Pricing, Fees, Interchange and Commercial Models

The cost of a payment has several layers, and a product manager must understand each one before setting a price. The first layer is the scheme or clearing cost, which is the fee paid to the payment system, for example the per-transaction participant charge a bank pays to Pay.UK for a Faster Payments transaction in the United Kingdom; Pay.UK sets no fee for merchants or consumers, and the participant charge amounts are in the Pay.UK participation fee guide, not a fixed 2 pence. The second layer is the processing cost, which covers the payment hub, the core banking system and the staff who handle exceptions, often 8 to 12 pence per payment. The third layer is fraud and risk, which covers losses from authorised push payment fraud and the cost of screening, often 3 to 5 pence per payment. The fourth layer is the cost of sales, support and technology, which can add another 10 pence. A payment that looks cheap at 5 pence can cost the bank 25 pence in total. Interchange is the fee paid between banks on card payments, and it is often misunderstood. When a customer pays 100 pounds with a debit card, the merchant bank pays an interchange fee to the cardholder bank, typically around 0.2 percent for a consumer debit card in Europe, which is 20 pence on a 100 pound purchase. That fee is capped by regulation in Europe, but it is higher in other markets. The merchant also pays a scheme fee to Visa or Mastercard, and a merchant service charge to its acquirer. A product manager who builds a card product must model all three fees, because a small change in interchange can turn a profitable product into a loss making product when volumes reach millions of transactions a month. Scheme fees are the charges set by the card schemes and the payment systems for using their network. Visa and Mastercard charge a scheme fee on every transaction, plus additional fees for cross border transactions, currency conversion and premium services. A cross border card payment of 500 euros may attract a scheme fee of 0.4 percent plus a currency conversion fee of 1 percent, which the customer sees as part of the total charge. For account to account payments, the scheme fee is the charge from the clearing system, such as the fee for a SEPA Instant payment through the Eurosystem. The product manager must track scheme fee changes, because the schemes publish new fee schedules twice a year and a change can affect the margin on millions of payments. Commercial models describe how the bank charges the customer, and the choice depends on the segment and the product. The simplest model is pay per transaction, where a small business pays 35 pence for each instant payment and nothing when it does not use the service. A second model is a monthly subscription, where a company pays 250 pounds a month for up to 5,000 payments, with extra payments charged at 20 pence each. A third model is a bundled price, where payments are included in a wider package with the current account and lending. A fourth model is revenue share, where the bank and a partner such as a software company share the fee. The manager chooses the model that matches how the customer values the service and how predictable the bank needs its revenue to be. Testing a price before launch is essential, because a price that looks right in a spreadsheet can fail with real customers. The manager tests the price with ten or twenty customers in discovery interviews, asking whether they would pay 35 pence, 50 pence or 75 pence for an instant payment, and what they would do if the price rose. The manager also runs a pilot with a real price for three months, watching the take up rate and the revenue per customer. If the pilot shows that only 5 percent of customers use the service at 75 pence, but 25 percent use it at 35 pence, the lower price may earn more total revenue. Pricing is revisited every year, because costs, competition and regulation all change.