By Ben Dwyer
Merchant account pricing can be categorized as pass-through, bundled or a mix of both. Pass-through pricing is the most transparent, flexible and least expensive form of pricing. Bundled and mixed pricing models, although currently more prominent in the marketplace, are opaque and result in inconsistent and often greater processing costs.
Pass-through pricing is commonly referred to as interchange plus for the way in which base processing charges of interchange, dues and assessments are billed and reported separately from markups.
Separation of processing costs is the primary component of interchange plus pricing that opens the door for a host of other benefits that ultimately lead to greater transparency and lower costs. Primary benefits include transparent reporting, the receipt of interchange credits and cost reductions (such as the proposed Durbin Amendment), and a consistent card markup independent of interchange qualification.
Interchange plus processing statements provide a complete picture of charges including interchange-level detail. This detailed reporting makes it relatively easy to reconcile costs and optimize interchange expenses.
The majority of credit card processing costs are the result of interchange fees. The detail provided on an interchange plus processing statement makes it possible to analyze and optimize interchange costs.
Interchange plus pricing allows acquiring banks to pass interchange credits and reductions along to their merchants. This is something that is not possible with bundled pricing and results in hidden costs.
The separation of base costs and markups on an interchange plus merchant account results in a consistent markup regardless of interchange qualification. This consistent markup eliminates surcharges, lowers costs and makes comparing merchant account quotes much easier than with bundled pricing.
The transparent, consistent markup of interchange plus pricing makes comparing merchant account quotes relatively straight-forward. Unlike with bundled pricing, there are no surcharges based on a provider’s generalized pricing tiers.
Bundled pricing is named for the way in which interchange, base processing costs and markups are combined and passed to the merchant in an oversimplified format. Bundled pricing is often referred to as “bucket” or “tiered” pricing because fees are generalized into tiers or buckets called qualified, mid-qualified and non-qualified.
Major pitfalls of tiered merchant account pricing include inconsistent buckets, hidden costs, inconsistent markups and difficult reconciliation, all of which contribute to greater overall processing expense.
The tiered pricing model makes it possible for merchant service providers to dictate which rate tier or bucket an interchange category qualifies. A provider’s ability to influence how interchange is routed results in something called inconsistent buckets, because not only would you need to know a provider’s rates in order to compare quotes; you also need to know how they qualify interchange to determine the markup for each category.
The bundling of costs on tiered pricing prohibits interchange credits and fee reductions from being passed to merchants, resulting in what can amount to significant hidden expenses.
The card markup on the tiered pricing model varies per interchange category making reconciliation difficult and contributing to greater processing expense.
Reconciling processing costs by referencing a tiered merchant account statement is difficult at best and impossible at worst. Interchange detail is typically not disclosed on a tiered merchant account statement leaving the merchant to guess how interchange categories are qualified. In this case, an educated guess is as close as a merchant can come to reconciling actual processing costs.
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