A Guide to Interchange Plus in the US a Guide to Interchange Plus in the US 2

A Guide to Interchange Plus in the US A Guide to Interchange Plus in the US 2

Executive Summary

Understanding interchange -- and the many variables that affect how much it costs to process a credit or debit card transaction -- Might sound as thrilling as, say doing a deep dive on your taxes. But a little insight into how these fees work can translate into ongoing savings.

Accepting payments on an e-commerce site or app With easy-to-read merchant statements, and expertise in is relatively easy, especially for merchants working best practices for checkout design, payment settlement, with Braintree. and data passing, Braintree helps merchants understand and potentially optimize their transaction fees. They can While many merchants may prefer the convenience see exactly how much they pay to card-issuing banks, and predictability of flat-rate pricing, there is another card networks, and to Braintree. option that could make more sense for merchants who are willing to navigate additional complexities This whitepaper details what merchants should keep in in order to find greater flexibility and transparency: mind when thinking about the IC+ pricing model. Interchange Plus (aka IC+).

Merchants who are new to IC+ -- or haven’t delved into the details -- can familiarize themselves with the nuances of this model.

Interchange can depend upon a number of variables, yet taking time to understand these fees, and subsequently improving how your organization Understanding Interchange could offer: handles payments, can help offer returns: better transparency and lower transaction costs due to it. By maintaining good payment “hygiene,” merchants Better transparency can help keep the interchange component of their transaction fees to a minimum. Lower transaction costs A Guide to Interchange Plus in the US 3

Understanding the payment ecosystem

When a merchant accepts a payment via a credit or debit card, many different entities work behind the scenes to help authorize the transaction, ensure that card data is kept secure, and, ultimately, transfer funds from the card issuer to the merchant account.

The key players include:

Merchant account providers* Acquiring banks

Companies like Braintree act as a merchant account The financial institutions that belong to the card provider through partnership with a sponsor bank networks and have the ultimate responsibility and and make it possible for merchants to accept debit liability for handling and settling payments for and credit cards (as well as alternative payments), and merchants with issuers. Traditionally, acquirers bundle receive payment quickly. While they offer many services, processing and payment gateway services and the their primary role is to facilitate transactions between provision of merchant accounts together but now customers’ and merchants’ financial institutions. many will sponsor others to do this on their behalf.

Payment gateways Credit card networks

These securely transmit payment data between These include Visa, Mastercard, Discover, and merchants and payment processors. As a full-stack American Express, which operate the networks that provider, Braintree offers both the payment gateway process credit card payments worldwide and each and bank-sponsored merchant account, which alleviates have rules that govern interchange fees. the need for merchants to pay fees to two different parties on a single transaction. Credit/debit-card issuing banks

The financial institutions that issue consumer credit cards and debit cards. These cards all carry varying interchange rates based on several factors.

*Note: Networks in the US usually only allow banks and financial institutions to be direct members of the networks for financial settlement and clearing of transactions collected from issuers and ultimately cardholders. These financial institutions are often referred to as acquiring banks. Companies like Braintree partner with or seek sponsorship from acquiring banks to service full-stack merchant relationships -- allowing the seamless, streamlined integration of back-end financial settings and the technology and customer service used by merchants every day. A Guide to Interchange Plus in the US 4

Weighing different pricing models

The first step in choosing a pricing model is understanding the best options for your business. All Braintree merchants, regardless of pricing, get access to our support team and such key features as basic fraud protection, and simplified PCI compliance validation scope.

That said, we offer U.S.-based merchants the option of flat-rate pricing or IC+.

Flat-rate pricing Interchange Plus

Also known as bundled pricing, flat-rate pricing If flat-rate pricing is the payment equivalent of has the benefit of simplicity for reconciliation taking a standard deduction on your taxes, IC+ is and forecasting. Braintree merchants who opt akin to taking itemized deductions. It may take time for flat-rate pricing generally pay a fixed fee per to get up to speed on the nuances of interchange, transaction (along the lines of 2.9% + $.30) with but this model offers complete transparency and, the option for custom pricing based on volume with that, an opportunity to manage some of the and business model. factors that influence interchange fees.

