Interchange optimization: Win accounts without sacrificing margin.

Written by Jereme on

Analyzing a merchant’s payment processing statement may reveal that they’re paying too much.

Competing on price is always a race to the bottom. There are people in our industry who believe the only way to sign a new account is to cut into your margin and offer lower fees. However, there is a smarter way: Interchange optimization.

What determines an interchange rate?

As a value-added reseller, ISO, or agent selling payment processing, you know interchange fees are the fees that the credit card issuing bank charges for each digital payment transaction.

What you may not know is that they aren’t necessarily set in stone.

There are three common reasons that the interchange rate a merchant is paying may be too high.

1. B2B or B2G card transactions: 

Some merchants sell to other businesses (B2B) or government entities (B2G), such as a coffee shop that sells its signature blend to restaurants or cafeterias. When the merchant submits the necessary information, interchange rates for those transactions can be lowered, rather than the business paying the rates associated with credit card sales directly to consumers.

2. Electronic interchange reimbursement fees (EIRF) or standard downgrades: 

When a transaction doesn’t qualify for the interchange category that it should have, it can be downgraded, and the merchant pays a higher fee. Reasons for downgrades include not settling within the required timeframe, not using address verification, and the authorization amount not matching the settlement amount. Correcting those issues can achieve cost savings for the merchant.

3. Interchange rate markup. 

Some of your competitors’ payment processing partners have found a way to mark up interchange. It isn’t obvious when the merchant reviews the statement – it takes a complete analysis of interchange charges to uncover this added cost.

An Interchange Optimization example.

The white paper Interchange Optimization Made Easy from North American Bancard partner PayTrace uses an example to illustrate the cost savings that interchange optimization can provide to a merchant, while helping you win new business.

Suppose a business has $100,000 in digital payments per month and pays an average interchange rate of 1.7 percent, which totals $1,700 per month. The company also pays $250 per month in payment processing fees and $150 in card brand fees. The markup (which represents margin for the VAR, ISO, or agent) is $250.

Your competitor’s sales rep, who isn’t aware of the potential savings that interchange optimization can deliver, makes an offer to shave $100 off the merchant’s monthly charges by making less margin on the deal.

Meanwhile, you look for a better way.

As you speak with the merchant, you discover that half of their monthly sales are to other businesses, which should be charged at 0.3 percent less per transaction. That’s $50,000 times 0.003, or $150 per month in savings.

When you review the merchant’s statement, you see that it has $8,000 in EIRF and Standard downgrades, charged at 2.95 percent, and find that those transactions could cost about 1 percent less. That’s $8,000 times 0.01, or $80 per month in savings.

Finally, when you evaluate the merchant’s interchange table, you find a 4-basis point (0.04 percent) markup from the processor. That’s $100,000 times 0.0004 or $40 in savings per month.

You can now offer the merchant $150 + $80 + $40 or $270 in monthly savings, while you keep all $250 of your margin!

Show off your expertise.

There are even more factors that can lead to a merchant paying higher interchange rates. Look at the merchant category code (MCC), whether the card is swiped or dipped, the data provided such as card verification value (CVV), billing address, or ZIP code, and the transaction size.

Explaining the impact of those variables on merchants – and showing them how they can lower their fees through interchange optimization – will help position you as a knowledgeable consultant and a good resource for their businesses – and one that can save them money. A solution designed for interchange optimization can quickly analyze a merchant’s statement and interchange table, giving you all the information you need to make a competitive offer while preserving your margin. Contact North American Bancard to learn more.