In our recent blog post, Navigating Card Brand Changes, we delved into the importance of staying informed about changes made by major card brands to their interchange rates and fees. As an Independent Software Vendor (ISV) or Value Added Reseller (VAR), awareness of these changes is crucial to maintaining a healthy residual income from credit card processing. We also highlighted some recent updates, including new interchange programs for merchant category codes (MCC) for e-commerce and card-not-present (CNP) transactions, and discussed the significance of avoiding downgrades to protect your profit margins.

As promised, we’re back with part two, and this time, we’re taking a deep dive into the world of residuals. In this blog, we’ll guide you through understanding your residuals, how to identify areas for interchange optimization savings, and exploring the impact of different pricing models on your earnings. Additionally, we’ll provide you with valuable insights into level 2 and 3 processing, ensuring that you’re well-equipped to maximize your revenue and stay ahead in the competitive payments landscape.

So, buckle up and join us on this journey as we continue to empower ISVs and VARs like you with the knowledge and tools needed to succeed in the ever-evolving world of payment processing. Let’s dive in!

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Understanding Residuals

Residuals refer to the recurring revenue that payment processing partners earn from the credit card transactions processed by the merchants they support. Residuals are typically a small percentage of the bank card volume and/or a fee per transaction that the ISV or VAR receives as compensation for their services.

In the payments industry, various factors can influence the residuals earned by ISVs, VARs, or ISO agents. Here’s a summary of the key factors to consider:

1. Volume, transactions, and fees: Higher bank card volumes, transaction counts, and monthly fees can lead to increased residual income.
2. Pricing models: The choice of pricing models, such as interchange-plus, flat-rate pricing, or dual pricing, can influence residuals. Each model has its pros and cons, and the impact on residuals will vary depending on the specific circumstances and strategy of the ISV, VAR, or ISO agent.
3. Merchant retention: Provide exceptional support, communication, and services to merchants to ensure they remain loyal and continue generating residuals.
4. Card brand changes: Changes in interchange rates and fees by major card brands like Visa, Mastercard, Discover, and American Express can directly affect residuals. Staying informed about these changes helps ISVs, VARs, or ISO agents adapt their strategies to protect residual income.
5. Technological advancements: Embracing new payment methods, security enhancements, and improved processing solutions can help ISVs, VARs, or ISO agents stay competitive and maintain their residual income streams.

Pricing Models and Their Effects on Residuals

Flat rate pricing offers a straightforward approach, charging a fixed percentage and/or a per-transaction fee for all transactions, regardless of card type or transaction details. This model can provide predictable residuals and easy-to-understand pricing for merchants and payment partners. However, it can have limited earnings potential due to possible interchange downgrades leading to higher costs making this model risky and less profitable for certain merchant category codes.

Cost Plus (Interchange-Plus) pricing is a transparent model that separates interchange fees and card brand fees from the payment processor’s markup, charging merchants the actual interchange cost plus a fixed markup. This approach promotes higher residuals, tailored pricing strategies, transparency, and flexibility, giving payment partners a competitive edge. Although, it comes with increased complexity and variable residuals due to merchant transaction profiles.

A Dual Pricing Program

or dual sticker pricing, allows merchants to offer preferential pricing based on the payment method used for a transaction. The strategy involves offering two different prices for a product or service depending on whether the payment is made with cash or a credit card. Cash payments do not incur the cost of acceptance that credit card payments do, so merchants can incentivize customers to use cash by offering a lower price.

By offering dual pricing, ISVs, and VARs can reduce or eliminate the costs associated with credit card payments for merchants. Passing higher rates through to the consumer can result in higher profits for each transaction, ultimately leading to higher residuals for the ISV or VAR.

Impact of Pricing Models on Downgraded Transactions 

Downgrades are important to consider when managing your residuals on merchants using a flat-rate or dual pricing program. A downgrade occurs when a credit card transaction does not qualify for the best possible interchange rate due to missing or incorrect information, failure to meet specific processing requirements, or delays in settlement. When a transaction is downgraded, it is processed at a higher interchange rate, which ultimately increases the processing cost and reduces the profit margin for the partner. Additionally, downgrades can lead to lower merchant satisfaction as they seek more cost-effective payment processing solutions, potentially resulting in merchant attrition and further declines in residual income.

How to Identify Interchange Optimization Savings

Interchange optimization is the process of ensuring that your book of business gets the best possible interchange rates when processing credit card transactions. One key factor that can lower interchange rates is level 2 and 3 processing. Level 2 processing requires additional data, including tax amounts, customer codes, and merchant postal codes, leading to lower interchange fees and enhanced reporting. Level 3 processing, the most comprehensive tier, demands even more transaction data, such as item descriptions and quantities, making it particularly advantageous for B2B merchants. By adopting the appropriate processing level, merchants can enjoy reduced processing costs and a deeper understanding of their transactions.

Assessing Residuals and Identifying Areas for Improvement

When assessing residual income from merchant processing, ensure you have access to detailed transaction data from your payment processing partner. This data should include information on bank card volume, the type of payment method used, the monthly processing fees charged, and any disputes.

At BOLD, we offer extensive reporting to our ISV and VAR partners. This report includes detailed information on all their residuals down to the penny. This level of transparency allows our partners to track and analyze their residual income with precision, identifying trends and issues that may affect their profitability. With access to this level of reporting, BOLD partners can optimize their residual income and ensure that they are getting the most out of their payment processing partnership.

Empowering your Payment Processing Partnership  

In conclusion, staying informed about card brand changes and understanding the intricacies of residuals is vital for Independent Software Vendors (ISVs) and Value Added Resellers (VARs) looking to maintain a healthy residual income in the ever-evolving payment processing landscape. By carefully considering the effects of different pricing models, optimizing interchange rates, and embracing level 2 and 3 processing, you can maximize your revenue potential and maintain a competitive edge. At BOLD, we’re committed to empowering our partners with the knowledge, tools, and transparency needed to succeed in this dynamic industry. So, go ahead and leverage the insights shared in this two-part series to navigate card brand changes and unlock the full potential of your payment processing partnership. Here’s to your continued success!

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