those high transaction costs as a necessary evil of accepting online payments. It works, you get your deposits, all is good. And you are right all is good, BUT….. can you be doing a better job at controlling these costs? To understand where you can control payment processing costs, you need to understand all the pieces that make up the payment processing price you are paying.
There are 3 (sometimes 4) pieces to the equation: Interchange, Assessment, Payment Processor fees, and sometimes, Shopping Cart fees.
1. Interchange Fee. Interchange is the lion share of your cost and is the amount of money that will go back to the card issuing bank (the bank that issued the consumer’s card). Each bank takes a calculated risk on granting a consumer a credit card and they offset that risk by charging the merchant that accepts the card. Unfortunately, it’s the cost of doing business in the retail world.
In the US, there are about 300+ different interchange rates which are publicly available, like the current rates for Visa and Mastercard. Globally, there are many more rates and will differ depending on geography.
It is worth knowing that rates vary greatly depending on several factors. This includes the type of card that is being processed (debit cards, credit cards, or corporate cards), the status of the card (rewards card, premium, or reloadable debit card), industry type, and transaction amount. The rates can range from .05% + $0.10 to 3.10% + $0.22. It’s your payment processor’s job to collect and pay these fees on your behalf.
2. Assessment Fee. Assessments are the fees that the card associations (Visa, Mastercard, American Express, and Discover) will take right off the top of every order. The associations take this fee for the “privilege” of accepting their brands, a cost of doing business. The associations are most certainly a for-profit enterprise and they will always take their small piece, generally in the 0.12-0.15% range. These fees are updated and modified twice a year in April and October.
3. Payment Processing Fee. The third part of the payment processing cost equation is what your processor will charge for processing your transactions. As a merchant, it's very difficult and time-consuming to connect directly to the card associations, which is why the majority of merchants use an intermediary known as a payment processor, like Checkout.com. This part of the equation is the only place where a merchant may have a chance to negotiate. Payment processors have wide-ranging fee structure options which will vary depending on what you sell, how you sell, the viability of your business, your average order value, your refund rate, your chargeback rate, and other factors. Each of these variables can have an impact on your rates.
4. Shopping Cart Fee. The fourth piece of the equation is not always applicable but may be for some merchants, so we’ll cover it. If you use a shopping cart or similar e-commerce software, like Shopify or Magento, they will sometimes charge merchants an additional fee for using their services that allow you to integrate to a payment processor with no coding effort and no heavy lifting on your part. You simply use their cart to connect to the processor by entering in your production credentials.
In today’s mobile and online payments world, there are two popular pricing options payment processing companies offer to merchants. Which pricing model is right for you and your business depends on a variety of factors. These can include everything from your average ticket price, your target demographic, whether you are selling B2C or B2B, how much information you require from the customer upon checkout, and how much information you as a business owner wish to know about your transaction fees.
Discounted or “Blended” Pricing
Many payment processing companies offer merchants a discounted or “blended” pricing model. Blended rates take the Interchange rates, card associations fees, processor fees, and gateway fees and lump them all into one overall rate. These rates are set for every transaction, no matter what type of card is used to make the purchase and the associated interchange rate. Whether the card is credit or debit, Visa, American Express, Mastercard, Discover, rewards or non-rewards, you are guaranteed to be charged the flat rate that the processing company has set for you. These rates typically range from 2.3%-2.9% + $0.30 per transaction, depending on the volume of online sales your company is processing each month.
- Simplicity – As the name implies, blended pricing combines all processing costs into a single price. You will not have any transparency into the actual hard costs you accrued, but can safely estimate what you will have to pay in transaction costs for a given level of sales.
- Offset High Interchange Rates – Blended rates can be a good fit if your products have a high average ticket value and have a large percentage of Amex and rewards cards sales. These conditions can often create higher interchange rates, so a blended cost may actually end up cheaper than the transaction cost, in which case the provider can raise the blended rate.
