Embedding payments into software platforms has never been easier, but many providers fail to offer the tools and strategies needed for interchange optimization, which is crucial for maximizing margins and optimizing payment portfolios. For platforms monetizing payments, reducing interchange fees through strategic optimization is essential for driving profitability and staying competitive.
Embedded payment providers should do more than just process transactions—they should empower software platforms to maximize their margins. In this blog, we’ll explore how software companies can unlock additional revenue through interchange optimization, covering essential tools, techniques, and strategies for success.
What Is Interchange in the Context of Software Platforms?
Interchange refers to the fees paid by merchants to card-issuing banks every time a credit or debit card transaction is processed. These fees are typically a percentage of the transaction amount, plus a fixed fee, and they form a significant portion of the overall cost of accepting payments.
For software platforms offering embedded payments, interchange is a critical cost factor that directly impacts profitability. While interchange is often seen as a fixed cost, the reality is that it can vary based on several factors, including the type of transaction, the merchant’s category, and the data provided during processing.
Optimizing interchange is especially important for software platforms that monetize payments. By lowering interchange costs for their merchants, platforms can improve margins while offering competitive rates and a better overall experience for their users.
Understanding the mechanics of interchange—and how to influence it—puts software platforms in a stronger position to drive profitability and create value for their merchant customers.
The Importance of Optimizing Your Interchange
Optimizing interchange is not just about cutting costs—it’s about driving long-term profitability and staying competitive in the software space. For platforms monetizing payments, even small reductions in interchange fees can result in substantial margin improvements at scale.
Moreover, optimizing interchange demonstrates value to your merchants by lowering their payment processing costs, which enhances their loyalty and trust in your platform. With rising competition in the embedded payments space, taking a proactive approach to interchange optimization can be a key differentiator that sets your platform apart.
The right strategies and tools enable you to turn interchange from a cost center into a profit-driving opportunity.
Key Tools for Extracting More Margin
Understanding the Components of Interchange
Interchange fees represent a significant portion of the costs your merchants or SMB customers pay for payment processing. By managing these components effectively, you can unlock substantial savings.
The key factors impacting interchange include:
- MCC (Merchant Category Code): Properly categorizing your clients into the right industry codes can dramatically lower interchange costs. For instance, a business categorized as a “Professional Service” may face higher fees than one classified as “Healthcare,” even if they perform similar services.
- Transaction Indicators (CIT/MIT): Transactions are categorized as either Merchant-Initiated (MIT) or Customer-Initiated (CIT). Correctly using these indicators reduces costs, improves fraud prevention, and ensures proper interchange qualification.
- Level 2 and Level 3 Data: Providing detailed transaction data, such as tax amounts, invoice references, and itemized product breakdowns, qualifies merchants for lower interchange rates. This is especially critical for B2B transactions.
- AVS and CVV Data: Address Verification System (AVS) and CVV checks reduce fraud and unlock better interchange rates. Payabli requires these data points to optimize transactions and help partners maximize margins.
Additional Methods to Lower Costs
- Network Tokens
Network tokens, managed by card networks like Visa and Mastercard, replace real card numbers with secure, unique identifiers. These tokens are critical for reducing fraud in card-not-present transactions (e.g., online payments) while also lowering interchange fees by up to 10 basis points (BPS). This margin increase requires minimal effort from the software platform or its merchants. - Convenience, Surcharging, and Service Fees
While Pass-Through Fees do not necessarily impact Interchange, compliantly passing fees to customers, is an effective way to reduce processing costs while increasing profitability. Here’s how:
- Convenience Fees: Applied for payments made through non-standard methods, such as online or over the phone.
- Surcharge Fees: These fees are added to credit card transactions, offsetting the merchant’s processing costs.
- Service Fees: Similar to convenience fees, service fees are designed for specific MCCs and involve two transactions: one for the service fee and one for the payment itself.
- Cash Discounts: Merchants incentivize customers to pay with cash by offering discounts, avoiding card processing fees altogether.
Monthly Reviews and Pricing Strategy Consultations
At Payabli, we don’t stop at providing tools. We actively work with our partners to ensure they’re maximizing profitability through regular business reviews and tailored pricing strategies.
- Partner Reviews: Each month, our team of experts evaluate your portfolio’s performance and identify opportunities for increased profitability.
- Pricing Suggestions: Based on industry trends and transaction data, we offer recommendations to help you adjust pricing for optimal margins.
- Flexible Pricing Tools: From offering discounts for new client enrollments to setting up custom fees, we empower you with flexibility to grow your business.
Why It Matters
By leveraging tools like network tokens, interchange optimization, and strategic pricing, software platforms can unlock better margins without compromising on customer experience. With the right provider, like Payabli, these processes are seamless and bundled into a unified solution.
If you’re ready to enhance your embedded payments strategy, lower processing costs, and extract the margin you deserve, Payabli is here to help.
Ready to optimize your payments stack? Contact us to learn how we can help you drive better margins and profitability for your platform.