This plan, which is available to all merchants, Whereas flat-rate pricing doesn’t vary from carries no minimum or monthly fees, and the same transaction to transaction, the fees passed through rates apply to all card types. in an IC+ pricing model depend on many factors: the types of cards merchants process, issuing bank Flat-rate pricing is a popular choice for location, merchant type and region, the level of organizations that don’t want to devote data merchants share, the cost of a sale, and the operational resources to managing interchange. security measures they choose to take, among others. Predictability is another perk, as the fees are the For example, debit cards generally carry lower same for every transaction. interchange fees, while reward cards tend to have higher interchange fees (more on this later).

Depending on the types of transactions merchants typically process, among other variables, switching to IC+ has the potential to reduce fees right out of the gate. What’s more, once merchants understand which variables affect interchange -- and the steps they can take to optimize -- they may be able to realize additional savings by opting for IC+ pricing. A Guide to Interchange Plus in the US 5

What, exactly, is interchange?

The technical definition of interchange refers only to the fee that issuing banks charge for their services -- this accounts for the largest share of fees merchants pay to process transactions.

When a payment processor, such as Braintree, refers to “interchange,” (as throughout this whitepaper) they are often using this term as an easy way to refer to those fees and any fees they pass through, such as cross-border fees for overseas transactions, assessments1 charged by issuing banks, Misuse of Authorization Fees2, Transaction Integrity Fees3, Zero Floor Limit Fees4, EIRF Fees5, etc. charged by card networks like Visa (all of which Braintree’s payments expertise can help you analyze, navigate, and sidestep). “Plus” then refers to the markup charged by the payment processor.

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1. Assessments are paid to the card brands (e.g., Visa, MasterCard, and Discover) to cover the operating costs of managing their network. 2. Visa assesses a Misuse of Authorization Fee to merchants for transactions that are not reversed or settled within a specific amount of time -- including the use of a $1 “test transaction” for verification purposes. 3. The Transaction Integrity Fee (TIF) is a Visa-imposed fee of $0.10 per transaction assessed on transactions that don’t meet guidelines set forth by the Visa Customer Payment Service. Examples of imposable actions are missing order numbers, missing AVS, and untimely settlement. 4. Zero Floor Limit fees are assessed by Visa at $0.20 per item where the transactions cannot be correctly matched to a partially or fully authorized transaction during the clearing process. 5. EIRF (Electronic Interchange Reimbursement Fee) is a downgrade category typically seen by merchants who don’t settle on time or don’t pass AVS data, amongst other things. A Guide to Interchange Plus in the US 6

Potential interchange Potential interchange benefits: drawbacks:

• Better transparency: Combined with Braintree’s • Complex reconciliation: Whereas Braintree nets Transaction-Level Fee Report, IC+ gives merchant flat-rate fees from sale proceeds, IC+ fees are insight into the true cost of each transaction. debited separately, adding an extra line item to reconcile. Analyzing interchange may require • Ability to optimize fees: With insight into what additional resources. influences fees, merchants can adopt best practices to help minimize them. • Variable fees: The nature of the transactions, including which cards customers use, can affect • Cash-flow improvements: Whereas Braintree’s interchange. Meanwhile, card networks periodically flat-rate pricing model disperses sale proceeds net reset and introduce new interchange rates to adjust of fees, IC+ pricing through Braintree gives U.S. for such things as interest rates or credit risk. merchants access to 100% of sale proceeds; fees are debited at the beginning of the following month.

There is no simple rule of thumb for choosing between flat-rate and IC+ pricing. That said, merchants with resources to study their transaction costs and manage their payments may be able to reduce their payment transaction costs by moving to IC+. Not sure if it’s right for you? Ask the Braintree team about your particular business. A Guide to Interchange Plus in the US 7

Optimizing Interchange Plus

Interchange isn’t just a one-to-one relationship with a Luckily merchants don’t have to navigate these waters card type. Most card types have a range of interchange alone. With a payments partner like Braintree, merchants that can be applied based on merchant behavior, can help ensure that they are taking the right steps to transaction type, and information shared. By adopting process transactions securely and settle them in an and maintaining best practices, merchants can qualify efficient fashion. At the same time, Braintree’s robust for better interchange rates available for the types of features and payments expertise can help merchants transactions processed. Over time, these good habits design their checkout flow for optimal interchange. can have a noticeable impact on overall fees. On the other hand, when merchants don’t meet certain technical requirements or they adopt practices that are not supported or encouraged, there is the potential for interchange downgrades -- in other words, higher interchange fees. A Guide to Interchange Plus in the US: Optimizing Interchange Plus 8

