The price of a card payment is influenced by several factors. Therefore, Martin Kütt, the Head of Acquiring Services at LHV, explains in more detail what this price consists of and what a merchant should know when choosing a pricing model.
In the journey of a card payment, it is important to distinguish between roles: the participants in the process are the merchant, the bank providing payment services to the merchant (the acquirer), and the bank that issued the payment card.
The fourth role in the payment journey is the payment processor, a task performed either by the merchant’s bank itself or outsourced as a service. The payment processor is the technical link between the merchant, the merchant’s bank, the issuing bank, and the card networks.
How are the price components formed?
A card payment consists of three cost components:
- the processing fee;
- the interchange fee;
- the merchant bank’s (e.g. LHV) service fee.
The processing fee is, simply put, the technical cost associated with processing the transaction. It aggregates costs related to the transaction incurred by the bank, the payment processor, and the card networks (Visa, Mastercard). The bank passes most of this money on to its partners.
The interchange fee is established by the card networks. This fee is collected from the merchant by the acquiring bank and passed on to the bank that issued the customer’s card. The interchange fee motivates banks to issue cards. The size of the fee depends on the type of card the client uses: credit and business cards have higher fees, while debit and private cards have lower fees.
The third component, the service fee, is the margin for the bank providing payment services to the merchant. While the merchant’s bank passes on most of the processing fee and all of the interchange fee, the service fee stays with the bank. This fee covers the labor costs of the teams supporting the product, as well as a portion of bank-wide overhead. Everything remaining is the bank’s profit.
Which pricing models are available?
Merchants are offered two pricing models: Interchange ++ and Blended Pricing.
Interchange ++ pricing means the bank agrees on a specific service fee with the merchant. Concerning the processing and interchange fees, the contract states that these two components are variable.
A parallel can be drawn to everyday life: this model is like a stock-market electricity package. It suits merchants who value greater flexibility and are comfortable with the total cost being more difficult to forecast.
In the second model, Blended Pricing, the bank agrees on a fixed percentage for the service fee. Regardless of the type of card the customer uses or the country where it was issued, the bank’s fee is always at a fixed rate. Two variations are common in the market: the bank takes a certain percentage or a percentage plus a fixed absolute amount per transaction. Since the bank’s cost depends on the size of the payment – and costs for smaller transactions are generally higher in percentage terms – the ‘percentage + absolute sum’ model is often used in businesses where most transactions are small in value.
The Blended Pricing model is similar to the logic of a fixed-rate electricity package. It is an easy-to-understand model where the same service fee percentage applies to all transactions. Before offering blended pricing to a merchant, the bank analyses their profile and calculates an averaged price. For this reason, this model may be slightly more expensive for the merchant.
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