Merchant Care is about Stewardship. See how we can make a difference.
A Primer on Commercial and B2B Merchant Payments Processing
and Interchange Reimbursement
INTERCHANGE REIMBURSEMENT FEES
enTrust Merchant Services is known for its payments stewardship with our customers. Our transactional economics model deploys best practices in payment acceptance, business process management in your Operations, and Six Sigma expertise to your Treasury function to ensure you are receiving the best pricing and processing rates available to you.
Merchant Services is a complex industry with bankcard regulations and a sophisticated Interchange Reimbursement structure.
The interchange rates are fees paid to the member institutions that issue bank- and payment cards to their customers. These include Visa, MasterCard, Discover, and American Express, and others. Interchange is income to issuers to recoup their costs of onboarding new customers, managing purchase transactions on their behalf, and to cover the costs of funds transferred to a merchant. Card-holders have until the end of the billing cycle before payment is due. A cardholder may have up to 60 days
before a payment is made and interchange income offsets the cost of money during this float.
Merchants do not directly pay the interchange reimbursement fees. Instead they pay a discount rate to their processor that will cover the cost of interchange and other fees, plus a margin above the cost of funds the processor advances to the merchant for each transaction [because merchants want their sales payments the next day.]
Some pricing schemes are Tiered Discount Rates based on Qualified Debit, Qualified Credit, Mid-Qualified, and Non-Qualified transactions. Others are based on Interchange Plus models. Tiered rates must be sufficient to cover the interchange
and transactional cost whereas Interchange is cost-plus pricing.
The bankcard and payment card companies apply published Interchange Reimbursement rates based on the type of card [e.g. debit, signature credit, rewards, and purchasing cards] and the payment environment [e.g. card present EMV/swipe, card not present Mail Order Telephone Order, e-commerce and online bill pay.] Other factors come into play based on industry types [e.g. supermarkets, service station fuel dispensers, restaurants & hospitality, travel, and governmental payments.] Of course, such Interchange Reimbursement reflects the risk of fraud loss and bank exposures to unfunded chargebacks from merchants unable to repay the disputed transaction.
Most CFOs and their staff may not fully understand interchange pricing. Many merchants believe, that in addition to network access fees, bankcard association fees and dues, that Interchange is not negotiable. And business owners believe, since they have to accept bankcard and payment cards, that they must also accept the fees as a standard cost of doing business. There is nothing standard about merchant services.
INTERCHANGE RATES VARY
There are in excess of 400 Interchange categories. Interchange Reimbursement also carries a per item transaction cost of $0.05 to $0.15. If your average sale is $100 or more, this cost is negligible in the rate you pay. But for some small tickets [such as quick serve take-out food establishments] this could have a costly impact on your sales.
Card associations publish and update their interchange tables twice a year but not all rates are modified. The rate you will ultimately pay to your processor will be affected by factors you can manage as well as those outside your control.
While you cannot control the type of card your customer will use [Brand, Rewards, Debit, etc.,] interchange rates can be affected by the way your account is configured and the steps you take to complete each transaction and settle your daily sales.
SURCHARGES AND DOWNGRADES
Card associations quote the lowest rate for a transaction, assuming that a number of requirements have been met. These are classified as Qualified Transactions. If one or more of those requirements are not met, the transaction may be submitted at a more expensive interchange level. These are referred to as downgrades and categorized as Mid-Qualified and Non-Qualified transactions. The card associations have over 400 rate combinations and they reflect the payment type and environment as described above.
Discount rates assessed by your processor also reflect an underwriting risk to the acquiring bank. Those risks include fraudulent purchases, risk of chargebacks and disputes, and the possibility the merchant is unable to refund valid chargebacks and disputes. Payment processing is therefore an underwritten risk.
B2B - WAYS TO SAVE IN A BUSINESS TO BUSINESS ECONOMY
Business, commercial and purchasing cards are used just like personal debit and consumer credit cards, but these cards are more costly as they carry a higher interchange rate due to incentives given to businesses like enhanced reporting, a single consolidated bill payment for employees’ use, and a rebate back to the organizational owner of the cards. The risk of non-payment of their monthly statement is usually offset by a corporate guarantee. However, the risk by fraud and card-not-present types of transactions raise the risk of loss due to higher value of items purchased and perhaps too the types and quantities acquired from card-not-present transactions. Though corporate guarantees cover the payment of month end billing, it does not allow for recovery of fraud loss in many instances.
LEVEL II AND LEVEL III INTERCHANGE
For business-to-business payments, merchants may qualify for lower commercial rates [especially in card-not-present environments] by collecting more in-depth Level II and Level III data with each commercial card transaction.
More merchants now collect Level II data like: i] taxable sale; ii] itemized sales tax amount; iii] address verification; and iv] the card’s verification code. Not doing so could result in a Mid-Qualified and Non-Qualified transaction surcharges.
Level III data includes all the Level II details plus: i] a transaction summary; ii] order date; iii] invoice number; iv] line item detail including item description, product code, quantities and unit costs.
Since a card is rarely present in these transactions, the level of processing for best interchange pricing is done through a payment gateway available from enTrust Merchant Services.
EXPECTED COSTS OF PAYMENT PROCESSING
For most merchants, their effective rates paid are between 2.50% and 2.75%. It could be less depending on the volume of payments received by Regulated Debit cards. Interchange Reimbursements for large banks [Assets exceeding $10bn] are limited by the Durbin Amendment. These is the least expensive interchange rate, so this should be reflected in your discount rates you pay.
If a merchant is not processing using address verification and card security codes, the rates may exceed 3.00% due to Mid-Qualified and Non-Qualified transaction downgrades and subsequent surcharges.
If there is a higher volume of corporate and commercial cards, the rates you pay can easily exceed 3.50% depending on other downgrades/surcharges.
For those transactions, capturing Level II and Level III detail can reduce your effective costs to 2.50% or less depending on your transaction volume.
INTERCHANGE PLUS PRICING
Rather than accepting a one-rate bundled discount fee, or pricing for your merchant account with excessively high tiered rates with undisclosed surcharges, i.e. debit, qualified, mid-and non-qualified discount rates, we offer pricing based on Interchange Plus.
We know that interchange rates, network access fees, and dues and association costs are not negotiable with the card brands, but making sure the transactions are submitted at the proper interchange level, and assuring interchange conditions apply is our priority in our Merchant Care stewardship ethic.
However, enTrust Merchant Care understands transactional economics to optimize processing rates by submitting each transaction and assigning the lowest Interchange category. The average cost of interchange in merchant accounts is 1.80% to 2.00% +/- so with a markup for cost of funds, you would pay 2.50% to 2.75% if interchange conditions are met.
Some surcharge levels may add from 0.50% to 1.50% or more to interchange costs. Adding the discount fee for processing, you
can see how quickly your costs will escalate.
Contact enTrust Merchant Services right away for a comprehensive, and complimentary review. It might be that we will be
helpful in your payment processing oversight.
Merchant Care is about Stewardship. See how we can make a difference.