Billback is a way for credit card processing companies to simplify the billing of interchange fees to merchant accounts. This is done by billing all cards at a single standardized rate up front, and then going back and rebilling the same merchant account for the difference between the rates once all transactions for the month have been processed, hence the name billback. This creates two separate line items on the merchant’s billing statement.
For example, if Visa has set the interchange rate for swiping a card under normal conditions at 1.50%, the billback system will assume that all processed cards fall into this category. The credit card processing company will bill the merchant for all cards at 1.50% first, so if the company charges $2000, they will see an initial processing fee of $30.
Then, the credit card processor will go back through those charges and determine which ones fall into different categories of interchange fees. If half of those charges ($1000) are classified as keyed cards instead of swiped cards, their interchange rate would normally be 1.80%. Since the merchant account has already been billed for 1.50%, the difference between the two will only be 0.30%. As a result, the merchant will receive a billback statement for the difference between the two rates. $1000 x 0.30% is $3. The billback for the month will be $3.
One of the biggest factors in the billback system is the time delay between the initial charges and the billback charges. This is because the first bill is for the current month, but by the time the billback charges arrive, the merchant is already into the next month. As a result, the charges appear in such a way that the merchant account is being billed for the current month at the standardized rate, and the previous month for the difference between the standard and the actual rates. This can be somewhat confusing when reading the credit card processors bill.
Overall, using a billback system can make it easier for merchants to track their credit card processing expenses. By breaking down the different interchange rates, merchants can see how often their charges are being swiped versus keyed, while still staying current on the majority of their processing fees in the current billing period.