What you need to know about pricing models in SaaS payments

June 5, 2024

At first glance, pricing models within payments can seem pretty complex. What’s the difference between an interchange plus and fixed rate pricing model? Why does an issuer charge interchange? And why does pricing change for every transaction? 

But ultimately, as a software company, everything you need to know about pricing should be focused on answering a key question: how can you ensure your payments are profitable while your pricing remains competitive in the market?

That’s what we’ll be addressing in this article, where we’ll cover:

  • What is interchange and why does it exist?
  • What are the pricing models?
  • 3 most important things to know about pricing models in payments
  • How we help SaaS companies set the right pricing model

What is interchange and why does it exist?

Interchange is a fee that is taken out of every payment transaction.

Image by Matt Brown

The entire fee goes to the issuing banks, which are the banks that exist to provide a service to cardholders by issuing credit and debit cards and collecting payments from those cardholders. Interchange exists to cover costs in two key ways:

  1. The cost of the type of card. For example, a card that is tied to high rewards will lead to a higher interchange fee.
  2. The level of risk. For example, an online payment is deemed higher risk than an in-person purchase, and therefore interchange will be higher.

The interchange fee will vary depending mainly on:

  • The card used
  • The situation (in-person, online, over the phone)
  • The region

The variability in each transaction is why your costs for processing payments vary month over month. 

Visa and Mastercard are required to publish their interchange fees and update them once or twice per year. You can monitor and check publicly on the following links:

Image by Matt Brown

 

Understanding the two key payments pricing models: fixed rate and interchange plus

If you currently use Stripe, then you’ll be familiar with a fixed rate pricing model. For every transaction, you pay 2.9% + $0.30.

If you wanted to move away from Stripe, integrate payments into your platform, and take your own percentage of every payment transaction, should you do the same as Stripe and use a fixed rate model? Or one that fluctuates with every transaction?

We’ll first explain the difference between the two models, and then what model typically works best for when.

Fixed rate pricing: easy to set up, more expensive for your customers

Fixed rate pricing is the most straightforward option: your customer pays the same percentage fee for every transaction. Integrated software companies like Square were the first software company to introduce fixed pricing, and many other payment facilitators like Stripe have also introduced it. Typically, the fee is at around 2.9% + $0.30 per transaction.

The main benefit of this pricing model is that it’s straightforward for your customer to understand and for you to set up. No matter what the real transaction cost is, the fee remains the same. This means your customers can more easily forecast their costs and budget for the future. 

The downside is that this model is more expensive for your customers. While a fixed fee may not impact smaller merchants because of lower processing volume, it’ll be a much larger factor for larger merchants processing millions or billions of payments. 2.9% is not a large proportion for a restaurant doing $200k per year, but it’s a lot for a company doing $3 million per year. 

Interchange plus: cheaper for your customers, harder to forecast

With this pricing model, you mark up the interchange costs with a fixed margin. This means that your customer will pay a different fee for every transaction, depending on the classification of interchange. 

Say, as an example, you set a fixed fee of 0.5% per transaction. When a cardholder makes a purchase at a retail store with a Visa credit card with basic rewards, the basic interchange will be 1.43% +$0.10. With your added 0.5%, the merchant then pays 1.93% + $0.10 for that transaction.

Image by Matt Brown

If a different cardholder makes a payment at the same retail shop but with a Visa Infinite high value credit card, the interchange is then 2.30% + $0.10. With your markup of 0.5%, the merchant then pays 2.8% + $0.10.

The benefit here is that the merchant pays less in payment fees, which especially benefits those that are processing high volume transactions. It’s also more transparent, as it shows the true cost and margins of each payment transaction. 

The downside is that it can also make it a lot more difficult to calculate and forecast costs, and it could also lead to merchants questioning certain costs which are variable every month.

Which pricing model is best for you? 3 key things to know about payment pricing models

Now that you understand the different pricing models and what interchange is, how does this apply to your company? Which model should you use?

Here are three key things we believe software companies need to know about pricing in payments.

1. If you’re aiming for a broad user base, start with a fixed pricing model

Although at Fiska we support software platforms that want to set up a fixed or interchange plus model, we generally recommend software companies to start with a fixed pricing model. 

This is especially true if you’re aiming for a broad user base or if you’re working primarily with SMBs. Flat pricing is best to start with because it’s a lot simpler for merchants to understand. Thanks to software companies like Stripe, Clover and Square, merchants are used to and happy with the fixed rate model.

The other reason is that SMB merchants are typically not as price sensitive when it comes to payments. For a small business doing $300k per year, a difference between 2.9% or 2.7% in fees won’t make a huge difference. Ultimately, they are choosing to use your software because they want to use your features, and payments are just a small part of that.

