In the payments world, there are countless different fees to know. In truth, trying to make your way through the business expenses world can feel like walking through mud, especially when little known fees enter the fray. For instance, do you know much about pass-through fees? The fact that you’re reading this guide says that you want to learn more; in that case, you’ve come to the right place.
We know that some payment processing costs can be confusing, so let’s break it down and understand the ins and outs of this complex, yet important subject.
TL;DR
- Pass-through pricing involves directly passing processing costs (e.g., interchange, assessment fees) to merchants without markup.
- It provides transparency and can help businesses better understand payment processing expenses.
- Strategic implementation requires aligning pricing with business goals, customer expectations, and compliance standards.
- Emerging trends in payment tech, like real-time payments and AI-driven processing, are reshaping fee structures and cost models.
- Understanding consumer psychology is key. Transparent communication can reduce backlash and increase acceptance of added fees.
- Leveraging advanced analytics can optimize fee structures, improve forecasting, and increase profitability.
- Ultimately, pass-through pricing can offer strategic advantages if managed with transparency, insight, and adaptability.
Understanding Pass-Through Pricing Fundamentals
First, what are pass-through fees?
Pass-through fees are costs that a company pays on a customer’s behalf and then charges back without adding any extra profit. They are simply “passed through” from one party to another, hence the name.
Let’s say you hire a company to manage your advertising and they pay a fee to Facebook for running your ads. That Facebook fee is a pass-through fee. The company includes it in your bill, but they don’t make any money from it — they just pass the exact cost on to you.
The Anatomy of Pass-Through Fees
Earlier, we mentioned that payment processing includes several fees, and it’s important to understand these to give you a full picture. While you might consider interchange fees and payment processing fees as separate entities, they are still pass-through fees in theory. That way, you can understand where you might be able to reduce credit card processing fees and save money.
Interchange Fees: The Foundation
The main chunk of the fees you pay for any transaction is due to interchange fees, and these form the core of pass-through pricing. Interchange fees are non-negotiable as they are set by card networks, such as Visa, American Express, Mastercard, and Discover.
These fees are paid to the issuing bank, and vary according to processing method, card type, transaction size, and the merchant industry. For instance, if you’re in a high-risk industry, your interchange fees may be higher.
The table below gives more information on interchange fees and what affects them:
| Card Type | Average Interchange Rate | Key Factors Affecting Rate |
| Standard Credit | 1.51%-1.80% | Card presence, industry type, transaction size |
| Premium Rewards | 2.10%-2.95% | Card benefits, processing method, security measures |
| Debit Cards | 0.05%-1.20% | Regulated vs. unregulated issuer, verification method |
| Commercial/Corporate | 2.25%-3.15% | Level of transaction data, business category, processing method |
Assessment Fees: The Network's Share
Next, we have assessment fees, and this is where card networks make their money. This is the fee you pay them for using their infrastructure, but these are typically smaller than interchange fees. In many ways, assessment fees are easier to predict because they don’t fluctuate across merchant categories, but they can vary by card brand and transaction type in some cases.
Processor Markup: The Negotiable Element
While the other two types of pass-through fees aren’t negotiable, processor markup is. This is where you can negotiate to try and save money on processing fees over time.
The processor markup is the fee you pay your payment processor for using their services. It is usually a percentage of each transaction plus a per-transaction fee, and varies from processor to processor. However, this is a very transparent fee ,so you can easily see what part of your fees goes to your processor and what goes elsewhere.
Understanding the pass-through rate can help you negotiate savings over time.
Source: pexels.com
Comparing Pricing Models: Why Pass-Through Stands Out
Pass-through pricing is very different from several other common pricing models, such as flat-rate, tiered, and blended models. Let’s explore the differences in this next section.
Tiered Pricing: The Hidden Cost Structure
Tiered pricing is a simple category that groups many interchange categories into a few easy to understand tiers. These include qualified, mid-qualified, and non-qualified. However, these fees are often difficult to completely understand because the actual cost is difficult to pinpoint.
In most cases, tiered pricing costs more as processors bundle transactions into higher-fee tiers. This is particularly the case for card-not-present transactions, which are common, yet costly.
However, pass-through pricing makes the situation more transparent by showing actual interchange costs, so you can easily spot any areas for savings.
Flat-Rate Pricing: Simplicity at a Premium
Flat-rate pricing is another popular option, and it’s commonly used by platforms, such as Stripe and Square. The benefit here is that you know what you’re paying because it’s one single amount, regardless of the transaction method or card type. However, this simplicity has a downside because it costs more for businesses with high volumes or debit transactions.
On the other hand, pass-through pricing means businesses can benefit from lower interchange rates on these types of transactions, rather than paying just one flat rate.
