Pass-Through Pricing: As Good As It Gets?

Scott StoneIndustry Terms1 Comment

Interchange Plus Pricing

Whether you call it interchange plus pricing, true pricing, cost plus, or pass-through pricing, it is widely considered the most transparent and merchant-friendly credit card processing pricing structure. The savvy CFO has insisted her credit card processor utilize pass-through pricing for years now, but is that what’s really being provided?

Pure Pass-Through Pricing

Pass-through pricing is simply a pricing model used by credit card processors that charges merchants the industry-wide interchange fees plus a small fixed percentage markup, usually referred to in basis points. Essentially, pass-through pricing can be thought of as:

Fixed + Variable

Where Fixed is the Interchange Fee and Variable represents a per-transaction fee, usually represented in basis points.

The type of card being used, the way the card is processed, and other related variables each play a role in determining which interchange category, and subsequently the final charge amount, for the transaction at hand. Make no mistake, there is a huge volume of variables. Just a few of these variations are listed below.

  • Types of Cards:
    • Credit, Debit, Prepaid, Business/Corporate, Rewards
  • Process Method:
    • Card Present (CP), Card Not Present (CNP)
  • Other Variables:
    • Consumer Rates
    • Corporate Rates
  • Merchant Category
    • Supermarket, Retail, Airline, Service Station, Automated Fuel Dispenser, Restaurant, Hotel and Car Rentals, Passenger Transport, Travel Service, Utility, Ecommerce

Fixed Fees: Interchange Fees

Interchange fees can be found in tables released by the major credit card networks every six months. These interchange tables have over 350 different card types and categories, which differ across each card network. The card networks also add on dues and assessments to the acquirer, which are also generally passed through.

Variable Fees

Variable fees are added onto interchange fees. These transaction-specific fees are represented with basis points (BPS). One basis point is the equivalent to 1/100th of a percentage point.

  • 1 BPS = 0.01%

On paper, pass-through pricing is a transparent and cost-effective pricing for merchant accounts. Especially compared to its alternatives.

The Alternatives

Tiered Pricing

Tiered pricing, also called bucket pricing, is the most commonly used pricing structure and typically afflicts SMBs. Instead of treating each of the card networks hundreds of interchange rates as individuals, they separate the fees into buckets. Each processor has different names for their buckets, but Qualified, Mid-Qualified, and Nonqualified are seen frequently. Regardless of the range in fees inside, the merchant pays the highest-priced rate in the bucket.

The processor is able to raise the rate of the buckets if one of the rates contained surpasses the existing highest rate. Therefore, merchants end up paying higher rates for an entire bucket when just a few of rates might have been impacted. This also makes it difficult to compare rates among several processors. Each processor categorizes their buckets differently, leaving it nearly impossible to draw direct comparisons.

Standard Pricing (Stripe Model)

The other alternative to pass-through pricing is a standard pricing model. Used famously by Stripe, standard pricing uses one set of processing fees for all transactions. Every card accepted has the same rate and fees are taken out of the total amount of each successful transaction. The flat rate charged by Stripe is:

  • 2.9% + $0.30

Under Stripe’s model, merchants will end up paying more in payment processing fees. But, they save the complication and confusion associated with pass-through pricing.

It’s pretty clear why tiered pricing is bad news and standard pricing could cost merchants more. How could the transparent, cost-effective alternative in pass-through pricing that lets you see the separation of processing costs be called into question?

The Underbelly of Pass-Through Pricing

Unfortunately, the simplicity of pass-through pricing is lost when it moves from idea to fruition. Largely due to the inherently complicated nature of interchange tables and widely-varied format and included information in the statements merchants receive.

Ever-Changing & Confusing Tables from Card Networks

There are hundreds of interchange rates across the card networks that change every six months. If that didn’t already make it a challenge to decipher, the reports themselves are anything but easy on the eyes, let alone easy to read. Unless you find copious amounts of tables and card network jargon soothing.

Interchange Tables

Left: MasterCard U.S. Region Interchange Programs and Rates pg. 1
Right: Visa USA Interchange Reimbursement Fees pg. 7

Lengthy Statements with Varied Information from Processors

The majority of processors are honest with their merchants about how the fees that are being charged. However, that doesn’t stop some processors from capitalizing on the inherent confusion in the merchant account statements. Even the brightest CFO needs to get his bearings before delving into and making sense of a statement for a company that has hundreds of thousands of transactions.

Even if you receive a full disclosure report with line item transactions, it’s not realistic to sit down and match up the nuances of every transaction in your statement with its corresponding row in the specific card network’s interchange rate table. All things considered with pass-through pricing, what’s the smart CFO supposed to do?

Tips for Ensuring Your Really Getting Pass-Through Pricing

We asked our SVP of Strategic Alliances, Camille Mauerhan, and our President, Khalid El-Awady, to lend a hand in what you can do to ensure you’re actually benefiting from that pass-through pricing you think you have. Camille has gained her expertise through 20 years of working with three large credit card processors: Wells Fargo, Bank of America Merchant Services and Chase Paymentech. Previously, Khalid has worked at Visa, the largest payment network in the world, and managed the cloud products of Monitise, a mobile banking provider.

“Unfortunately, merchants are told by processors that they’re on pass-through pricing, when they’re actually on a blended model,” Camille said. In this case, processors are providing merchants with a mix of tiered and pass-through pricing. Which still leaves the merchant paying more than they should.

There are a handful of things CFOs can do to make sure their companies are on the receiving end of pass-through pricing in its pure form:

  • Maintain a communicative relationship with your processor. It’s critical to have consistent communication with your processor. Set up monthly calls and ensure they understand your business, while you gain understanding of their operations.
  • Make sure your statements are full disclosure. Even though you won’t spend your free time matching up transactions with fees, it’s important that you still have the entirety of transactional data your business completes.
  • Hire a third party provider to audit your statements from processors. Another option to ensure you’re truly getting pass-through pricing from your processor is to have a company that specializes in statement audits to review your documents.

Pass-through pricing can be as good as it gets for merchants. As long as you ensure you’re actually receiving true interchange plus pricing from your processor.

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