By Dee Karawadra
Pricing is crucial to our industry. There are a number of pricing models used, and some of the more popular ones are mind-boggling. The pricing methods you, as ISOs and merchant level salespeople (MLSs), use will be dictated by the type of merchant you are boarding and your processor's technology.
Commonly used pricing methodologies include fixed rate, interchange plus (IC plus), two tier, three tier, six tier, billback and enhanced billback:
The fixed rate, also called flat discount rate, applies to total bankcard volume regardless of individual transaction interchange qualifications.
The rate can be applied to gross sales or net sales, depending on how the processor sets it up. This rate structure usually includes a per item fee applied to each transaction.
IC plus, also known as interchange pass through, entails passing through interchange and assessment costs to the merchant. There is an additional per item fee for authorization, capture, transaction settlement and declined transactions.
With IC plus pricing, you can add margins to the transaction fee, interchange percentage, or both. This markup is often referred to as the "plus." This markup is very flexible and is referred to as basis points (BP).
For example, let's begin with a retail credit card with interchange priced at 1.54% and $0.10. The three ways to price an IC plus deal would be:
While there is no set rule, most of the time IC plus pricing is used for larger merchants. With IC plus pricing the profits are easy to figure out.
GS Online's MLS Forum member Wisdompower wrote, "I honestly think that interchange plus is a great way for the ISO/agent to know exactly what their profit margin is, instead of having to do the math off of multitier levels, etc."
The billback model uses target interchange qualification levels. In this model you apply a fixed discount rate (interchange price) to all transactions regardless of their individual interchange qualification levels. The merchant is then assessed "billback" for the rate differential between the initial target and the cleared interchange qualification rate.
For example, let's assume you have a $100 retail credit card transaction for which the target rate is 1.54%, and the card actually clears at 2.30%. You also want to make 20 BP on this transaction, so you set 1.74% as the base rate.
Actual billed amount:
You charge $1.74 (1.74% x $100)
You add a billback of $0.76 (0.76% x $100)
You bill the merchant $2.50
Thus, on top of the 20 BP on the target rate of 1.54%, you make 76 BP for a total of 96 BP.
Enhanced billback mirrors the billback plan. However, an additional fixed percentage markup is added to all billback adjustments. The billback adjustment and markup are combined and billed together. This plan allows you to retain or rebate differentials on signature based debit/check card transactions.
Using the prior billback example, let's assume you have a $100 retail credit card transaction for which the target qualification level is 1.54%, and the card actually clears at 2.30%. You also want to make 20 BP on this transaction, so you set 1.74% as the base rate. This is separate from the fixed percentage markup.
Actual billed amount:
You expected to charge $1.74 (1.74% x $100)
You add billback $0.76 (.76% x $100.00)
Add enhanced surcharge $0.30 (.30% x $100.00)
You bill the merchant $2.80
This type of pricing is often seen as misleading to the merchants. David Hanlin, Slick Streetman on the MLS Forum, stated, "I spot the EBB (enhanced billback) and start salivating all over their statement." EBB is hard for merchants to detect, but agents can spot it easily.
The three tier plan groups interchange categories into qualified, mid-qualified and nonqualified tiers. These tiers can differentiate discount rate and transaction fees by card type within the tier. Depending on the processor and the technology used, the tiers into which interchange categories fall is determined by the processor and the rate table used.
What may be a qualified transaction on one processor's rate table, may not be so on another processor's rate table. The three tier model is identical to the six tier plan except it allows separate rates for signature-based debit and check card transactions. This pricing method is widely used in the industry. It should be used on small to medium-size merchants. Two tier The two tier pricing structure groups interchange categories into qualified and nonqualified tiers. However, it can allow four tiers to create separate rates for signature-based debit and check card transactions. It also permits per-item fee differentiation on debit/check card activity. The two tier plan is generally used on MO/TO merchants.
I hope this article expanded your pricing knowledge. Talk to your ISO or processor and see which models you can use. Then experiment to see which one you like best. As always, if you have any questions or need clarification, please shoot me an e-mail.
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Dee Karawadra is the founder, Chief Executive Officer and President of Impact PaySystem, based in Memphis, Tenn. He and his team have a wealth of knowledge on the merchant services industry, with a niche in the petroleum market. Dee's experience on the street as an agent has guided him in laying a foundation for an agent program that is both straightforward and lucrative for his agents. Contact him at 877-251-0778 or email@example.com.
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