Understanding Why Credit Card Providers Use Different Pricing Plans

A few merchants recently sent me their provider’s email response after the merchant insisted that their current pricing plan be changed Interchange Plus pricing.  Some of the providers responses where down right ridiculous and even laughable as they tried to explain why their Tiered pricing, flat rate pricing, flat fee pricing plans, etc. were “better for the merchant” than Interchange Plus pricing.

If you take a look at pricing from the provider’s side and you’ll see why these other pricing plans are not better for the merchant than Interchange Plus.  In fact, you’ll see that these other pricing plans can make it more difficult for the provider to maintain consistent margins on an account.

Credit card processing is a lot like buying and selling chicken wings, only in reverse.

One of my clients is a chain of pizza & wings restaurants.  I recently spoke to their accounting department and they explained that chicken wings are one of the most difficult products in which to maintain a consistent margin.  In fact, the product requires constant monitoring or losses can occur practically overnight.

The problem with maintaining margins on chicken wings starts with the fact that the restaurants buy chicken wings by the pound but their clientele require that they be sold by the piece.  Buying a product in one unit and selling the product in a different unit can cause margin issues in any industry.

Maintaining consistent margins on chicken wings is further aggravated because of the inconsistent product they receive from their distributors.  One delivery of wings may have excessive meat on the bone which the clientele love. However, the extra weight per wing may not only cause margins to fall but could actually cause a loss. The next batch of wings may lack meat which the clientele dislike but margins benefit from it.  Finally, chicken wings are a commodity and their per-pound price can fluctuate which can cause margin issues and even cause losses for the chain.

Understand that credit card processing is just like buying and selling chicken wings only in reverse – Providers buy credit card processing by the piece and they inflect the same margin problems on themselves when they try to sell it in a different unit (Tiered, Flat Rate, Flat Fee, etc.) because they don’t how much the next transaction will cost them and they have to account for the changes in wholesale pricing from the card companies.

What providers do know is the pre-piece cost of every transaction. If a customer buys a product from a US retailer with a basic swiped/dipped Visa credit card the provider knows the extra pre-piece cost is 1.51% + $0.10 for the interchange, 0.13% for the Visa assessment fee, and $0.0195 for the Visa APF fee.  If the next customer buys the same product using a Visa Signature Preferred card that is key-entered, the provider knows that the exact pre-piece cost is 2.40% + $0.10 for the interchange, 0.13% for the Visa assessment fee, and a $0.0195 Visa APF fee.  If there is an issue with the transaction forcing Visa to charge a “Visa Transaction Integrity Fee,” the provider knows that the exact pre-piece cost is $0.10.  With the exception of a couple fees, the provider knows the exact pre-piece cost of every transaction independent of the card brand, card type, or issue, because processing wholesale cost is sold to them by the piece.

Interchange Plus is a pricing plan that allows the provider to sell processing services to the merchant by the piece as well.  It makes it very easy for the provider to calculate their gross revenue and it makes it very easy for the merchant to calculate the negotiable cost to them which happens to be the provider’s gross revenue.  Changes in card company wholesale cost do not impact the provider because their pricing is above the wholesale rates. Also, the increase and decreases in the wholesale rates are passed through in a fair manner to the merchant without guessing or taking advantage of the merchant.

Say your company processes $1,000,000 per year with a $100 average ticket and the interchange plus rate is 0.10% + $0.10 over published interchange rates and the actual pass-through fees charged by the card companies.  The provider’s gross annual revenue is (0.10% x $1,000,000) + ($0.10 x 10,000 transactions) = $2,000.  If the provider charges a $15 monthly service fee, it’s an additional $180.   The $2,180 is also the negotiable cost for merchants. This is the number you need to know when judging your service or soliciting offers from other providers.

Think about it, a provider that requires $2,180 in gross annual revenue on an Interchange Plus pricing plan isn’t only going to require $1,500 of “sustainable” gross annual revenue on a different pricing plan.

So why do providers offer different pricing plans?

So if these other pricing plans don’t benefit the merchant, make it more difficult for the provider to calculate their own gross revenue, and providers need the same minimum sustainable gross annual revenue independent of the pricing plan, then why do they offer the other pricing plans?  The answer is simple, many providers use these other pricing plans to lure unknowledgeable merchants into thinking they are getting a better deal than they really are.

These plans also make it easier for the providers to raise the merchants rates and fees under the auspices that the card companies have changed their rates and fees so the provider need to increase the merchant’s rates and fees.

One of merchants I spoke with recently was offered a flat fee program of $7,500 per month.  The merchant currently spends around $8,000 per month for processing so the flat fee pricing looked intriguing.  However, upon closer examination the provider would lose money at a flat fee of $7,500.  This was not a sustainable pricing plan and providers do not run a charity business. They like to make a profit and lots of it possible. This offer had all the signs of a teaser rate.

Keep in mind that teaser rates often come with the hidden purpose of getting merchants to use the provider’s proprietary gateway/POS system, lease equipment, sign a long-term maintenance agreement, etc because the processing the teaser rate seems so low to the merchant.  Once the provider has the merchant locked in, it’s not only easier for them to increase the processing rates, but it’s also easier for them to increase the cost on their other services used by the merchant.

In the above case, I told the merchant to have the provider quote the same $7,500 monthly cost but on an Interchange Plus pricing plan.  Of course, the provider couldn’t do it because they would have had to disclosed a negative rate and admit that their flat fee pricing was not sustainable.

Lastly, many providers simply do not want the merchant to know their gross annual revenue.  In fact, most merchants on these other pricing plan would probably change providers or at least demand better pricing if they knew how much the provider was really making on their business.

Summary

  1. If someone tells you that their pricing plan is better for you than interchange plus, try not to laugh and walk them to the door.
  2. Keep in mind that Interchange Plus pricing does not guarantee competitive pricing or a reputable provider.  You need to use the tools and methodology I teach in these articles to weed out the unacceptable ones and obtain a competitive sustainable cost from the more acceptable ones.

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