Blended Rates: The Compromise Solution
Finally, we have blended rates. These combine all fees into just one percentage. It looks a little like single-rate pricing, but the terms are negotiated for high-volume merchants. This is a less transparent option and it can be hard to understand where costs are going and to identify any optimization areas.
Yet, pass-through pricing makes it easy to spot any hidden costs, so you can make more informed decisions about your payment strategies.
Strategic Implementation for Business Success
We’ve covered the common question of what pass-through fees are, now let’s talk about how to implement them. This takes more than simply switching your pricing models.
Statement Analysis and Cost Optimization
When you choose to implement pass-through pricing, you’ll need to learn to analyze statements carefully. These contain valuable data about cost-saving opportunities. When you learn how to decode these statements, you can spot patterns that lead to significant savings, and then make strategic changes to your payment acceptance practices.
A good option here is to have regular statement audits. This can help you spot any areas for improvement that may currently be costing thousands in fees you simply don’t need to pay.
Interchange Optimization Techniques
When you learn how to decode your statements, you’ll spot areas where you can reduce pass-through costs by optimizing how transactions qualify for interchange. There are some useful strategies to implement here, including using AVS (Address Verification Service) for online transactions, coding recurrent payments properly, and batching transactions. You should also make sure that you assign proper business category codes to your merchant account. These may seem like small shifts, but they can move you into a more favorable interchange category and save money.
The table below sheds some more light on this:
| Optimization Technique | Potential Savings | Implementation Difficulty | Best For |
| Daily Batch Settlement | 0.05%-0.10% | Low | All merchants |
| Address Verification (AVS) | 0.10%-0.30% | Medium | E-commerce/CNP |
| Level 2/3 Data | 0.30%-1.00% | High | B2B merchants |
| EMV Compliance | 0.15%-0.25% | Medium | Retail/in-person |
| Proper MCC Classification | 0.10%-0.50% | Low | All merchants |
| Recurring Billing Flags | 0.05%-0.15% | Medium | Subscription businesses |
Future Trends in Payment Processing
Technological advancements look set to change the pass-through pricing landscape over time.
Source: unsplash.com
The payment processing landscape is forever shifting and changing, mostly due to regulatory changes and technological advancement. Understanding new trends and patterns can help you stay up-to-date and position your business in the most advantageous position possible.
Regulatory Impacts on Interchange
First, let’s talk about regulatory impact. All industries have specific regulations they must comply with. Additionally, if you trade over borders, you’ll also need to comply with geographic regulations too. Government regulations increasingly look toward payment processing practices and fees. Some of these changes may be challenging,while others could be advantageous. In this case, knowledge is power.
Durbin Amendment 2.0 and Credit Interchange
One of the most significant regulatory changes was the Durbin Amendment, which capped debit interchange. However, since that time, similar regulations for credit card interchange fees are also under consideration. While these are yet to pass, it certainly raises future potential for cost lowering opportunities.
State-Level Surcharging Regulations
Surcharging isn’t possible in all states. Over the last few years, federal courts have generally approved merchants’ rights to use surcharging, however state-level regulations are continually evolving.
If you use surcharging with pass-through pricing, it’s vital to stay up-to-date on state-specific requirements. This includes maximum limitations, disclosure requirements, registration processes with card networks, and signage regulations.
This can be a challenge for businesses that operate in more than one state, so it’s a good option to use geofencing technology to automatically adjust surcharging based on location.
Technological Disruption in Payment Processing
We can’t talk about trends without mentioning technology. There are several payment technologies that are revolutionizing the payment processing landscape, including pass-through credit card fees and beyond.
Let’s explore some of the most exciting options now and on the horizon.
Real-Time Interchange Optimization
AI is present in many different spheres, and it’s certainly doing a lot in payment processing. These systems can analyze transactions in real-time and then push them through the most optimal processing route. In terms of lowering costs, such systems can also add any missing transaction data, to qualify for better rates. They can also choose the best timing to avoid high fee windows.
Embedded Finance Integration
Embedded finance is another exciting advancement, which integrates financial services into platforms and reduces friction for customers at the point of payment. The effect of this is new pass-through pricing models.
Integrations such as this usually split interchange arrangement, so platforms share the responsibility. If this is interesting to you, it’s a good idea to look at revenue-sharing agreements with software platforms that are based on transparent pass-through costs.
Consumer Psychology and Fee Management
Most customers don’t like fees – no one does.However, how you communicate pass-through fees to customers can change how they’re perceived and affect purchase behavior.
Customer Response to Fee Visibility
Generally, pass-through credit card fees become visible to customers through itemized receipts for surcharging. At this point, their brand perception and purchasing decisions can change. If you handle it with a positive approach, customers are more likely to remain loyal. Much of this comes down to communication and transparency, helping to build a bond of trust between you and your customers.