Here are the key factors that can influence interchange fees:

Credit vs. debit Credit card type

Although merchants shouldn’t penalize customers Fees also vary by card network and card type. For for choosing one payment method or card type over example, rewards cards often carry higher fees because the other, they can present, front and center, payment the issuing banks need to recoup the cost of airline methods that carry the lowest interchange. miles, cashback bonuses, or other perks. Merchants that offer their own branded cards -- such as Amazon. Generally, debit card transactions carry lower com, Nordstrom, or Orbitz -- conversely, may save on interchange fees than credit, even in ecommerce when interchange fees when customers shop with those cards. customers don’t enter a PIN. This is a result of the 2010 Durbin Amendment, which was included in Dodd- To see the range of interchange fees for different Frank, and limits the majority of debit card interchange transactions, take a looks at recent price sheets available fees, depending on the card issuer (exempt issuers for Visa and Mastercard. have reported assets of less than $10 billion) and the size of the transaction. Security and settlement For example, based on October 2017 interchange data from Visa, a $100 order purchased with a debit card When it comes to minimizing interchange fees, might cost a merchant 0.05% plus $0.21 (0.27¢). That building the right security and settlement steps into same order paid for with, say, a Signature Visa, could your checkout process is another important thing you runs the merchant 1.8% plus $0.10 ($1.90). And, once can do. Vital steps include: again, that same exact order purchased with a business card or corporate purchasing card may incur IC fees of • Passing AVS: around 2.65% plus 0.10¢ ($2.75). Address Verification Service is key to qualifying for lower interchange rates. While the increased fee for not passing AVS varies by card type, it can easily add 10 cents to 50 cents per transaction. Sample IC fees for $100 transaction: • Passing CVV: While asking for the three or four “secret” digits Card type Interchange Merchant fee fee on $100 trans. on the designated area of the card does not affect interchange rates, it does help to reduce fraudulent Debit card 0.05% + $0.21 $0.26 transactions and save the merchant money through reduced chargebacks and resources spent. Visa/Mastercard 1.8% + $0.10 $1.90 • Submitting for settlement: Corporate card 2.65% + $0.10 $2.75 It’s important to submit transactions for settlement within 24 hours after authorization to avoid interchange downgrades.

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Customer location/ foreign exchange Level II and III data

U.S.-based merchants typically pay higher To help further reduce interchange, merchants should interchange rates when they accept payments from consider whether it makes sense to collect and pass customers with cards issued abroad. These so- more information on certain transactions such as those called cross-border transactions can drive up the paid for by business cards, government-issued cards, total interchange transaction cost. How much? For and corporate purchasing cards. (which can be as merchants in the United States, the interchange rate simple as customer gifts, bulk office supplies, etc.).. is typically 0.60% to more than 1% higher for cards issued in other countries. While all merchants are eligible for Level II and III savings*, the rate they pay is still influenced by the Merchants who do a significant portion of their types of cards their customers use. In exchange for business overseas should look at the pros and cons sharing more data, merchants can qualify for lower of establishing local acquiring accounts in countries interchange rates for certain transactions. where they do a lot of business. Braintree can do local acquiring in up to 46 markets. Many Braintree The benefits to merchants are twofold. When issuers merchants set up multiple international entities in have access to more information about a transaction, the same gateway, routing transactions to the local it offers additional protection against fraud. It also processing account based on the consumer’s location. gives them more insight into their customers, further This is another way to greatly optimize IC+ fees. improving future credit and risk decisions.

Braintree’s Estimated IC+ Transaction-Level Fee Report can help merchants understand and analyze Merchant category the different card types, customer locations, and other factors that impact interchange fees over a given There are hundreds of merchant category codes month. With this knowledge, merchants may be able to (MCCs) and this too can affect fees. Some categories make strategic business decisions to help reduce costs. of merchants, such as charitable organizations, may be eligible for lower interchange rates. While merchants cannot game the system by choosing a category with the lowest fees, they can verify that their assigned MCC is the optimal one by checking in with their merchant account provider.

