Insurance models, making my weekly grocery list and perhaps scheduling my next dentist appointment may sound equally as interesting to you as what I’m about to discuss. Ecommerce pricing models. I know, even has a catchy ring to it doesn’t it!
However, like all things that we know are good for us, they can sometimes be ignored. When it comes to ecommerce pricing, it pays off, both in the short and long term, to knowledge-up on the subject as it can benefit your business considerably.
So, take out your last processing statement, sit back, relax, get comfy and let’s talk payments!
What are my options?
The most typical pricing options offered by payment processors are either:
a. Interchange Plus Pricing; or
b. Fixed Pricing models
Let’s break each down and look at the pros and cons, but first, let’s do a quick summary on what happens when a purchase is made online.
The payment process
As we talked about in our previous post ‘About online payment services – a guide for SMEs and…everybody!’ there are a few parties involved in the payment process; when a transaction occurs on your website, and all the intrinsic functions that happen thereafter.
Here is a quick refresher.
The companies involved when a customer buys something from your website are:
1. Issuing bank – the financial institution that issued your customer with their credit card. These come in various forms, such as the widely known Visa and MasterCard.
2. Processor, or PSP – they enable the transactions to occur between each of the parties and manage the security of your customer’s payment information.
3. Acquiring bank – where you (the merchant) hold your merchant account facility.
Who sets the interchange fee?
All businesses who want to accept credit cards on their website, in short, pay for the convenience to do so. It is the non-negotiable constant, just as night turns to day.
There are many variables that make up this complex pricing structure, shown as a percentage of the total purchase price. The pricing structure, determined by the card networks are based on things such as:
• the location or region the transaction is taking place
• your business size and industry
• the type of credit card that is being used (be it standard or premium); and
• what type of transaction it is.
In fact, there are up to 125 different interchange rates that can be applied based on all of the above factors, and are then put into varying categories.
Also important to note, interchange fees are not static. The card networks regularly adjust their pricing, typically twice a year. The outcome of any pricing changes generally stem from the elements mentioned above and things like changes in the market and potential fraud exposure, just to name a couple.
Interchange Plus Pricing
When your customer hits submit after including their payment information, a beautiful sequence of events then occur in a fraction of a second that decide whether a payment is either approved or declined.
This process involves people, systems, security and enables ecommerce to flow seamlessly. Well that is the intention and goes a little like this.
1. Your customer buys something from your website, let’s make it simple and say it costs $100. The transaction is then submitted to the issuing bank for approval.
2. In this scenario, the issuing bank approves the transaction and authorises for the funds, less the interchange fee, to be sent to the acquirer / payment processor.
3. The payment processor then pays you, the merchant, and also deducts their processing fee at this time.
4. The money that lands into your merchant account is the balance of your $100, less interchange and acquirer fee.
Here’s an example of how the dollars would break down
a. $100 purchase. The amount that is charged to your customer in full.
b. Less $1.50 interchange fee. In this example we are using 1.5% (Fees can range between 0.2 – 2%, based on where you are located and services offered).
c. Less a percentage (for example 0.5%) of the purchase price paid to the acquirer / processor (the ‘plus’ component of ‘interchange plus’).
d. You receive $98 in your merchant account and the summary of fees in question, show up on your statement.
The element that is negotiable in this scenario is the ‘plus’ part. The fee paid to the acquirer / payment processor. Based on your processing volume, there may be some room for negotiation with your PSP.
The benefits of interchange plus pricing is the transparency it provides. You are fully aware of the fees and charges made every time you accept a transaction from your website.
What is a Fixed Price model?
Fixed Pricing offers merchants a set charge, coupling the fee from the Issuing Bank and the Payment Processor.
With Fixed Price models, PSPs will group processing volumes into different tiers and set a rate against each level. Therefore, based on your average monthly processing volume, your account will fit into one of possibly five pricing tiers.
Generally, a Payment Processor may have anywhere from three to five tiers (or levels) when it comes to pricing, to accommodate all differing types of merchants.
The interchange rates, mentioned above, are then categorised into one of the pricing tiers offered. This enables the PSP to ensure it can provide an economic service rate for all levels of business. Be it smaller startups to an established enterprise.
This type of pricing model can be of value for merchants who like to know and forecast exactly how much they are likely to be charged and earn each month.
The disadvantage of this model is that the pricing may not be accessing the full spectrum of interchange rates available and applicable to the individual transactions occurring on your site.
If you need a take a short walk to clear your head after all of that information, you’re not alone! Alternatively, if you would like more information or to talk to someone in the know about payment pricing models, speak to one of our experienced team. You can call us on +1833 245 5776 or send us an email via our website www.billpro.com/contact