When we begin talking with new customers interested in how PayFac-as-a-Service with Tilled can benefit their B2B software business, we often find it’s not long before we’ve completely lost them with our terminology and industry jargon. And that’s ok — we’ve been in the boardrooms of companies processing billions of dollars a year through their systems that couldn’t explain many of these terms. Yes, true story.
Other processors may see this as an advantage. But at Tilled, we pride ourselves on transparency. We never play games with our customers, and that includes making sure everyone is clear up-front what doing business with us will look like. In that spirit, we’d like to offer a glossary of terms for entering the world of payments facilitation, credit card processing, and even just “payments” in general.
The first thing you will — or should — see when talking with any payment facilitator or payments processing company is a Schedule A. This is a pricing table that is attached as an exhibit to your revenue share agreement, or contract, with your processing provider. In it, you’ll see all the different pricing elements that make up your costs and determine how much you need to charge your customers to process payments in order to break even. Terms like transaction fees, settlement fees, chargeback fees, monthly fees, setup fees and more should all appear (and also appear later in this glossary). The Schedule A also includes your revenue share percentage. This is where it often gets tricky.
Before you sign a contract, it’s very important that you understand ALL the aspects of your Schedule A, and don’t get distracted by just one or two of them. While a 100 percent revenue share may seem more attractive than an 80 or 60 percent share, this is often where processors will start to play games, hoping that unsophisticated or unknowing customers will fall for it. Depending on the fees included, it’s entirely possible you’ll make significantly less in the end even with a higher revenue share percentage. When looking at a Schedule A, the most important number is the bottom line.
Interchange Plus vs. Flat Rate
Your Schedule A should also indicate whether or not your processing provider will be using flat rate or Interchange Plus pricing. Processors like Stripe, Square and Braintree exclusively offer flat rate pricing, charging a percentage rate plus a transaction fee, typically 2.9% and $0.30. This means software companies must charge more than 2.9% and $0.30 to their customers before they earn a penny of revenue.
Interchange Plus pricing, however, is where the direct costs from the card brands such as Visa, Discover, Mastercard, Amex, etc. are passed through to the merchant (plus dues and assessments, as outlined in the Schedule A) and depend entirely on what card is being processed. The rates for each card are transparent and publicly available, with some costing less than 5 basis points (0.05%) and $0.22 per transaction. This stands in stark contrast to the flat rate pricing you’ll get from Stripe, Square or Braintree, which often charge 3-4 percent on every transaction without taking into account the card’s specific costs.
This is one time that simple is not always better
From an ISV perspective, flat rate pricing is also less transparent. There is no way to see how much profit a company like Stripe, Square or Braintree is making off processing your payments thanks to their pricing model. With Interchange Plus, there is transparency throughout the system, and you get the benefit every time your customers run lower cost cards such as debit cards.
At Tilled, our buy rates and schedule A are always represented in Interchange Plus pricing. This provides maximum transparency, allowing us to pass through the costs we incur from the credit card companies with no unknown markups. That said we do allow our B2B software partners to charge their merchants either Interchange Plus or flat rate pricing, giving them ultimate control over their pricing.
To put it simply, your revenue share is calculated by taking the price you as an ISV charge your merchants to process their transactions, minus the costs your processor charges you established on your Schedule A, multiplied by your revenue share percentage. It may be easier to think of it as your profit.
(Price-Cost)* Revenue Share %= Revenue Share or Profit
With Tilled, our Schedule A costs are seven basis points as our settlement fee or discount rate, plus five cents per transaction as our transaction fee, and $6 per month, per merchant. Our revenue share percentage for ISVs starts at 66 percent and increases based on volume.
So, as an ISV with Tilled, for every basis point that you charge in excess of .07% (seven basis points), for every penny per transaction that you charge in excess of $0.05 (five cents), and for every dollar per month that you charge in excess of $6.00 (six dollars) as a monthly fee that you charge your merchants, you receive at least 66 percent.
Lost yet? Let’s break it down further.
First and foremost, a basis point is one-hundredth of a percent, .0001, or .01%. On $100, one basis point is one penny. Or, in context, for every $1,000,000 in transactions processed, 1 basis point is $100.
Settlement Fee/Discount Rate
At Tilled, our cost is seven basis points for our Settlement Fee, also known as a Discount Rate, Or, in context, on a $100 transaction, our cost is 7 pennies.
This represents the cost to process the volume of transactions flowing through your system. Any basis points that you charge merchants above seven then goes towards your revenue share. For instance, if you charge your merchants 50 basis points (not an uncommon rate), 43 basis points would be split according to your 66 percent revenue share, creating 28.38 basis points (or ~$0.28 on every $100s processed) in profit for your company.
Our cost is five cents per transaction on each transaction processed through our system at Tilled. Any cents that you charge your merchant above this would go towards your revenue share.
For example, if you charge your merchants $0.25 per transaction, $0.20 per transaction would be split according to your revenue share %. At 66% revenue share, this translates to ~$0.13 cents per transaction in profit for your company.
While this fee is fairly straightforward, one aspect to be aware of is if this fee only applies to approved transactions or is also charged on returns, or refunded charges. Some processors will play games in this area as well — make sure you know the answer to this question before you sign. At Tilled, this fee only applies on approved transactions.