* While eligibility is open to all, some merchants will not qualify for Level II or Level III savings, dependent upon a number of factors such as willingness to collect and share tax information, card mix, or business model. A Guide to Interchange Plus in the US 10

LEVEL I LEVEL II LEVEL III

At a minimum, merchants must Merchants processing corporate Used for government transaction pass Level I data to process a or government cards can realize and corporate purchase cards (which transaction. This includes total interchange savings by sharing Level can be as simple as customer gifts, purchase amount, date, merchant II data with issuers. This includes the bulk office supplies, etc), this data category code, and company name same basic data captured in Level captures information found on a -- in other words, all the information I, as well as tax exempt status, tax typical itemized invoice. In addition that is captured during a traditional amount, and order number. to Level I and Level II data, it includes credit or debit card purchase and many other details, ranging from shared with the customer. product descriptions and codes, to ship-to and ship-from zip codes, etc. (see below for a comprehensive list).

• Date • Date • Date • Company Name • Company Name • Company Name • Purchase amount • Purchase amount • Purchase amount • Merchant category code • Merchant category code • Merchant category code • Tax ID • Tax ID • Tax exempt status • Tax exempt status • Tax amount • Tax amount • Order number • Order number • Product descriptions & codes

• Product quantities • Ship-to and ship-from zip • Freight amount • Unit of measure • Extended item amount • Discount amount • Unit discount amount • Credit indicator

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Sample fees by level and card type for a $350 transaction:

Visa Corporate Purchasing Card

Level of data passed IC+ rate Fees Savings

Level I 2.65% + $0.10 $9.38 -

Level II 2.05% + $0.10 $7.28 0.60%

Level III 1.85% + $0.10 $6.58 0.80%

MC Business Level 3 Card

Level of data passed IC+ rate Fees Savings

Level I 2.86% + $0.10 $10.11 -

Level II 2.21% + $0.10 $7.84 0.65%

Level III 1.96% + $0.10 $6.96 0.90%

MC Business Level 4 Card

Level of data passed IC+ rate Fees Savings

Level I 2.96% + $0.10 $10.46 -

Level II 2.31% + $0.10 $8.19 0.65%

Level III 2.06% + $0.10 $7.31 0.90%

Braintree now gives merchants the ability to pass Level III data from government and corporate purchase cards to issuers, potentially reducing interchange fees on those transactions. The decision of whether to pass along more data depends largely on the types of credit cards some customers are using -- business, corporate, and government purchase cards are a few to note. Braintree can help merchants understand whether passing along additional transaction details could help add up to lower interchange. A Guide to Interchange Plus in the US 12

Working with Braintree At Braintree, we believe in giving our merchants the tools and information they need to understand payments pricing -- and make informed decisions with confidence. We aim for better transparency in the often-murky world of interchange.

While understanding interchange transaction costs may present additional challenges, for merchants who opt for IC+ through Braintree, our Estimated IC+ Transaction-level Fee Report provides an easy-to-read monthly break down of the estimated fees for each of your transactions, providing a better understanding of your company’s costs. Armed with this insight, merchants can analyze their fees -- and take steps to help ensure that they qualify for the lowest interchange fees available.

With Braintree, merchants also benefit from working with a full-stack provider that functions as both the payment gateway and the processor. As one point of contact with visibility across the payments spectrum, Braintree can help merchants find the right solution for their business -- and gain deeper insight into what they are paying for interchange and how to optimize their payments every step of the way.

To learn more, visit www.braintreepayments.com or email [email protected] About Braintree

Merchants in more than 45 countries worldwide can accept and process payments in more than 130 currencies using Braintree. As a leader in the mobile payments revolution, Braintree believes payments are about more than getting paid. We provide the commerce tools merchants need to grow businesses, expand globally, and enable new commerce experiences. And, as a PayPal service, Braintree uniquely enables merchants to accept PayPal (with over 235 million active accounts), Venmo, Apple Pay, Google Pay, credit and debit cards, and more in one single integration.

To learn more, visit www.braintreepayments.com or email [email protected]

The information in this whitepaper has been prepared by PayPal and is for informational and marketing purposes only. You should not act or refrain from acting on the basis of any content included in this whitepaper without seeking the appropriate professional advice. This whitepaper contains general information and may not reflect current developments or address your specific situation.

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