Have you ever stood behind someone at a store, or a gas station and they are paying for a package of gum using a piece of plastic? I occasionally see this and kind of scratch my head, it is almost as bad as seeing someone writing a check at the supermarket. Earth to person, nobody does that anymore, well at least the supermarket thing. As much as it annoys me it is really bad for the merchant in both cases. The use of credit and debit today in Business to Consumer (B2C) situations is universal. It is hard to think of a place that does not accept some sort of plastic in the B2C world. From Quick Service Restaurants (QSR) to your taxes, you can make a payment on a debit or credit card. And even if the establishment does not take credit or debit, you can make a payment via a third-party provider like Plastiq, assuming you are willing to pay a fee. For point junkies and those people who choose to go cashless, a flick of the wrist and you can get what you want when you want it with plastic.
To be sure, credit and debit have a place in the modern economy, it would be hard to imagine life without these payment vehicles. They are ingenious instruments refined and developed over time to give consumers and businesses alike a way to live, buy, and conduct business. Consumers and businesses usually do not give any thought to the impact of their use from the cardholder side of the equation. From the merchant side, it can be a different story. In examining why discount rate is relative to average ticket, it is important to know several key items to calculate total cost. Below are some examples that might surprise you.
To illustrate my point, I have taken two extreme examples. The first looks at the credit and debit cost on a $1.50 transaction using Visa Interchange Costs and the second example uses a $100 average ticket using Mastercard’s Interchange rates.
As can be seen, when the average ticket is low, the per transaction cost has a dramatic effect on All in Cost. A $1.50 ticket that can be on a small ticket Interchange rate, costs upwards of 12% to accept with credit, and this is with Pass Through style rates and with a mere .10 cents for the processor. On debit, that rate on a $1.50 pack of chewing gum rises to 17% for Regulated Debit. Now in fairness, the rates do come down considerably when the average ticket increases. In the next scenario, we chose $100 to illustrate the point. Base Interchange on credit sinks to 1.82% and 1.37% for debit where the per transaction cost has less of an effect.
It would be rare to find a merchant that has an effective average ticket of $1.50. Sure, there are cases where cardholders do spend $1.50 or even less and this costs the merchant dearly, but they are not the majority of transactions. Therefore, the associations have in place rules making the minimum purchase $10 for the use of a credit or a debit card, to give the merchants a chance. The simple rule of thumb is the higher the average ticket the lower the net effective cost and the lower the average ticket the higher the Interchange cost. This is why Interchange can be attractive in the B2B space as a cost-effective collection tool where transactions tend to be higher and rates lower.
Roger McNamara Bio:
Roger is a 25+-year veteran of the Payments Industry, most recently as the Director of Business Development with American Express in the US. He has worked on the largest Acquisition targets for acceptance across multiple industries and across the globe that include: Airlines, Communications, Technology, Cruise Lines, Entertainment, Fractional Jet, Freight, Government, Healthcare, Insurance, Oil & Gas, Residential Rent, Restaurants, QSR’s, Retail, Services, Supermarkets, Travel, Vehicle Sales, B2B and Wholesale. Over that time, he has sold more than $300 Billion worth of Card processing and became an expert in Bankcard Interchange and Discount Rates, how they are calculated and what merchants pay to accept Credit, and how this is dramatically different from what they believe they pay. He is an expert in Merchant Statement analysis and payment processing and the rules and regulations associated with payments and the associations. Roger has also developed the insight for Merchant Services Salesforces and salesforces, in general, to be able to better position their products and gain share, particularly in B2B. Let him show you how you can too. He can be reached at Guide2Interchange@gmail.com