Tiered Pricing, Interchange Differential, Interchange Plus...What s the difference and how does it affect me?

Transcription

1 Tiered Pricing, Interchange Differential, Interchange Plus...What s the difference and how does it affect me? Introduction Explanation of Interchange Tier (Bucket) pricing versus Interchange PLUS" (referred to as IP) pricing Introduction: Credit Card processing operates under the same basic principles as banking, i.e. 'the lower the risk the lower the rate'. Conversely, the higher the risk, the higher the rate. There are basically three general types of credit card charges. They are listed below in order of the lowest to highest risk. 1) Regular/Basic Bank Cards (a.k.a. "no frill" cards, because there are no rewards attached to them) 2) Rewards Cards (these give points or awards for their use) 3) Business / Commercial Cards [highest risk], Transactions typed into a terminal despite what card is used. This is otherwise referred to as card not present What is Interchange? The credit card associations (Visa and Mastercard) publish a schedule of fees referred to as Interchange Reimbursement Fees. While Visa and Mastercard have different ways of charging Merchant Service Providers (MSP)/processors their fees, that is inconsequential to the business owner. What is important is that both Visa and Mastercard have Interchange fees. These Interchange fees are essentially the wholesale Merchant account rates for the various types of cards. Remember that there are 300+ such cards in existence today and the number is growing as banks and other institutions continue issuing new card types in an effort to win over consumers. You can find the Interchange charts on Visa s and Mastercard s web sites. As per Visa s website: Interchange is not a single amount. There are a number of interchange rates and they may vary by the type of retailer, cost of the sale, payment product type, processing technology the retailer uses and region or country. For example, transactions at fuel merchants and grocery stores each possess unique attributes that may require different interchange categories and processing strategies. Similarly, the type of payment product used and how that product is used affect the interchange rate and processing requirements. The different rates are used to encourage product and market development; data quality; and risk management programs

2 To illustrate how this all works, a customer with a credit card from financial institution X makes a purchase at a retailer who deals with financial institution Y. The retailer informs institution Y of the purchase amount by swiping or keying in the information in its payment processing terminal and receiving an approval. Institution Y forwards the information to institution X for approval. The cardholder s institution X then remits the amount of the purchase minus Interchange rate to the retailer s financial institution. There is a final step in this process. The retailer s institution forwards the proceeds of the sale to the retailer minus the retailer s Merchant Discount Rate (MDR). The MDR is the rate that the retailer has negotiated with their institution. The MDR includes the Interchange fee. To simplify it, lets assume that the Interchange rate on a card is 1.50% and the retailer pays its payment processor 2% for the transaction. Cardholder makes a $ purchase. The cardholder s institution (X) forwards $98.50 ($ %) to the retailer s institution (Y) and then Y forwards $98.00 ($ %) to the retailer. It is important to note that Interchange rates are the same for everyone. There are no exceptions. At the time of writing, the BASIC rate for Visa is 1.54% and 1.59% for Mastercard. If a salesperson tells you that they can give you a rate lower than that (or any current rate sheet), they are effectively lying as I can 100% guarantee to you that they are making up the difference, and more, elsewhere on your statement with spurious and likely excessive charges. Chances are that if they re not above lying, they re also not above overcharging/ stealing (albeit legally based upon the contract you signed). Request our FREE report 7 Ways some merchant service providers overcharge their clients and what you can need to know to protect yourself and save money Tierd (Bucket) Pricing versus Interchange PLUS" Pricing: Now that we understand a little about Interchange - and that ALL Merchant Service Providers pay the same wholesale rate we can discuss the three major pricing models. They are Tierd Pricing (also called "bucket pricing"),interchange Differential and Interchange PLUS pricing. One other thing all retailers should understand and accept is that with the plethora of cards available today, and you know this from experience, most card holders have opted for some sort of Rewards card (AirMiles, Cash Back etc) so a vast majority of your sales will be via mid.- Qualified transactions

