Will Detterman, the chief executive of Leap Payments Inc., admits he is taking a chance in introducing a payment card acceptance pricing model that bucks the traditional formula.
“We make less money,” Detterman says.
But the potential upside of offering merchants of all sizes what is known as “interchange-plus” pricing hopefully will pay off in the long run, he says.
Leap Payments, an Agoura Hills, Calif., company Detterman founded a year and a half ago, announced last month it would begin charging merchants the interchange rate on card transactions plus a small markup to simplify the fee structure and be more transparent. The markup is the same for most transactions, but the exact mark up depends on the size of the business.
“Our goal is to be indifferent to what type of card is processed and how the card is processed, so typically our markup is the same for all cards based upon merchant volume,” says Detterman. “But because PIN-debit and signature-debit pricing is typically more competitive, we do offer clients with significant-debit volume a lower markup on debit transactions, he says.
Interchange-plus pricing is not unheard of in the industry, but service providers historically have offered it to large companies with high card volume. It also is not the typical model used by ISOs such as Leap Payments.
Historically, ISOs have earned revenue by charging a variety of fees and using complex pricing schedules, note observers.
Detterman is trying to set his business apart with a more transparent pricing model, which may trigger a pricing war among ISOs and force companies in other parts of the payments industry to rethink their pricing, say some observers. It also is a sign of how tough the current market is on service providers.
“Here in the United States, most merchants accept credit cards,” says Thomas McCrohan, an analyst with Janney Capital Markets, a Philadelphia-based financial advisory. “Signing up merchants now is a takeaway game. Third-party resellers, ISOs, those are the ones getting squeezed by the current market.”
Sanford Brown, chief sales officer of Heartland Payment Systems Inc., a Princeton, N.J.-based acquirer and processor, agrees.
“As merchants become more educated they are going to demand to know what they’re paying and why,” he says. The poor economy has “driven more merchants to pay attention to this and ask questions,” and “it’s tougher and tougher for independent sales organizations to survive,” says Brown.
Heartland has offered interchange-plus pricing exclusively for the past five years, Brown says.
Leap Payments offers clients processing services from Atlanta-based Elavon, U.S. Bancorp’s merchant-processing unit.
Merchants may choose to go directly to Elavon for processing, or they could work through Leap Payments, which says it offers even small merchants the type of pricing that many providers typically only offer to large companies that process a higher volume of card transactions.
“There are a lot of variables that are considered when we offer interchange-plus pricing,” says Holly Lytle, an Elavon spokesperson.
Rod Brown, the chief financial officer of MadeToOrder Inc., a customized apparel maker in Pleasanton, Calif., says interchange-plus was not an option for his company with Elavon, so he switched to Leap Payments at the end of last year.
MadeToOrder, with revenue of between $10 million and $15 million a year, completes about $1.5 million to $2 million in card transactions a year—about the size of business that Leap Payments is targeting.
“Typically those with $50,000 or less” in monthly card volume “are never offered this type of pricing,” Detterman says.
MadeToOrder spent about $70,000 to process card transactions last year, or nearly $6,000 a month in transaction fees, Brown says. Since switching to Leap Payments, the company pays “$5,000 and change” a month, a nearly 20% savings, he says.
Leap Payments serves more than 2,000 merchants that average between $500 and $500,000 in card transactions per month.
Interchange rates, which are set by the major card brands such as Visa Inc. and MasterCard Inc. and funneled back to the consumer’s bank, vary depending on the type of business, the method the merchant uses to process the card and the type of card used during a transaction. For example, rewards cards often carry higher interchange rates than do basic cards.
Instead of merchants trying to keep track of every rate for every different kind of transaction—Visa’s and MasterCard’s lists of rates are several pages long—processors generally follow a blended pricing model where they group certain rates together and charge a set rate. For example, for every type of transaction that has a rate of 1.1% or less, the company may charge a rate of 1.2%.
“It makes it easy for the merchant, very convenient,” says Adil Moussa, an analyst at Boston-based Aite Group LLC. “But for the acquirer, they make a lot of money that way.”
This model, though, has hurt some smaller business owners that process fewer card transactions.
“Historically, the biggest clients have gotten the lowest price per transaction,” says Rafi Mohammed, the author of “The 1% Windfall,” a book on pricing strategy. “And since it’s been less competitive to have smaller businesses, there’s been more room for margins and pricing schemes.”
Detterman also says his pricing model could be a benefit to clients if pending legislation changes the way the interchange rates are set.
If Visa and MasterCard were to lower their rates at some point because of public pressure or policy changes, Detterman’s simplified model would not require merchants to deal with a lot of complex changes, he says. A company that offers blended pricing might have to reshuffle how it groups rates.
Sara Lepro is a reporter with ISO&Agent Weekly sister publication American Banker.
