Of Cards and Costs
by Arnout Schuijff • October 25, 2022
In his second blog post, Arnout Schuijff talks about bringing enterprise price levels to small and independent businesses. Unfortunately, comparing prices isn’t always easy, specifically with the opaque and complex cost structure of credit card payments. He’ll do his absolute best to bring some clarity.
For my friend Frits, owner of my local bar, keeping costs down is always on his mind. Also when it comes to payments. A couple of years ago, when he selected his previous payment provider, he exclusively looked at the per transaction price for Maestro debit cards, the most used card at his bar. The reason why he recently decided to switch to Tebi Payments is twofold. First, he found out that on top of the transaction price there were a lot of extra costs like “contract costs”, monthly fees for tipping and refund functionality and even a monthly fee for downloading his daily transaction report which made the total cost much higher for him! Secondly, he found out there’s a cheaper alternative to the high blend fee that he paid for credit cards.
Most payment providers offer Blend pricing for credit cards. This keeps it “simple” by combining all transaction fee components into one number, for example “1.9% of the transaction value”. At Tebi we have chosen to offer “transparent” pricing, showing the different components that the fee is composed of and what we put on top of it. This is called “Interchange++ pricing”, and while it is generally not perceived as “simple”, it is almost always cheaper for merchants.
What is Interchange++?
Let’s dive into the nitty gritty of credit card pricing, starting with the Interchange++ formula:
Interchange++ = Interchange fees + Scheme fees + Acquirer markup
Now, before I give an example let me explain who the different parties in a credit card payment transaction are. Let’s imagine that you, the reader, are a business owner, a merchant. So we have:
- You, the merchant, who in the end pays for all the costs
- The acquirer (i.e. Tebi), who charges the Acquirer Markup
- The card scheme (Visa or Mastercard), who charges the Scheme fees.
- The issuer (or your customer’s issuing bank), who charges the Interchange fee
- Your customer, the cardholder, who isn’t aware of any of those fees you’ll have to pay and sometimes gets incentivized, with cash-back programs, to use expensive cards.
(The above is a simplification. If you want to know the whole truth, read this Wikipedia article, especially the bit about the four-party scheme).
So now let’s imagine you own a clothing shop in Denmark called Sweaters Galore, and Anna, Betty and Caro are your customers. All have Visa credit cards, but Anna has one from Denmark and Betty has one from the US. Caro is a French business woman and has a Visa Commercial credit card. They each buy a €50 sweater. (Anna gets a mauve wool blend with 5% cashmere, Betty gets a polyester jumper that says “YOLO” and Caro opts for a light knit of 100% merino wool, but none of that is important right now.) If you look at your settlement report the next day, you’ll see that, after all the fees have been deducted, you, the sweater merchant, make €49.66 on Anna, €49.31 on Betty and €49.13 on Caro. Caro’s transaction is more than twice as expensive for you as Anna’s! How is that possible?
This has to do with the difference in Interchange and scheme fees that get charged by the issuer (your customer’s bank) and the Card Schemes (in this case Visa). Those fees are defined by Visa and Mastercard in Interchange and scheme fee tables, which they publish on their websites. To make things more complicated, each region has their own set of interchange tables. When a transaction with a card from another region than where the merchants operates is processed, this is referred to as inter-regional. Betty’s transaction in our example is inter-regional. Anna’s is intra-regional: the card is from the same region as where the merchant operates (in this case Denmark).
The interchange and scheme fees can vary depending on:
- The region of the cardholder
- The region of the merchant
- The type of business the merchant is in
- The type of credit card used: consumer or commercial
- The type of transaction: Card Present or eCommerce
- How the transaction was secured (i.e. signature, pin, 3DS)
All this leads to complex Interchange and Scheme fee tables that acquirers have to implement for the settlement of transactions. To protect merchants, the European Union capped the Interchange rates to 0.3% for consumer credit cards in 2015. In the US, Interchange fees remain uncapped and merchants still get charged through the nose. On a $50 sweater, the interchange fees on some commercial cards can be as high as $1.78.
So now you know that different transactions have different costs. And maybe it just suffices to remember that, generally speaking:
- Transactions with US cards are more expensive than those with EU cards
- Commercial (Business/Corporate) cards are more expensive than consumer cards
- Inter-regional are more expensive than intra-regional transactions
- eCommerce are more expensive than card present (POS) transactions
- Unsecured are more expensive than secured transactions
The Tebi Method
For Tebi Payments, we have chosen to offer Interchange++ pricing for credit card payments because, for our merchants, the bulk of credit card transactions are ‘card present consumer intra-regional’, meaning many transactions will attract a 0.69% fee:
Tebi Payments has a transaction fee of €0.05 for every payment, to which €0.02 gets added for debit cards, and, for credit cards, the Interchange plus scheme fee plus an acquirer markup of 0.4%, as you can see in the example. (This is the situation in October 2022, for current prices, please check the pricing here.)
Part of Tebi’s mission is to bring low enterprise prices to you, the independent (small) business owner. The reason why we can offer these low prices is because, unlike with blend pricing, with Interchange++ pricing we are making a small margin on every transaction and thus don’t have to factor in an ‘insurance premium’ just in case our merchants have an expensive credit card mix with, for instance, a lot of interregional commercial cards. Credit card fees are complex and we believe that lower costs are more in the interest of merchants than simplicity, and therefore Tebi has chosen Interchange++ pricing for credit cards. In Denmark and beyond.