Which Payment Processing Fee Structure is Right for Your Software?
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Previously, we’ve discussed five payment integration models for your software, but that’s just the tip of the mountain when it comes to deciding your payment strategy. There are several other considerations to keep in mind when integrating payments into your software platform, but an important one revolves around which payment processing fee structure is the best fit for you and your clients. There are three main billing types to choose from, each with their own pros and cons.
Payment processors typically use one of three fee structures when charging for their services – bundled, tiered and interchange plus. Understanding each payment processing fee structure and how it relates to your situation is key to knowing where the true costs lie and widening your revenue opportunities.
Bundled – The first method is referred to as bundled. This option has become a popular solution as of late due to payment processors that mass produce their product offerings for smaller merchants. A prime example of this structure is a flat rate of 2.75 percent or 2.9 percent plus $0.30. Its simplicity is its biggest advantage. On the other hand, it’s not always the most competitive pricing structure. In this method, some factors are not accounted for such as card type, transaction volume or size of transactions, all of which are used to determine pricing in other models.
Tiered – The tiered model is very similar to bundled but in this case some of the transactional data is used to create different pricing tiers. From there, a merchant falls into a certain tier based on several transactional criteria. The number of tiers and how they’re priced can vary between different payment processors, and each tier price can increase over time. This method offers more flexibility than some flat rates, but in the end, there is not a lot of transparency and it’s difficult to compare rates between processors because many of the criteria are arbitrary.
Interchange Plus – This model is sometimes referred to as Cost Plus and is often ideal for larger merchants. Pricing begins with the interchange rate charged by the credit card company and attaches a fixed but negotiable markup. It offers the most transparency to the customer and is recommended for platforms that serve established businesses. Many of the transactional criteria are used to determine the fees associated with each transaction, and the markups can be negotiated between the software provider and the payment processor.
Each one of these models can end up having an enormous impact on the overall revenue potential of your payment strategy. Depending on types of clients you service, determining which model to deploy should be a key part of your strategy.
If you’re interested in understanding how these fee structures impact payments on your platform, Wind River can provide a use-case to help you better see how you and your clients would be impacted.