Framing Effects on Fee Acceptance
How you frame your pass-through fees can drastically influence how customers accept them or otherwise. For instance, if you say these are ‘network access charges’ rather than ‘credit card surcharges,’ they’re likely to be accepted more freely. You could also frame it as a ‘cash discount’ rather than a ‘card surcharge.’
As you can see, neutral terminology helps avoid negative associations with specific words. Most people immediately understand the word ‘fee’ or ‘surcharge’ as something generally negative. However, if you can turn that on its head with more positive language, it may be better tolerated. You can also connect these fees to perks, e.g. improved security or faster checkout service.
It’s worth remembering that everyone is unique, so test out different approaches with your customer base to see which is well received.
Timing of Fee Disclosure
It’s not all about the words you use, but when you use them. If you disclose fees at the start of the shopping experience, your customers have a chance to digest the news and decide how they feel about it. However, if you drop the news out of the blue as they’re about to pay, they’re far more likely to abandon their cart.
Again, it comes down to testing. Try different disclosure points to identify the optimal choice for your customer base. There is also the option of multi-stage disclosure, that introduces fees over a gradual amount of time.
Advanced Analytics for Fee Optimization
Payment analytics can help you leverage pass-through credit card fees more advantageously.
Source: unsplash.com
Payment analytics offer a goldmine of information that you can use to improve your services. You can dig deep into pass-through rate patterns, identifying optimization strategies that go far beyond the basics. While these approaches do require a certain amount of data expertise, it’s more than worth the investment.
Predictive Modeling for Fee Reduction
Advanced analytics allow you to look closely at historical transaction patterns and predict future trends and patterns. This then allows you to predict interchange qualification and implement strategies to optimize your future moves.
For instance, machine learning algorithms are very useful here in predicting the likely card types based on customer demographics and purchase patterns. You can also use authorization optimization algorithms to look at approval probability and cut down on any unnecessary authorization attempts.
Competitive Intelligence Through Pass-Through Data
It’s always a good idea to keep a close eye on your competitors, and pass-through pricing allows you to gain important insights that wouldn’t be available through other models. You can look closely at detailed interchange qualification data and explore customer behavior and competitive positioning. This will then help you make stronger decisions about your business growth strategies and operations moving forward.
This information is valuable on so many levels. Not only does it help you optimize your payment strategies to support marketing, but also product development and customer segmentation.
Customer Segmentation via Card Type
The different card types used for pass-through pricing can give valuable information about customer segmentation. In most cases, premium-level cards, such as Infinite, Black, and Signature versions, usually show higher household incomes and greater spending capacity. However, business cards usually point to professional purchasers.
This information allows you to develop your marketing strategies in a more targeted way, creating strategies specifically for different card type users. Of course, this could boost spending and retention over the long-term.
Competitive Positioning Analysis
Taking a close look at interchange qualification patterns can also give you important insights into how different payment networks categorize your business in relation to your competitors. Just because you’re in the same industry doesn’t mean you’re necessarily going to qualify for the same interchange categories. If you notice that one or more of your competitors are in more advantageous groups, it’s vital to dig deeper and uncover how.
All of this helps you identify the most favorable business category for your interchange qualification. If it means you need to adjust your business model to qualify for a better category, that’s entirely doable. Ultimately, miscategorization can cause unnecessary costs, and these can build up significantly over the long-term.
Final Thoughts
The payment processing landscape includes several types of fees. If you want to navigate all of this without spending unnecessary amounts of money, knowledge is power. Thankfully, that’s what you’ve done today – you’ve absorbed plenty of information about pass-through fees and you now know what they are, what they do, and why they’re important.
While some pass-through fees are simple and don’t end up costing much, there are many that end up affecting your bottom line if you’re not careful. Interchange fees in particular are the biggest culprit, and it’s a good idea to see if you can position your business so that it’s in a lower band. Don’t underestimate how much this will save you over the long-term.
Of course, you don’t have to do all of this alone. Choosing the right payment processor is a good first step, acting as a strategic partner for help and advice.
At PayCompass, that’s exactly what we aim to do. We’re focused on support, transparency, and cost efficiency, something which sums up the pass-through pricing model perfectly.
We don’t believe in hidden fees and extras that cost you without even realizing it. Instead, we offer merchant accounts that come with all the tools and features you need, including fraud protection, real-time transaction monitoring, and chargeback prevention. Not only that, but our team of experts are on hand to help you with any questions or concerns you may have.
So, if you’re ready to embark on a transparent payment processing journey that could revolutionize how your business operates, contact us today. Let’s work together to demystify processing fees and save money.
