This Month In Commercial Banking
Handling 157 billion transactions valued at $9.4 trillion in 2021,1 credit and debit cards are the most commonly used vehicle for noncash payments in the U.S., and corporate treasurers have taken notice. Increasingly, they’re focusing on card processing to better manage both costs and risk.
A number of strategies can help minimize card processing costs. One alternative company treasurers are exploring with their banks is flat-rate pricing, sometimes called “bundled pricing.” It’s the simplest form of pricing and, for businesses with low transaction volumes, the most cost-effective. It consists of a specific fee and interest rate applied to transactions regardless of card type or processing method. For larger merchants, unbundled or pass-through pricing is less expensive and offers more control over processing costs to take advantage of incentives included in the interchange price structure.
How Processing Fees Are Determined
The cost structure of cards is dramatically different than that of treasury management services, so here’s a brief primer for corporate treasurers.
Merchants pay interchange fees to their bank, which then pays the cardholder’s bank through the payment processor. The interchange fees are set by the card networks (e.g., Visa and Mastercard) and comprise the lion’s share of processing costs. The fees of the merchant card processor, by contrast, are usually less than 10% of total processing costs (Figure 1).
Interchange categories typically include these factors, any combination of which determines its own associated fee:
Card type. Business cards often have higher interchange fees than consumer cards.
Card network. Each major card network has its own interchange fee structure.
Transaction method. Card-present (in-person) transactions are considered less risky than card-not-present (online or phone) transactions, so they tend to have lower interchange rates.
Merchant industry. Some industries are considered higher risk, so they have higher interchange fees, but in some cases, lower rates are charged to promote card use in a specific industry.
Transaction details. These include whether a transaction is debit or credit, whether it’s a recurring payment or whether it involves international processing.
Due to the complexity of the card-processing ecosystem, corporate treasurers may be well advised to engage payment processing consultants or other financial experts, along with the right tools, to undertake the analysis that uncovers the right one for them. Treasury Strategies, Curinos’ corporate treasury consulting arm, offers an online software tool to improve a company’s visibility into the costs of its card activity, benchmarks them with others in the industry and illustrates trends that can reveal actionable insights.