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. in • ter • change in-ter-cheynj 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.