Softening Your Merchants’ Impact of an Interchange Rate Increase
As expected, Visa and Mastercard have confirmed an April 2019 increase in interchange rates, the fee charged by banks that covers the cost of handling and credit risk inherent in a bank credit or debit card transaction. While they have not announced the amount of the increase, your merchants should expect to pay slightly more for their merchant processing in the coming months.
How Interchange Fluctuation Affects Your Merchants
The increase of interchange rates is not uncommon in the merchant processing industry, and the impact can be different from one merchant to the next depending on their ticket size and type of transactions they run. Some processors/partners, depending on the pricing structure they use for their merchants, can choose to eat the increased fees, while others pass the higher fees off to the merchants. Below are some examples of merchant pricing structures and how an increase in interchange can affect them:
Flat Rate Pricing– Flat rate pricing is one rate provided by the merchant processor/partner for all transaction types (manually keyed, swiped, moto, etc) and usually does not change when interchange fluctuates. Unless the merchant processor/partner decides to increase the merchant fees to offset the cost, a merchant on flat rate pricing will feel no effect of a rise in interchange rates.
3 and 4 Tier Pricing– A merchant paying rates based on tiers will also not feel the effect of a rise in interchange. In this scenario, a merchant processor has given the merchant 3-4 rates based on the transaction type (i.e.- the merchant will experience a higher rate when a transaction is manually keyed as opposed to swiped/dipped). As interchange fluctuates, the tiers remain the same.
Interchange/Cost Plus Pricing- The most common rate structure offered by merchant processors, Cost Plus Pricing is based solely on the rate of interchange with an additional markup for the merchant processor. In this scenario, the merchant’s rate will fluctuate with interchange while the fees to the processor remain the same.
What You and Your Merchants Can Do
For merchants priced with Flat Rate and Tier Pricing, it is up to the merchant processor/partner to determine if they will eat the cost of the increase in interchange or pass the fees off to the merchant. Rather than a blanket rate increase, it is smart to adjust rates on a merchant by merchant basis.
For merchants on Interchange/Cost Plus Pricing, it is important to be upfront with the merchant about the change in rates and what it might mean for them. Make sure they understand that their fees (the merchant processor/partner fees) will remain the same, however the rate of Visa Mastercard will adjust.
Proactive Options for the Merchants
If you sense aggravation about the inconsistency of rates, the good news is that there are available solutions for your merchants. For example, Cash Discounting has become a very popular solution. A Cash Discount Program is not a convenience fee or a surcharge. Merchant’s simply price their items at cash discount prices. When a customer chooses to pay with a credit or debit card, a non-cash price adjustment will be passed through to the customer and deposited in the merchant’s bank account the following day.
Here’s How it Works
For the sake of simplicity, let’s say the customer makes a $100 purchase and the merchant totals $50,000 in sales for the month. Below is an example of what to expect if the merchant were to charge a 4% Customer Service Fee.
Cash Discounting is not as simple as tacking on fees at the time of checkout. There are rules and regulations that must be followed, and it is important to use a processor that is familiar with the subject. To learn more about how to implement cash discount for your merchant, you can email email@example.com.