What is a Billback? What should I be afraid of?

A billback is actually a surcharge credit card companies use when certain transactions do not qualify for the lowest qualified rate.
The billback pricing model uses target interchange qualification levels. In this model you apply a fixed discount rate (interchange price) to all transactions regardless of their individual interchange qualification levels. The merchant is then assessed "billback" for the rate differential between the initial target and the cleared interchange qualification rate.
For example, let's assume you have a $100 retail credit card transaction for which the target rate is 1.54%, and the card actually clears at 2.30%. The processor adds 20 BP for its revenue, so you set 1.74% as the base rate.
Initial billback calculation:
2.30% actual qualified rate (clears as Visa EIRF)
1.54% targeted rate
0.76% billback to merchant (76 BP)
Actual billed amount:
You charge $1.74 (1.74% x $100)
You add a billback of $0.76 (0.76% x $100)
You bill the merchant $2.50
Thus, on top of the 20 BP on the target rate of 1.54%, the processor makes 76 BP for a total of 96 BP. (Dee Karawadra. Impact Pay Systems.)

When a credit card company makes use of this billback system to charge its clients, what they do is break up discount rates as well as fees and this is charged to the payee or client over a period of a few months, which can be very deceiving. They do this instead of clearly stating it on a single billing statement. For example, your billing statement for the month of May would contain all the basic fees and a small portion of the discounted charges in relation to transactions done in April. However, all of the downgraded charges will not appear until the June monthly statement.

To make it even more confusing, the transactions which were downgraded would not be linked to the actual sales volume. What the statement would only show is how much transactions were downgraded as well as the downgrade fee. This billing option can pose a few problems, such as how could the business owner actually tell how much of the discount rate is being charged. In simpler terms, there are a lot of uncertainties when using a billback system.

Actual studies on the subject have shown that, when going back to several months’ checking charges and statements, it shows that the business owner was, in fact, being charged as much as four percent on three percent of all the transactions. In other words, more money is being taken by the bank or the credit card company. In most cases, business owners are not able to realize or see exactly how much is being charged to them due to the subtleness of the system.

It is no secret that the billback accounting service can help you track down costs efficiently. However, the price of this service is also quite high. A lot of small business owners have fallen for this setup, which can lead to hundreds and even thousands of dollars worth of losses, so be very careful.

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