Interchange Fees Are Changing: Are You Ready?
In preparing to share insights and awareness about the April 22, 2022 changes to interchange fees, I found myself coming back to one simple issue: If merchants don’t know how their payment process flow is mapped to the events that impact interchange fees, then they won’t understand how changes to interchange fees affect their business. More importantly, they won’t know what changes they need to make to their payment processing to avoid increased costs. That said, this post is focused on promoting awareness, one of Pagos’ three A’s.
Before we dig into what’s changing let's start with a refresher on what interchange fees are:
Interchange fees are transaction fees that the merchant's acquiring bank must pay to the issuing bank whenever a customer uses a credit/debit card to make a purchase from the merchant. The fees are paid to the card-issuing bank to cover the expenses issuers incur when offering added services, such as cardholder benefits and customer service; they also cover handling costs, fraud and bad debt costs, and the risk involved in approving payments.
Keep in mind, interchange fees are only one element in the complex set of costs merchants face when accepting payments. If you have physical points of sale, you have POS equipment and software that you’re paying for. If you sell online, you likely have multiple services that you use to manage your payment risk, which adds to your transaction costs. Then, if you’re on an interchange plus plan, not only do you pay the interchange and per-transaction fee that your acquirer pays to the issuer, but you also pay fees to the acquirer, the card brands, and a gateway processor. Merchants can control some of the conditions that drive these rates and fees, but some are outside of a merchant's control, such as the card product their customers use.
So…What’s Happening to Interchange Fees?
As of April 22, 2022, there will be over 300 different interchange plans and some fundamental shifts in when and how fees are applied—some of which have gone into effect already.
Take, for example, Mastercard Digital Enablement fee. This fee isn't new, but up until now, it's been only 0.01% on all sale transactions. As of April 4, 2022, it changed in two significant ways:
Instead of sales, Mastercard will apply this fee to all authorizations, regardless of whether or not they're approved.
The fee amount is increasing to $0.02 on authorizations under $100 and 0.02% for authorization amounts over $100.
So to recap, this single change shifts the event from sales to authorizations, adds a minimum fee amount, and doubles the percentage-based fee for authorizations over $100. That’s a significant change, and merchants of all kinds—even those with decades of experience—need to pay attention. This change alone could result in a spike in payment processing costs that will need explanation and likely a plan to mitigate that increase.
How Will This Impact Me?
Your net processing costs are likely to increase, the question is just when and how well you are prepared to forecast these increases. Alternatively, understanding the changes may help you assess alternative processing agreements
If you are one of the growing number of merchants on flat rate processor agreements, you may not see a change right away unless there are separate pass through fees. On flat rate plans, some transactions cost processors much less than the fees they deduct from your transactions, and since they essentially have a static markup, you will only see a change if the digital enablement fee and network fee changes make a big enough ripple.
If you're on a blended rate plan with pass through fees, or on an interchange plus processor agreement, however, you’re likely to see a change in your processing costs. A few lucky merchants will actually benefit, but not many.
Before you can determine exactly how your fees will change, you must take the time to learn more about your payment processing agreement and how pass through fees are currently deducted from your merchant account. Your payment processor may offer you a rate analysis to help you understand your fees, but something like that isn’t enough if you don't know how your payment processing steps are mapped to various fees or what you can and cannot control regarding interchange.
What Exactly Should I Do?
If you know how your payment process is mapped to each payment message call, then you're way ahead of the game in terms of being able to identify how rate changes will impact your business. We recommend you begin thinking about how much money you're willing to give up from each of your sales; doing so can help you define how to monitor new costs. Here are some actions to get you started identifying the costs and impacts of mandatory fee changes:
Identify the type of rate plan you're on for each merchant account
If you use Pagos' Parrot Batch product, you can begin tracking the card products your customers are using, which influence interchange rates and can help you make better more informed decisions
Identify where your fees are billed or deducted from your merchant accounts
Identify all the merchant category codes (MCCs) used in your payment processing and make sure they're the same in authorizations as in settlement
Define which fees are pass through fees and which ones are based on a message call (and which payment event they represent)
Add up all the fees deducted from your merchant account and divide this by your gross sales transactions and use these metrics to monitor your processing costs as a percent of gross sales
Divide the count of fees by the count of gross sales transactions
Divide total fees by total gross sales
Gather all your per-message call fees and catalog these with a description of the intended value of the service
Create an average cost to call metric by dividing total per-message call costs by gross sales transaction count
Payments are hard, if they weren’t, there wouldn’t be so many forms of payment, payment processors and acquirers, and—it’s fair to say—Pagos wouldn’t exist.
Chances are, you have had or will have a discussion with your processor and you might even contemplate shopping around. You may receive rate analysis from your current processors or those promising they can do better, but they can’t know your business better than you can. They can help you identify missed opportunities for the best interchange qualification and rates, but they can’t promise a bottom line number unless you know how, why, when you make payment calls, and what data is or is not being populated in your settlement file within 24 hours of authorizations. Finding the answers to those questions will put you on the path to action.
At Pagos, we’re committed to delivering processor-agnostic insights and services to reduce costs and complexity. Keep an eye on the Pagos Blog for further updates, or head over to the Pagos Product Documentation for more information on the entire payments ecosystem.
We've provided the content in this blog post solely to inform and educate. Pagos doesn't provide legal advice and this content shouldn't be taken as such. You're strongly encouraged to consult with your payments partners and legal teams before implementing any changes based on the content in this post.