The exception here is if you’re working mostly with enterprise customers. Since they’ll be processing large volumes, it may make more sense to work with an interchange plus pricing model for them. 

2. Understand the cost structure of every payment

It’s important as a software company to understand the basic cost structure of every payment. This will allow you to understand your margins and ensure your unit economics are viable. It’ll also mean you have an understanding of how your payment provider operates and how their fees work (and whether you should be paying less in some cases, as we’ll explain down below). 

Make sure to read the VISA and Mastercard documents, understand the different fees that different types of cards and payment situations cost and what that means for your company. For example, if you process a lot of e-commerce transactions, you’ll need to be prepared for higher interchange costs.

By understanding how the cost structure and interchange works, you’ll have a stronger understanding of your costs for every payment transaction, as well as how to optimize your margins.

3. Avoid talking too much about pricing

At Fiska, we believe that the less you talk about pricing, the better. 

We believe that your job as a software company is not to sell payments: you’re focused on selling what you do best, which is software.

As we said above, customers will be making a decision to use your software based on the features you offer and your user experience, not how your payments are priced. However, if you do start to highlight the pricing of your payments, you risk encouraging more questions and prospective customers will start to factor it into their decision.

Although your fixed rate may be cheaper than Stripe, that doesn’t mean you should position yourself as cheaper (plus, many won’t even know about Stripe). We believe that the less you talk about pricing, the better. 

How Fiska helps software companies price payments

We set up Fiska because we saw that integrated payments were the future of commerce, and yet many software companies found it expensive, resource-intensive and time consuming to integrate payments into their software. You can read more about the story behind Fiska here: Integrating payments as a software company is expensive, complex and time-consuming. Here’s how we’re solving it.

We specialize in helping software companies set up and integrate payments in a way that gives them full control over the payment experience, while still being able to turn it into a revenue stream. That’s why we only work with SaaS companies and not with merchants directly. 

Here’s how we help you understand pricing and set the right model for you: 

1. Integrated payments with an API and set your own pricing

Like Stripe, you can accept payments online, in-person and over the phone with our Fiska API. However, unlike Stripe, our cost base is interchange, which means that you’ll be able to add your own margin while remaining competitive. Whereas before you’d have to mark-up on 2.9% +$0.30 per transaction, you now just need to mark-up on the interchange.

We are pre-certified, pre-integrated into payment terminals and hold all the right certifications, which means all you need to do is integrate into our API, and your customers will be able to accept omnichannel payments in Canada and the US within weeks, rather than months or years.

You can choose to set your own fixed rate pricing, or if it makes more sense for your business, you can also use an interchange plus model. Our fees are also locked into a partner agreement at the time of signing, so any fees won’t be adjusted without first having a discussion.

With Fiska’s API, you can set your own fees via payments, allowing you to turn payments into another revenue stream for your business.

2. Fully customize the payment experience with your own branding

As a software company, a strong user experience and features are a key part of your platform. One of the main issues with Stripe and legacy payment providers is that when you onboard a customer, you have to refer them to a third party site. That means you lose control over the customer’s onboarding experience as well as complete visibility over the transaction and therefore cannot help the customer if they encounter an issue.

With Fiska, you can embed our merchant onboarding application into your platform, allowing you to fully customize the onboarding experience as well as include your own branding at each step of the process. This flexibility will also allow you to have full control over the experience and fix any issues as they arise a lot more quickly.

3. Work with a partner that supports you with your payments strategy and acts as a Head of Payments 

Payment infrastructure companies are often not very forthright about their fees and cost basis. That’s something we wanted to change when we started Fiska.

When we work with your company, we’ll take the time to show you how payments work, what your cost structure is and share recommendations on what pricing model might work best for you. 

You can almost think of us as your fractional Head of Payments, as we’ll guide you and help you along your payment journey. We also offer full support, allow you to call or Slack us with questions, we’ll help you put together a payment strategy as well as give our thoughts on how to best set it up.

Here’s an example to illustrate how helpful this can be: a software company we were working with had many customers in the non for profit sector. They didn’t realize that the interchange costs in non for profit are much lower – unfortunately, their previous payment provider had not alerted them of that fact. When we started working with them, we were able to educate them on what the non for profit sector meant for their business. This then allowed them to pass on those savings to their customers and get higher margins on every payment transaction. 

At Fiska, we’ll help you understand which pricing model would work best for you to maximize revenue from payments, while still remaining competitive in the market.

Payment pricing models: start with a fixed rate, understand the cost structure and avoid talking about pricing

Hopefully you now have a better understanding of how the various pricing models work, what you need to know about payments and why it makes more sense to start with a fixed rate model when first setting up payments.

At Fiska, we believe integrated payments is the future of commerce, and that can only be done with flexible payments infrastructure.

If you’re a SaaS company and have more questions about payment pricing models or how we work, reach out and book a call with us.