Monthly Fee per Merchant ID
For each merchant you sign up to use your system, Tilled’s cost is $6/month/merchant. This ensures each of your merchants have access to our customer support, PCI compliance, monthly statements, annual tax filings, and also keeps their account open with our banks. It covers the real costs associated with having a merchant ID.
This cost can be passed through to merchants, and again, anything above the $6 per month you are able to charge as an ISV goes towards your revenue share.
While these terms cover the most important terms you need to be aware of when looking at a Schedule A, there are also several other fees and costs you should be considering before signing with any processor.
In simple terms, a chargeback is a reversal of a credit card transaction initiated by a consumer’s bank.
If a cardholder initiates a chargeback with their bank, — for a fraudulent charge, goods that were never received, or any other reason — this fee is charged by the processor to cover the costs of working with the cardholder’s bank to determine liability. To be clear, this is just the fee for managing that process, and does not include any possible chargeback losses incurred if your merchant is found liable and you are not able to collect payment from the merchant to cover the amount of the chargeback. Depending on what processor you are working with, that liability could fall on you. With Tilled, we never ask our software partners to bear this liability.
This fee can come into play as a possible solution before a chargeback. If a consumer doesn’t recognize a charge and would like to see a copy of the receipt, this fee covers the processor working with the bank to retrieve a copy of the transaction data. While this happens very infrequently, it is another fee to be aware of on your Schedule A.
Batch Fee/ACH Fee
At the end of each day, once the settlement reports are done and we go to pay your merchants, there is a real cost of at least 25 cents per merchant to send them their funds. While we don’t charge these batch or ACH fees, many other processors will. This is something to consider if you are hoping to have a large number of merchants on your platform, as the daily costs can add up quickly. Stripe for example charges $0.25 and 0.25% for every payout through Stripe Connect.
Monthly SaaS Fees
If you’re considering using a PayFac-in-a-Box solution, or attempting to build out your own system using third-party platforms, be prepared to pay large monthly software fees typically in excess of $10,000 per month. At Tilled, we don’t charge any monthly SaaS fees for using PayFac-as-a-Service.
PCI Non Compliance Fee
To remain PCI compliant, your merchants will need to fill out an annual survey online. While it’s a simple process, some processors will charge a hefty fee if they don’t fill it out — and they’re not always the best about reminding them. At Tilled, we never charge this fee.
Monthly Minimum Fees
A monthly minimum fee is essentially a penalty that is charged if your merchants don’t process a certain amount of payments in a given month. For instance, if you have a monthly minimum of $25 in discount fees, but a merchant only processes enough sales to generate $20 in discount revenue a month, they can be charged a fee. Sometimes it will be the difference between what is charged and the minimum, while other processors will charge the full amount. Either way, there’s no real rationale behind it other than to play more games and find new ways to hide profit margins. Oftentimes, you won’t know you have one until it’s too late. If you see this listed on a processor’s Schedule A, make sure you pass it through to your merchants. Tilled, however, doesn’t have any such fee.
These fees are charged by processors and/or gateware providers for every new merchant account that is underwritten and added to your system. While there are real costs associated with verifying new merchants and integrating them into a system, these can also act as revenue generation for processors. If you see one, you’ll either need to pass it along or eat the costs yourself.
Underwriting fees go towards verifying Tax ID numbers, performing credit checks, verifying bank details, running background checks, etc. These costs typically are around $5/merchant underwritten but can be more depending on what third party systems you are using.
Gateway providers typically charge setup fees to generate a new gateway account and these fees usually range from $5-$25/Merchant and are a one time upfront fee per new merchant account setup on the gateway.
At Tilled, we have no setup fees or underwriting fees as a part of our Schedule A.
While all of the above fees can add to your costs, there are also several fees and features associated with PayFac that can benefit you as a B2B software company.
One of the big benefits of the PayFac model is the ability to split the settlement on an individual transaction. If you decide to charge a platform fee to your merchants, we are able to split that fee out and deposit not just the merchant’s money into their account on a daily basis, but to deposit your revenue share as well. Let’s say you wanted to charge a 3% Platform fee. On a $100 Transaction, Tilled would deposit $97 into your merchants account on a daily basis and the net revenue from the 3% platform fee would go to your business according to your schedule A and revenue share.
From a cash flow perspective, this is a great way to receive additional revenue on a daily basis without the hassle and worry of monthly invoices or merchants who don’t pay their bills on time. With many traditional processors, the revenue share is paid on the 25th of the following month meaning transaction revenue earned on transactions from July 1st wouldn’t be paid until August 25th!
Finally, there is one cost that we can’t forget to mention…
If you are attempting to become a fully registered PayFac yourself, or are considering various PayFac-in-a-Box options, remember there are costs associated with being a PayFac that are never listed on a Schedule A. Paying the salaries and benefits of the various staff members you will need to become and operate as a PayFac could easily cost as much as $50,000 a month. With Tilled, we eliminate that need entirely, saving your team not just money, but also time and effort.
While we realize this may seem overwhelming, we also realize that having a functional understanding of these terms is necessary for anyone considering offering payments processing through their software system. If you have any questions or would like further clarification on any of these terms, please don’t hesitate to reach out to someone on our team.