[abalone]

And to further the transparency, Visa & Mastercard also publish their interchange fees, which is the main cost for a processor like Balanced.

Here's Visa's: http://usa.visa.com/download/merchants/visa-usa-interchange-... For online the fee program is usually "e-Commerce Basic".

So here's Balanced's interchange costs, for Visa:

Major debit cards[1]: 0.05% + $0.21

Unregulated debit cards (small banks): 1.65% + $0.15

Non-rewards credit cards: 1.8% + $0.10

Rewards credit cards: 1.95% + $0.10

Visa Signature Preferred (highest-end Visa cards): 2.4% + $0.10

Mastercard is usually similar. AmEx is usually more expensive.

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[1] This 0.05%/$0.21 rate is super interesting to note. The Durbin amendment was recently passed and regulates most debit card interchange down to practically nothing. This basically just happened and is potentially a huge profit center for processors who haven't updated their fees to reflect it. My guess is processors are right now all looking at each other and waiting to see who breaks rank.. but for the moment, merchants are not necessarily seeing the benefit. Processors are.

[dangrossman]

This is one of the advantages to having a real merchant account instead of using a 3rd-party processor like Balanced/PayPal/Stripe. I pay interchange + 0.04% for all cards, so when someone pays me with debit, I'm charged 0.09% and not 2.9%. Several thousand dollars a month of my subscription payments are from debit/check cards; it adds up.

[alisasa]

Your insight about the debit markup is very interesting as it seems to me that Stripe and Balanced do it and perhaps also Braintree. That is a great revenue source for them and there is no way that the cost of accepting Amex (typically about 3.5% but can be negotiated down based on volume) outweighs the revenue from that markup on debit.

The only issue that I see with your analysis is that you refer to Balanced as a processor. Read their commercial entity agreement here: https://www.balancedpayments.com/terms/selleragreement Correct me if I am wrong but the references to Vantiv and Wells Fargo Merchant Services in this agreement indicate that those two entities are doing the processing--although Wells Fargo Merchant Services may have First Data do the actual sending of the transaction across the VISA network. What Balanced is really doing is signing up merchants for these entities as an ISO and perhaps also a Merchant Servicer as defined by VISA.

For the purpose of the following breakdown of Balanced's charges lets exclude closed loop networks like Amex and Discover because they don't have the same structure. Balanced's VISA and Mastercard rate is really a result of the following:

-Interchange charged by VISA and Mastercard (which is what abalone just explained). This fee goes to the bank that issued the user's card. One caveat is that abalone's explanation does not include EIRFed transactions which is a ~0.50% markup ontop of interchange for transactions that are not entered properly. For some companies this is a big pain and a source of unexpected cost.

-Assessment charged by VISA and Mastercard for using their network. This fee is ~0.11% + $0.0195.

-Processor's markup from Vantiv and Wells Fargo. Given their volume, this fee is probably ~0.06% + $0.10 or whatever calculation that gets the processor around 12 basis points from an individual transaction.

-Acquiring bank's cut of about 2 basis points for providing the BIN/ICA. For the Wells Fargo Merchant Services transactions

-Everything else is Balanced's commission that they charge for the service of signing up a merchant for the acquirer (ie bringing them x amount of transactions) and a charge for the service that they provide the merchant (customer service, great API, etc).

I'm not quite sure the reason for having 2 processors though. It must be a difference in price at a certain transaction size and risk profile.

Basically, it is really all of those factors combined that make up the price to the merchant. The reason for the tiers is that processing is all about economies of scale which means that the additional cost to the processor for routing more transactions through their systems is very small. That is how they are able to provide these tiers.

In reality these companies are not that transparent.

[zende]

This is dead on. Here's a few other things to keep in mind:

1. A Durbin Regulated Debit Card include any bank that has over $10B in deposits. That's most debits cards by volume.

2. We've been lucky in being able to negotiate with our processing banks (also called acquiring bank) to receive very favorable rates to pass on those savings. You have to factor in this cost in addition to the interchange defined by the card brands.

3. Amex is more expensive than most other cards, but Amex is also the only card brand that will negotiate on their interchange based on volume and other factors.

abalone: thanks for writing this up. It's a more detailed answer to https://news.ycombinator.com/item?id=7033534

[jareau]

This is really good insight abalone. Thanks for sharing.