Comment by willseth
2 years ago
> If the average fee is 3% and the high-end customer is getting 2% back ...
You're not picking realistic numbers. The fees range from around 1.5% to ~3%, and the 2.5%-3%+ fees are limited to ~10% of customers. An average fee of 3% doesn't make sense. Very basic napkin math would be 0.9((1.5+2.5)/2)+0.1((2.5+3)/2) = ~2.1% average. So only in the 100% passthrough case does the high end cardholder actually lose. That's not likely.
And if you look at the chart, if 740 is 10%, there are probably far fewer than 10% of transactions averaging 2.75%, so this is likely still way overestimating.
> The fees range from around 1.5% to ~3%, and the 2.5%-3%+ fees are limited to ~10% of customers. An average fee of 3% doesn't make sense.
That's just the interchange fee, not what merchants are actually paying. Stripe charges a flat 2.9% + $0.30 and this is considered competitive:
https://stripe.com/pricing
For a $20 transaction, that's 4.4%, and that's for everybody, not just the people with rewards cards.
> and this is considered competitive
Stripe is hella expensive! But they are easy to get started with.
Competitive rates depend on the type of business, i.e. their volume and their fraud risk. The most transparent form of pricing is called “interchange plus” where it’s a flat markup on the interchange schedule. High volume merchants should be able to find a markup in the fractions of a percent.
It is my understanding that the big Stripe customers negotiate lower rates with them as they scale.
> High volume merchants should be able to find a markup in the fractions of a percent.
And this is why small businesses are more likely to offer cash discounts than larger ones.
7 replies →
> That's just the interchange fee, not what merchants are actually paying.
What you pay Stripe is for the combination of interchange fees + Stripe's own service fees. The Stripe service component of the fee would be charged regardless. Whatever markup a merchant makes for Stripe's fees are not recoverable and irrelevant to the comparison.
By comparison, Stripe charges 0.8% + $0.00 for ACH, which includes any costs they might be paying to the bank, so the upper bound on the cost of their services is 0.8%. 4.4% - 0.8% is 3.6%.
Identify a payment processor that a small business making e.g. $60,000/year in $20 credit card transactions can use that would charge lower fees, if you can.
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> What you pay Stripe is for the combination of interchange fees + Stripe's own service fees.
Yeah, Stripe is a bad example. Because Stripe is a payment service provider. They take all the various fees involved with managing payments and package it up, then put a pretty bow on top with some useful services, APIs, nice marketing. But this package deal is significantly marked up. Stripe absorbs the variable interchange fees and different rewards card markups because they are charging you 3% flat (more or less) and have a healthy margin in for themselves in the middle. Stripe makes a little less when you charge a Platinum AMEX, but they make a relative ton when you charge a secured mastercard. They know that less than 10% of the transactions are these higher cost cards, so they just absorb the lower profit on those transactions.
This is a wholly different game than lower level payment processors. For example at a company I worked for about a decade ago, we stuck a deal with WorldPay which is the largest payment provider in the world. We were paying interchange fees, a small fraud fee of a few cents, and then a worldpay fee of 20-40 basis points depending on the card. We were directly charged more on a premium rewards card, but the margin on WorldPay was a few basis points above cost. But they provided nothing really in terms of services. We had to find our own payment software, terminals, and everything else. They were just the raw service.
So imagine worldpay on one side, which is just brokering with the banks and requiring us to do everything else. On the other extreme, you have Stripe which is "turnkey" and you can sign up with zero sales volume on a pretty website. One is interchange + 30 basis points, the other extreme is a flat 3%+20¢.
Stripe is a great business. But not a good example here. They essentially abstract away all the complexity in this article by charging you more money (their raw negotiated cost with banks is probably 0.8-1.2% on 90% of their transactions), they are marking up 1-2% for themselves as a service provider. That is not to vilify Stripe. They serve a valuable role and the abstraction layers (SaaS subscriptions, free trials, etc) are well worth it for a lot of companies. But keep in mind, this is a service company on top of the credit card system. So its not a great example in this discussion.