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The costs of getting paid

Carlos Muza 84523 Unsplash Carlos Muza 84523 Unsplash Placehoder

The pricing of card transactions is a complicated mix of different fees from the different parts of the payment ecosystem, and merchants have traditionally had limited insight into what they are actually paying for. Bambora wants to change that by employing a more transparent approach to pricing for acquiring and by using advanced tools to optimize the costs of merchants.

At first glance, card payments can seem uncomplicated: Money is withdrawn from the customer’s account and deposited into the merchant’s account, and the customer walks away with their product. In reality, however, card transactions are a lot more intricate and rely on a network of banks, acquirers and card schemes. And while this complicated process is not directly visible to the merchant, it does affect them in one clear way: the cost of the transaction.

Throughout the transaction process, the different parties involved all charge their own fees. All of these fees are then bundled together by the acquirer who withdraws the amount before depositing money in the merchant’s account. Since merchants don’t see the individual fees, they often lack insight into how the cost of a transaction is actually structured. This lack of transparency around what transactions actually cost is something that Bambora wants to change.

To us, transparency means that merchants should know exactly what they are paying for. But transparency is also a possibility for us to show merchants how we can lower their fees by optimizing their payments. To do that we have created advanced tools that allow us to enforce transparency and reduce costs for merchants by optimizing how transactions are handled.

The different types of fees


Interchange fee:

The fee that a card issuing bank charges for a transaction is called the interchange fee. This fee is fairly straightforward and is withdrawn, as a single price point, directly during the transaction. This price point can vary a lot, however, depending on card type, country and industry. Private cards are priced lower than corporate cards, domestic purchases have lower fees than international purchases and so on.

Depending on these variables every transaction is placed in a certain interchange program that has a specific fee and, as a result, interchange fees can vary quite a bit. Within European Economic Area (EEA) the interchange fee for consumers is capped at 0,20% of the transaction value for debit and 0,30% or credit. For international and high-risk transactions, on the other hand, interchange fees can be as high as 3% of the transaction value.


Card scheme fee:

When it comes to the card schemes fees, the picture becomes a lot more complicated. Scheme fees actually consist of many different fees, both fixed and variable, that make up the total cost of a transaction. Some of these are “base fees” that are split across all transactions, regardless of type. Other fees are unique for each transaction and vary depending on location, transaction type, card type, purchase amount and much more. To add to the complexity, these fees are also subject to frequent changes and acquirers need to review these updates on a regular basis.

Another difference from interchange fees is that card scheme fees aren’t withdrawn directly during the transaction but are invoiced to the acquirer. Depending on the fee, these invoices are sent yearly, monthly, weekly or even daily. It is therefore up to the acquirer to make sure that the merchant is charged the correct amount for each transaction.


Acquirer’s margin:

The last type of fee is the margin that the acquirer has on each transaction. The acquirer’s margin is supposed to cover the credit risk and overheads that the acquirer has, as well as the profit that the acquirer makes on each transaction. Because the risks and costs associated with a transaction vary depending on industry, transaction types, region and currency exchange, all these factors will impact what margin the acquirer will charge for a specific transaction.


The price models for merchants

Blended pricing
The simplest price model for acquiring is called blended pricing. With blended pricing the merchant pays a fixed rate for their transactions. The benefit of this model is its predictability and the easy forecasting, as well as the protection it offers merchants from increases in scheme fees. For these reasons, blended pricing is usually preferred by small and medium sized merchants. The downside of this model, however, is that acquirers have to charge a premium in order to cover the risk of scheme fees or interchange fees being raised.

Interchange++
The other price model is called Interchange++. This means that the price for every transaction is calculated by adding the interchange fee, scheme fee and the acquirer’s margin for that specific transaction. This model is usually preferred by larger companies because the merchant get more transparent reporting for individual transactions and can lower their costs by optimizing how payments are routed. For this model to work well, however, the acquirer has to have a very sophisticated model for calculating scheme fees and the merchant does run the risk of sudden price increases.

What Bambora offers

Reducing interchange fees
The key to reducing interchange fees, is to make sure that every transaction qualifies for the interchange program with the lowest possible cost. As an acquirer we use our expertise to request the best possible interchange program for each transaction and ensure that we send along the correct data needed to qualify for that program. Reviewing and enhancing the transaction data can result in significant reductions in interchange fees without requiring any actions from the merchant.

Advanced scheme fee model
Bambora has designed an advanced scheme fee model that is based on around 200 different fixed and variable fees, and that is continuously updated with new scheme fee releases. With the help of this model we can make sure that we, despite the complexity of the scheme fees, always charge our merchants the correct amount for each transaction and that we can supply them with transparent reporting on a transaction level. This capability is extremely important since many acquirers actually overcharge their merchants due to ineffective estimation models.

Scheme fee simulation
Bambora has also created a unique scheme fee simulator that can be used on the transaction flows of both prospect and current merchants. This simulator uses actual transaction data to test different scenarios in order to identify cost reduction possibilities, make acquirer comparisons and to enforce transparency. That way, we make sure that we deliver the lowest possible costs and the highest level of pricing transparency for our existing merchants and prospect merchants.