If you’re selling or buying online, payment processing fees are a given. They’re a necessary part of doing business and accepting credit and debit cards for payments. It’s good practice to learn more about your credit card statements and gain a basic knowledge of the fees you’re charged with. An internationally recognised payment service provider and direct card acquirer, ECOMMPAY, breaks down some of the common transaction fees you’ll likely see occur online through this guide.
Customer convenience is crucial to any successful online business and includes the consumer’s entire journey from shopping basket to successfully paid order.
One way to enhance customer convenience in online transactions is by utilizing a transaction enrichment tool, which can provide additional context and details about a customer’s purchase history and behavior, allowing for a more personalized and streamlined shopping experience.
Nowadays, there are an impressive number of ways to pay for goods and services online. However, one of the most popular payment methods remains the debit/credit card, with even kids owning one or having limited access to their parents’ payment cards. For merchants or business owners, it’s therefore crucial to understand the fees that payment providers charge for card transactions to better forecast profit and loss, or form an effective pricing policy to maximise profits.
This guide is designed to give a better understanding of card processing fees, and the distinction between the two most popular pricing models: Interchange++ and Blended Pricing.
First of all, let’s have a look at the variety of fee blocks involved in a typical debit or credit card transaction.
Merchant service charges or processor fees
The merchant service charge – depending on the pricing model arranged – could be the only fee deducted from your balance (in the case of blended pricing, for example, which we’ll explore a little later) or one of several fee blocks (if the Interchange++ model is being used).
The merchant service charge in an IC++ pricing model represents the acquirer’s EBITDA without administrative and fixed/variable costs, including such categories as IT infrastructure, licences, labour force, software, dispute process services, file transmission, etc. The pricing proposal to the merchant may vary depending upon several factors, including risk levels, transaction type and the volume of sales (for a tier-based tariffication).
Card scheme fees
Scheme fees represent what an acquirer is obliged to pay to VISA or Mastercard for its services. They can generally be divided into several blocks:
- Fees that are related to an authentication request (a check that is conducted in order to verify the cardholder and to prevent potential fraud).
- Fees that are related to the authorisation process, in other words an attempt to charge the funds from a cardholder’s account in the issuer bank.
- Fees that are related to the clearing process, in other words all of the transactions that were sent to the IPS for further processing on their side and will result in money movement.
These blocks include various charges for different purposes, totalling 30+ possible fees: applied depending upon incoming transactional and environmental variables, as well as the services that were used.
Interchange fees are member-to-member charges assessed on the entire transaction amount submitted by the acquirer for clearing and settlement. Generally, an acquirer reimburses the issuer for purchase transactions, whereas the issuer reimburses the acquirer for cash and ATM transactions.
Variables that affect the processing fees
As you’re now aware, a vast variety of variables are involved in card payments, and the fee calculations aren’t as simple as they may initially seem. Variables affecting fees include (but are not limited to) the following:
- Transaction type, such as a purchase, payout, or refund.
- Geographical region or specific country.
- Country-specific fees related to market development.
- Card product platform.
- Transaction currency, which can be further broken down depending upon the regional assignment of the currency.
- Specific services used, such as AVS (Address Verification Service)
- Acquirer-specific “environmental” settings.
This pricing model is probably the easiest to understand. Blended pricing, as the name suggests, merges all of the individual fees and transaction costs into a single fixed figure. By choosing this model, the acquirer covers the risks of excessive costs, so a merchant doesn’t have to worry about any variables and is presented with an easy-to-understand rate. Blended pricing can potentially be more expensive than Interchange++ but does have several advantages:
- Simplicity: It’s easy to understand the fee calculation and track associated costs.
- Forecasting: You can more easily plan your business strategy with the assurance that final transactional costs won’t fluctuate.
- Stability: Blended fees do not change with various processing variables.
This pricing model breaks down all of the previously mentioned fees into separate beings that are included in the previously mentioned blocks (Interchange fee, scheme fees, merchant service charges). Interchange++ fees are more complex than blended pricing models, and have the potential to fluctuate over time due to the changes implemented by the IPS (International Payment Systems). However, for certain businesses, they offer the following advantages:
- Fair play: There are no hidden fees, so acquirers charge only for the costs of the transaction and the merchant service charge.
- Transparency: The breakdown of the charged fees is provided, so merchants can see precisely where the bulk of transaction costs are coming from.
- Analytics: The Interchange++ fee breakdown could be used to analyse the transaction costs, as well as the basis for a pricing policy in a new country or region, for example.
Now you have a better understanding of the various fees incurred when a customer pays by card, you’ll be able to make a more informed decision on the type of pricing model that’s best for your business. While small business owners will benefit from the reassurance of blended pricing, mid- to large-sized companies may find it worth their time to consider an Interchange++ model. Although not necessarily cheaper, Interchange++ gives greater transparency and the ability to analyse what’s being charged, allowing businesses to tailor their payment portfolios and strategies accordingly.
Read the full guide about how the pricing models are made here.
About the Author
Deniss Gusakovs is a product owner at ECOMMPAY, a leading international payment service provider with its own fintech ecosystem for business growth. He primarily focuses on card schemes and their associated products, helping to deliver a broad scope of services around the Interchange++ tariffication model. Deniss uses his experience to provide efficient solutions for merchants, cost-cutting, and improving liquidity controls, and designs the IC++ products future.