Let’s face it, understanding the cost structure proposed by most payment processors can be a daunting task. In fact, most businesses that accept credit cards for payment don’t really understand everything they are being billed for. This is by design. By creating complicated pricing structures, downgrade tiers and binding contractual terms, the payment processing industry is notorious for attempting to confuse the consumer, and make it difficult to change service providers. The good news is, there is a better way! By leveraging a specific pricing model called Interchange Plus, any merchant that accepts credit cards can now guarantee to receive the absolute lowest credit card processing rates available.
Armed with proper knowledge around payment acceptance can save you $1,000's of dollars!
What is Interchange Plus Pricing?
In the payment processing community, Interchange is the wholesale cost structure as publicly outlined by Visa and MasterCard. Each credit card type, along with the manner in which it was processed, has a different fee associated with it. Visa and MasterCard don't always agree on the specific tiers, or the price they charge for similar card types, which has evolved into a wholesale cost structure with over 200 different Interchange categories. Specific categories exist for Retail versus Card-Not-Present merchants, Rewards Cards, Corporate Cards, businesses that deal primarily with the Government, Charities and other industries where the card brands are trying to gain adoption; Health Care Payments, real estate and property management. You can see that Visa and MasterCard play a large role in determining the the overall fee structure typically found on the merchant statement. So, understanding Interchange will have a significant effect in managing the overall credit card processing fees.
How can a merchant control Interchange costs?
The first step in managing your Interchange costs starts with proper vendor negotiation, where you'll need to ensure you're set-up with a very specific pricing model called Interchange Plus. Other processors refer to this pricing with names such as Interchange Pass Through, Interchange pricing, or Cost Plus. These are all based on the same structure, but could vary drastically between payment vendors. These fee structures are typically reserved for merchants processing in excess of $500K per year, but due to the demand for greater price transparency, more processors are offering this to smaller and smaller merchants. Under this model, 90-95% of your total processing fees will fall under “Interchange Fees” while the remaining 5-10% going towards the actual cost of processing the transaction (communication, funding, support).
Variables with the largest affect on Interchange
Now that you're payment processing vendor has you set-up on an Interchange Plus pricing model, how can you leverage it to continue to keep your fees down? Since the cost of Interchange is a based on two specific variables; card type and how it is processed, you as the merchant have the ability to manage part of this process, and ultimately, reduce your costs.
As an example, let’s look at a traditional Medical Practice that collects the co-pay from patients at the time of care. This practice will typically have the card present, and will swipe a Debit, HSA (Health Savings Account) or other Consumer or Rewards credit card. With Interchange rates for Card Present Debit transactions as low as 0.05%, it is critical that your system is in full compliance and has the ability to “Pass” all relevant information along with the transaction so it “Qualifies” at the absolute lowest rate. If, for example, the magnetic stripe on the card is not working, and the transaction must be key entered, the transaction is not passing all relevant information contained in the magnetic stripe, resulting in a “Downgrade” and bumping the cost up significantly.
In cases where the card is being key entered, either due to a defective magnetic swipe, or when accepting payments via Online Bill Pay, Integrated payment solution or Recurring Billing plans, address verification must also be passed with the transaction otherwise it will downgrade even further, costing you more.
With over 250 Interchange categories, and changes to the structure at least two times per year, it is nearly impossible for merchants to understand everything about interchange. It is, however, important to know that the fee structure being billed is the most transparent and fair pricing model available, and that it is imperative that you are working with a payment processor that believes in offering the most comprehensive payment platform available.