- Good for Startups – If you are just starting a business and don’t have the time and resources to investigate and reconcile credit card processing and interchange rates, blended rates provide a simple and easy solution while you get your business up and running, allowing you to focus your attention on other parts of your operation.
- No Transparency into Transaction Fees – Typical consumer credit card interchange rates average 1.83% while debit card interchange rates can range from 0.05%-0.60%. If a small percentage of your customers are using debit cards, your payment processor can be making anywhere from 1-2% per transaction of the 2.9% rate that you’re being charged, for instance.
- Large Number of Transactions and Low Ticket Values – Blended rates also charge a $0.30 per transaction fee. If your company is conducting a large number of transactions and selling a relatively inexpensive product for $20 or less, $0.30 can increase your total transaction fees substantially.
- Limited Flexibility on Pricing – Companies that offer blended pricing may start with a standard 2.9% + $0.30 per transaction. In order to obtain their Enterprise rates, you have to be at a much higher sales volume with minimums as high as $10M dollars in online monthly sales. These rates often can only be negotiated to 2.3%-2.7% + $0.10 -$0.30.
- Hidden Fees – There can often be hidden monthly gateway fees, set-up costs, or PCI compliance fees that are buried in contracts.
Interchange ++ or “Pass-through” Pricing
The alternative to the blended pricing model is Interchange ++ pricing. Numerous payment processors offer merchants Interchange ++ pricing, which is also known as “pass-through” pricing. It standardizes the commission collected by the card associations, like Visa and Mastercard. With Interchange++ your payment processor will separate each fee you are being charged and then add a premium for their gateway and/or acquirer and processor capabilities. The final rate will be different for every transaction and is a sum of three parts:
- Interchange Fee – This is a fee set by Visa and Mastercard and paid to the issuing bank (the bank on your credit or debit card).
- Card Association Fee (Dues and Assessments) – This is the fee charged by the Card Associations, like Visa and Mastercard, for using their network.
- Processor/Gateway Fee – These are the fees charged by your acquirer, PayFac or payment processor. This is to cover the technology costs of providing the gateway technology to the merchant. They also own the merchant relationship, is your single point of contact regarding PCI compliance, chargebacks, adhering to Visa and Mastercard's rules and regulations, and your connection to the payment association. The average fees charged can range from 0.10%-0.40% + $0.20 depending on which payments company you work with and your total online sales.
- Complete Transparency into Transaction Fees – You know exactly who is making what on every transaction running through your platform.
- Lower Total Transaction Rates – With average interchange rates for credit cards of 1.81%, average card association rates of 0.11%, and average Processor/Gateway Fees of 0.10%-0.40% + $0.20, your total transaction rate for a consumer credit card would come out to 2.02%-2.32% + $0.20 per transaction versus the typical blended rate of 2.9% + $0.30. The difference can amount to huge cost savings over a period of time, especially for large enterprise businesses.
- Flexible Pricing – Companies offering merchants Interchange ++ pricing are often willing to work with merchants to tailor pricing to their specific needs. They are often willing to negotiate the 0.10%-0.40% processor fee if you sell an expensive item, or lower the $0.20 per transaction fee if your product is relatively cheaper to reduce your all-in rate.
- High Interchange Rates – American Express and status cards can have interchange rates that average above 2.0% consistently. So if you sell a product with a high average ticket value, consumers are more likely to use their Amex or rewards cards where the interchange rates are above 2.0%.
- Varying Rates per Transaction – With different interchange and card association fees for each transaction, the total processing fee rate for every purchase will be different.
Knowing these basics will allow you to make better decisions about which processing model is the right for your business. To determine which payment path is right for you, consider the pros and cons of each pricing model to see which one best fits your business bandwidth, aligns with how your customers like to pay, and which one will help you reach your revenue goals.
Need a second opinion? Contact us today to speak with a Checkout.com payments expert.