Interchange

Interchange is the actual cost charged to all merchant service providers by the credit card companies to process a credit card transaction.  These rates vary by brand and type of card (and also by the way the transaction is "handled").   For example, a standard VISA "card not present" transaction costs 1.85% plus $0.10.  The equivalent M/C transaction, called Merit 1, costs 1.90% plus $0.10.  Debit cards carry a lower rate (1.60%+$0.15 and 1.64%+$0.16, respectively).  Your "discount rate" is probably a lot higher.  If not, you're probably paying an excessive "per transaction" fee [more on that shortly].

 

The number of interchange "categories" and distinctions between them is mind-boggling.  But only a few are likely to concern you.  Card-Present (if you're a retailer swiping cards at checkout) or Card-Not-Present if you're doing mail order or internet direct commerce.  Typically, your MSP will set up your account with a "target rate."  Normally, unless you're strictly a retailer, this will typically be no less than 2.1%.  The important thing to understand is that different transactions carry different rates - some higher and some considerably lower than your target rate.  Two costly problems arise when you have a fixed discount rate: (i) it doesn't reflect the lower discount rate you should receive, for example, when a customer pays with a debit card; and (ii) when a transaction downgrades [see below] you're probably paying a huge mark-up from the interchange cost to your provider. 

 

Interchange Pass-Through

Large companies (say those doing $10 million or more in Visa and Mastercard sales) often know about and negotiate an "interchange pass-through" deal.  With IPT, every transaction-related cost is passed directly through to the merchant at true cost.  The advantage to the merchant is two-fold:  First, transaction mark-ups (from downgrades) are eliminated altogether.  Second, lower-cost transactions (e.g. debit cards) are billed at their reduced rates automatically.  With your current flat-rate deal, you're paying 2.x% to process a Visa debit card that only costs your MSP 1.6%+$0.10 to process.  Wouldn't it be nice to pay net cost instead of this roughly 40% markup?  Now you can. 

 

Small companies rarely get an interchange pass through deal.  That's where we come in and precisely what makes our service so unique.  But first, let's dig a little deeper into how this business works and how MSP's make money.  It will help you to understand and appreciate how and why our approach is superior -- and why we'll ultimately save you money.

 

No Profit?

You've probably noticed that there's zero profit in the IPT model alone since every transaction flows through to the merchant at actual cost. The MSP makes a profit on the additional per transaction fee.  Don't think this is pure profit, though!  There's a real cost to process transactions (independent of the interchange fees) imposed by credit card "processors."  This fee covers the processor's cost of doing business including servicing the transaction through the banking system.  Of course, the MSP has operating costs, too, most of which must be recouped via the transaction fee as well.  A reasonable markup of the "per transaction" fee alone should provide the MSP's profit - at least in a perfect world.  In reality, though, the vast majority of MSPs mark up other fees (espcially downgrades and chargebacks).

 

One way that virtually every MSP for card-not-present merchants makes additional profit

is by charging the full fee for partial transactions; specifically, authorizations that are never settled.

 

When a transaction is authorized by not settled, it actually costs the MSP a lot less to process.  But rarely, if ever, is this rebated back to the merchant.  One of the ways we'll save you money is by giving you the refund you deserve (instead of just pocketing the difference) when a partial transaction occurs. 

 

Understanding Downgrades

Downgrades occur when a transaction fails to "qualify" for the lowest possible rate for the card being used.  There are several reasons why this might happen in a card-not-present environment.  The three most common are (i) depositing a different amount than was authorized; (ii) settling more than two days after authorization was received; and (iii) failing to perform an AVS request.  When a downgrade does occur you will be charged a higher rate.  How much higher depends on your contract with the MSP.  Suffice to say that downgrades are extremely profitable to the MSP (i.e. costly to you).  And these happen a lot more frequently than you may realize.  The difference in cost between interchange and the rate you're actually charged for a downgraded transaction can be enormous.  An interchange pass-through deal ensures that you'll always pay the lowest possible rate no matter how the transaction comes across the wire. 

 

[Without going into a lot of painful detail, you may have heard about mid- and non-qual transactions.  These terms vaguely describe the relative degree to which transactions have failed to qualify for the best rates.  This, incidentally, is determined by individual processors and their MSPs -- not by any generally accepted rules.  When operating under IPT, you're paying the actual cost for every single transaction - no matter how well or how badly it may have qualified.  The savings here can be huge.]

 

The beauty of interchange pass-through is that you pay the true cost for
"non-qualified" transactions; not some arbitrary, and often outrageous, markup.  

 

                                                        

                                                      A Versatalis and Paymentech Strategic Partner

                                                      interchangeonly@gmail.com

 

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