There are many pricing models that merchant service providers use to assess charges, but two of the most common are bundled pricing and pass-through pricing. Understanding the different pricing models in the credit card industry will allow you to make better processing and processor decisions.
Take a look at your processing rate. If your merchant service provider is using a pass-through pricing model (also known as ‘Interchange-plus’ pricing) you should see a rate percentage, per-transaction cost, and detailed information on card pass-through fees such as interchange and brand network costs listed separately. If your merchant service provider is using a bundled pricing model, you will see a flat rate percentage with a per-transaction cost only – the card brand fees are not shown since they are part of the bundled rate. Uncovering your current processing pricing model is the first step in minimizing your processing costs.
A Quick Lesson on Interchange Rates
A business pays fees to three separate organizations each time a card is processed. Interchange fees are paid to the card-issuing bank and to the card brand (Visa, Mastercard, Discover and American Express). A separate fee is paid to the merchant service provider. This separate fee charged by the processor is called the markup fee and is negotiable. The interchange rate is non-negotiable as it is the same regardless of which processor a business uses.
Interchange rates are determined on a per-transaction basis. The card type, category, and processing method all have an effect on the interchange rate. Credit cards vs. debit cards, commercial cards vs. business cards, swiped vs. keyed — all of these variables play into your interchange rate. Interchange rates are published on card brand websites for reference and are determined by the costs of moving money and the risk involved. For example, card-present transactions present a lower risk to the processor and therefore result in lower interchange rates than card-not-present transactions.
Bundled Pricing vs. Pass-Through Pricing
When a merchant service provider uses a bundled pricing model, it means that the interchange fees and processor markup rates are bundled together into a flat rate that is applied to each transaction. This pricing model can be tricky to deconstruct. If you need assistance with breaking down your rates and fees, Pluss offers a free rate analysis service at no charge to current and prospective customers to break down and better understand your rate.
Pass-through pricing (also known as Interchange-plus pricing) means that the interchange fees are passed to the business at cost without markup. It’s more transparent than bundled pricing and allows for interchange rate optimization. With pass-through pricing, the interchange rate fluctuates based on the security of the transaction. Bundled pricing does not fluctuate, which means that you could be paying a higher rate on certain transactions than someone who utilizes pass-through pricing.
Pass-through pricing is appealing because of its transparent structure, however, there is one pitfall to be aware of and it’s all in the details. Some pass-through pricing offers low markup rates but has junk fees added on each month. A low markup rate with a high amount of junk fees will have an influence on your business’ effective processing rate (or total cost of acceptance), which is a culmination of all rates and fees. A low markup rate with a high effective processing rate is a huge red flag. Additional ‘junk’ fees are just as important to consider as the rate itself — they can add up quickly and have a large impact on the effective processing rate.
Formula for Calculating your Effective Processing Rate
A very simple way to check your effective processing rate is to take a monthly statement and apply the following formula:
Total Fees / Total Volume = Effective Processing Rate
The Bottom Line
Knowing the basics of your pricing structure and processing fee breakdown empowers you to make better processing decisions by asking different questions. Can my pricing model be adjusted to interchange-plus? What types of additional fees can I expect to see? What impact will those fees have on my effective processing rate?
Seek understanding in how you’re being charged and why you’re being charged a certain way, you may find that there are still savings to be had with your processing fees by simply posing the question.