Understanding the complexities of payment pricing can feel overwhelming, but as PASBA members, it’s essential to get a handle on how the process works to optimize your business operations. Recently, Don Wilczynski from Tried and True Consulting hosted a seminar to provide PASBA members with insights into the payment processing industry.
This blog breaks down the key takeaways from that session, focusing on interchange fees, payment processing, and how to choose the best pricing model for your business.
Understanding Payment Processing
Payment processing is the backbone of any transaction-based business. It’s the system that allows a customer to make payments and for a merchant to receive the funds. However, there’s more going on behind the scenes than simply swiping a card.
Payment processing involves several players:
- The cardholder: The customer making the purchase.
- The merchant: The business receiving the payment.
- The issuing bank: The bank that issued the customer’s card.
- The acquiring bank: The merchant’s bank that processes the transaction.
- The payment processor: The company handling the transaction from start to finish.
Understanding these relationships is crucial because each party involved takes a small fee for facilitating the payment. This is where interchange fees come into play, which can significantly impact your bottom line.
What Are Interchange Fees?
One of the most discussed topics during the seminar was interchange fees. Interchange fees are the charges that a merchant pays every time a customer uses a credit or debit card to make a purchase. Scott from Tried and True Consulting provided valuable insights on how these fees work and where they go.
Essentially, interchange fees are what merchants pay to the issuing bank and card networks (like Visa or Mastercard) for processing payments. These fees are usually a percentage of the transaction value, plus a fixed amount.
Scott explained that while these fees are often misunderstood as being purely for profit, they actually cover the risk that issuing banks take when they guarantee that a transaction will go through. The money is distributed among several parties, including:
- The issuing bank (for covering fraud risk and other services).
- The card network (for facilitating the transaction).
- The payment processor (for handling the transaction).
Insights from Rob Johnson (Visa)
During the session, Rob Johnson from Visa shared some critical insights on the current state of interchange fees and future trends. Visa, as one of the largest payment networks globally, plays a pivotal role in shaping how these fees are structured.
Rob highlighted the importance of understanding the fee structure and how it can vary based on the type of card, the type of transaction, and even the industry in which your business operates. He emphasized that while these fees might seem like a nuisance, they ensure the smooth operation of secure transactions worldwide.
Visa is constantly working to streamline payment processes for businesses, making it easier for merchants to accept payments while maintaining security and efficiency.
Pricing Models for Payment Processing
One of the most practical parts of the seminar was the discussion on pricing models for payment processing. Don and Scott walked through the most common models and how to choose the one that’s right for your business.
- Flat-Rate Pricing: This model charges merchants a fixed percentage per transaction, regardless of the card type or transaction size. It’s simple and predictable, making it ideal for small businesses that value simplicity.
- Interchange-Plus Pricing: This model involves paying the actual interchange fee plus a markup from the payment processor. While this option can be more complex, it offers transparency and may result in lower fees for businesses with high transaction volumes.
- Tiered Pricing: This model groups transactions into categories (e.g., qualified, mid-qualified, and non-qualified), with different rates for each. While it offers flexibility, it can be difficult to understand and may result in higher costs if not properly managed.
Scott emphasized that choosing the right pricing model depends on your transaction volume, the types of payments you accept, and your willingness to manage a more complex fee structure. He also recommended reviewing your payment processing statements regularly to ensure you’re not overpaying in fees.
Final Thoughts and Key Takeaways
The key takeaway from the seminar is clear: understanding payment pricing is crucial for optimizing your business. Interchange fees and pricing models can significantly impact your profit margins, so it’s essential to make informed decisions.
Now is a great time to evaluate your current payment processing provider and pricing model. Are you paying too much in fees? Could switching to an interchange-plus model save you money? The answers to these questions could have a significant impact on your bottom line.
