The challenges of validating merchant service charges – Part II

In my last post I discussed the challenges that merchants can face when accessing detail related to their customers’ card transactionsto enable them to validate merchant service charges. It is only when merchants gain access to transaction level detail via (1) reports sent over by their acquirer or (2) through their provider’s online portal, that the real challenge in validating merchant service charges begins.

When validating merchant service charges, it is important to understand how charges are applied to different types of card transactions. Merchant service charges comprise three distinct components: Interchange (fee applied by the card issuing bank), Scheme (fee applied by the card schemes) and Margin (fee applied by the merchant acquirer). The Interchange fee represents the highest proportion of each transaction charge followed by the Margin and lastly the Scheme.

The pricing model that the merchant is on will impact how transaction charges can be validated. Interchange+ and in particular Interchange++ pricing provide merchants with greater transparency as Margin and Scheme fees are more clearly denoted on contracts and fee statements. The challenge for the merchant with these pricing models is to validate the Interchange fees applied. Blended pricing is less transparent as all elements of the merchant service charge are ‘blended’ together into a single rate, thus making it very difficult to validate charges.

Validating Interchange fees is certainly complex. There are a number of factors that determine the Interchange rate that is applied to a particular transaction. Firstly, what type of card was used to complete the transaction, i.e. Visa versus Mastercard, debit versus credit and personal versus business. Secondly, what payment channel was used, i.e. Point of Sale, E-Commerce, Telephone, etc. Finally, what region was the card issued in, i.e. domestic (the card was issued inside the country where the transaction originated), within the EU or international (outside of the EU).

Each different type of transaction will incur a different Interchange fee depending on the card type, payment channel and region. Furthermore, there are different methods of payment within each individual payment channel which attract different Interchange rates. For example, a Point of Sale or Card Present transaction can be completed with the cardholder entering their pin or by swiping their card. E-Commerce transactions can be completed with or without the CVV code and with or without 3D secure (used to reduce level of fraudulent transactions).

All the various factors outlined above will have a bearing on what charge is applied to each individual card transaction. This makes it extremely challenging for merchants to be able to validate merchant service charges with any degree of accuracy. Having access to monthly fee statements is not enough.
First and foremost, merchants must request more transparency from their acquirer regarding access to a greater level of transaction detail. Once they have access to this detail they will then need to understand how the charges are applied. This is the more difficult step in the process and relies on the merchant spending both time and resources on learning more about merchant card acquiring.