3 If you were looking at an Interchange chart you would see over 300 different rates quoted. What Tiered pricing does is to distil these 300+ rates into 2, 3 or 4 different tiers. You will see terms like Qualified, Mid-Qualified and Non-Qualified. Each one of those Tiers will have a rate attached to them that applies to all the card types in that Tier which, in some cases, may be 50, 60 or 70 different cards. Questions: Who decides which cards go into which Tiers? Who decides the rate? What are you paying, to whom and why? The answer for all the questions is the Merchant Service Provider. Another issue is what happens if in one Tier, 10 or 20 card types have a rate increase but the other 50 or 60 remain the same? This is not an unusual occurrence What prevents a company from raising their rates on ALL cards in that Tier even though the vast majority had no rate increase and a few may even have gone down? (answer: nothing) On the discounted rates the retailer loses twice. He pays the increase and he loses the discount. Also, what prevents an MSP from raising the tier by 20% when the actual Interchange increase was only 12%-15%, thereby adding more profit to their bottom line at your expense? (Answer: nothing) Let s provide an example of this type of pricing. A company offers a tiered rate of 1.59% on basic transactions and a 0.70% charge for mid/non qualified transaction. If a mid/non qualified transaction is processed by the retailer, the retailer will pay 1.59% plus.70% or 2.29% which equals $2.29 Why do many companies still offer Tiered pricing to ALL their clients instead of customizing a plan as Clarion does? The number one reason, they make more money! This type of pricing is littered with hidden fees, no disclosure of pricing information to the retailer; the salesperson only quotes the lowest Tiered rate, etc. You will never know what you are paying for, to whom you are paying it, and how much the MSP is making on every transaction. Relatively new to Canada, despite the fact that it is used in many other countries, is the Interchange Pricing method but as with everything else in this world, you ll have companies playing the angles to increase their profits, again, at your expense.

4 Many companies, including some of Canada s largest, have adopted what they call and Interchange Differential method of calculating fees. We re going to get into some additional math, and while it may be simple, have a calculator handy if you re not particularly adept at that subject. Here is how Interchange Differential is calculated. Let s assume that the rate a business owner has been quoted by a salesperson is 1.70% for qualified transactions and 0.50% extra for mid/non qualified transactions. This is their Merchant Discount Rate (MDR). So let s assume that there is a $ Visa charge processed by the retailer that has a 1.75% Interchange rate. Remember, this is not the rate the merchant is charged (MDR), we ll get to that in a minute. What we do know for now, as mentioned earlier, is that the basic for Visa is 1.54 % so the Interchange Differential for this transaction is 1.75% minus 1.54% or 0.21% What is the retailer charged for this transaction? They re charged Basic rate of 1.70% plus the non qualified surcharge of 0.30 (total MDR) AND the Interchange Differential of 0.21% which equals 2.21% or $2.21 The pricing model Clarion prefers is "Interchange PLUS". Interchange Plus is as simple as taking the actual interchange costs for each card processed from the charts (wholesale cost), and then adding a flat fee (this is the PLUS) to the rates. That is it in a nut shell. It's totally transparent, because you see every card type you took with the rates attached. This is the most cost effective pricing model to accept credit cards. Let s compare Interchange Differential with Interchange Plus. Using the Interchange Plus model the previous example: The retailer is given a flat fee/mark up of 0.30% on all transactions. That same $ purchase with a 1.75% Interchange Rate would mean that the client is charged =2.05% which totals $2.05

5 That $0.16 savings (or $0.24 in the case of Tiered pricing) on the transaction may not seem like much but the numbers take on a much greater significance based upon the volume the retailer processes. Assuming similar transactions on a monthly credit card volume of $ , the savings are $16.00 for Interchange Differential pricing and $24/mo for Tiered pricing. These savings do not include further savings based upon cutting out those spurious fees as detailed in out other report : 7 Ways some merchant service providers overcharge their clients and what you can need to know to protect yourself and save money Did we mention that you can request that for FREE by contacting us? At Clarion Solutions, we realize that adopting policies that lead to cost savings for our clients means less profitability for us and greater profitability for them, however we also believe that most times, less is more and that our clients will stay with us and be as interested in building a long term relationship as we are.