What is a Billback? Is This Method the Right Fit for My Business?
Okay. Imagine this scenario: a teenager asks their parent to download a big, new triple-A game.
“How much is it?” the parent asks.
“$50,” the teenager answers. “I have the money, but I don’t have a credit card. If you buy it I’ll pay you back.”
The money is exchanged, the game is purchased, end of story… at least until the parent checks their credit card statement, and sees that taxes and a surcharge were added. So the parent goes to the teenager and says “You owe me another $7.”
“Why?” the teen asks.
“You promised you would pay for it,” the parent says. “You gave me $50, but the bill came to more than that. So you owe me the difference.”
That’s kind of like how billback pricing works. In this post, we’ll look at how billbacks apply to credit card transactions, how they differ from chargebacks, and whether this model is a good or bad deal for merchants.
What is a Billback?
- Billback
A charge applied to merchants for transactions that were processed during the preceding month. Credit card processors use billbacks when transaction costs exceed what was projected.
[noun]/bil • bak/
Billback pricing refers to a billing model by which your processor quotes you a specific per-transaction fee for credit card processing. This is called your qualified rate, and it’s the rate at which you'll be billed for each transaction, every month. The next month, however, your invoice will also include an additional charge, based on the actual transaction processing costs from the month before.
In other words, you’ll pay an attractively low flat rate cost for each sale, as long as the actual processing costs/interchange fees fall at or below the qualified rate. Any overages in excess of what you paid as your qualified rate will be “billed back” to you in the next invoice.
This should not be confused with hotel billbacks. This is a situation where the travel expenses of an organization’s employee are paid for by a travel management agency, which is then reimbursed by the employer at a later date.
It almost sounds like a bait-and-switch; you’re sold on one rate, then end up paying more. But, the fact of the matter is that interchange fees can vary based on the type of transaction. For example, debit cards generally have lower interchange fees than rewards cards.
Paying a set amount for processing each transaction during the billing period, then getting billed back for the difference, actually simplifies the process. Otherwise, you’d have to calculate the total fees for each sale in real time.
Billback pricing is also known as blended rate pricing, mixed rate pricing, or enhanced reduced recovery (ERR).
How Does Billback Pricing Work?
The processor charges the merchant a low, qualified rate. The processor then calculates the actual cost of service, and invoices the merchant for the difference the following month.
Let’s say your processor offers a flat rate — 1.8%, for example — for each one of your transactions for the month. That means that for every transaction you process that month, you pay a fee equivalent to 1.8% of the total transaction.
As we mentioned earlier, though, interchange rates are going to vary, so the 1.8% figure won’t necessarily cover the provider’s costs. So, at the end of the month, your processor looks at all those transactions and determines the difference between the real cost of processing, and the amount you paid. Then, on the following month’s statement, you’ll get a billback invoice for the difference between the flat rate and the actual cost of the non-qualifying transactions.
In most cases, the invoice won’t show the processing volume nor the fee breakdown, and there’s a reason for that. Without a clear look at that data, it’s almost impossible to calculate what rate you’re paying. That works to the processor’s advantage.
Billback pricing is not necessarily dishonest, but it can be misleading. If you don’t see both figures, it’s easy to think you’re paying a single flat-rate for all transactions you take. At the same time, most merchants only look at the low rate and the convenience of billback pricing; not the real cost involved.
Weighing the Pros & Cons of Billback Pricing
Billbacks often offer lower upfront rates and simplified accounting. At the same time, the process is complex and hard to decipher, and typically costs more in the long run.
So, is billback pricing a bad thing? Well, that might depend on who you talk to. There are arguments for and against this billing model:
Billbacks vs. Enhanced Billbacks
Enhanced billbacks work the same as typical billbacks, but may include a variety of additional fees.
If you’re on the fence about accepting a billback pricing model, someone offering an enhanced billback system might tip the scales. Here’s the problem: “enhanced” in this case only works to the provider’s benefit; not yours. They’re essentially asking you to enhance their profits.
You’re still charged a flat rate. And, as with regular billback models, you’re charged that rate on every transaction for that month’s statement, along with the difference between the flat rate and the actual costs for the previous month. With enhanced billing, though, you’ll also be invoiced for an additional markup for value-added services. This can include administrative expenditures, performance-based fees, management services, or something similar.
The fact is that you’ll be paying more because you’ve agreed to pay for services that your provider can easily tack onto the already confusing statement. It’s like all the miscellaneous costs tacked onto a new car’s sticker price; it’s hard to tell whether you’re getting any real value for the extra money you’re paying.
Use Cases for Billbacks
A billback model can be beneficial when the amount you charge customers can vary from month to month.
All of this can make it sound like billback pricing is always a bad deal. But, there are some situations where it can be a good option.
Think about scenarios where customers can be charged a fluctuating amount on a regular billing cycle. For example:
- Recurring billing
- Electricity and utilities
- Offering multiple pricing tiers
- Software as a Service (SaaS)
- Billing customers for irregular add-ons
- Calculating costs based on consumption
Trying to determine fair pricing for processing services can be a nightmare when any of these factors are at play. Even just providing an array of products or services can make it hard to determine whether you’re getting a good deal from your processor using a conventional billing schedule.
The billback model, however, allows you to consolidate all those charges into a single invoice, summarizing all the services or products used. Having a single, up-front transaction charge (as opposed to creating different invoices for different services) simplifies processing, and can make it easier to anticipate your costs.
Billbacks vs. Chargebacks
Billbacks are a processing payment method. Chargebacks are a consumer protection system that can be easily abused to commit fraud.
The names may sound similar, but a billback and a chargeback are two completely different animals.
Billback pricing involves flat-rate processing costs which are later adjusted to reflect additional charges or credits. Chargebacks, on the other hand, are customer refunds forced by the issuing bank. While the chargeback process is an important consumer safety mechanism, chargebacks are increasingly misused by customers seeking a convenient refund or attempting to get something for free.
Both billbacks and chargebacks happen post-transaction. But, where billbacks are an agreed-upon arrangement for monthly payments to your processor, you can’t anticipate chargebacks. They pop up weeks later, long after you thought a transaction over and done. This can wreak havoc on your cash flow… and your bottom line.
Effective chargeback protection requires a comprehensive approach that addresses every aspect of the problem. The experts at Chargebacks911® have been involved with all areas of chargeback prevention and revenue recovery for over a decade. We can save you time and headaches and up your ROI. For more information, contact us today.
FAQs
What is the billback payment method?
The billback payment method is a billing model where a low per-transaction rate is assessed initially, with actual costs calculated later and the difference billed to the merchant.
What is a billback example ?
Imagine that a transaction costs a processor 1.75% in interchange fees. The merchant and the processor have agreed on a 1.5% fixed rate for that transaction. In the first month, the processor will charge the 1.5% fixed rate for that transaction, regardless of the true cost.
The following month, however, the processor will calculate those costs and bill the merchant for the difference owed for that transaction (an additional 0.25%, in this instance).
What are billback charges?
Billback charges are additional fees that processors tack on to each invoice, above and beyond the billback amount itself. Because the costs are bundled together, it’s often difficult for merchants to calculate what they are really paying for processing.
How does a billback work?
For each credit card transaction, the processor bills the merchant a flat rate. If the actual rate is higher, the processor will invoice the merchant the next month to recoup the difference.
What is a billback invoice?
A billback invoice is a secondary bill issued to adjust a previous statement. When working with credit card transactions, this typically refers to an invoice sent to collect costs beyond the initial flat rate charge.
