Credit card processing today allows business owners to accept various payment methods beyond cash. However, managing the details of the credit card payment system can be challenging for merchants. Interchange plus pricing, or the structure of rates and money flow after it is deducted from their sales, is one area that is difficult to understand.
Interchange plus pricing is one of the top forms of credit card transaction pricing offered by merchant account providers. This guide will focus on interchange plus pricing, its effects on your business, and more.
Understanding Interchange Plus Pricing
Interchange-plus pricing, or cost-plus pricing, is a transparent credit card processing model that divides transaction costs into two distinct components: interchange fees and the processor’s markup.
Interchange fees are set by credit card networks (such as Mastercard, Visa, and AmEx) and paid to the card-issuing banks. They are non-negotiable and vary based on card type (e.g., credit, debit, rewards), where premium or rewards cards might carry higher fees than standard cards, transaction method (e.g., online, in-person), with in-person transactions typically costing less than online or phone transactions due to lower fraud risk, and merchant category, which varies by the merchant’s industry classification.
The term “plus” denotes the additional charge a processor adds to each credit card transaction. This charge is often stated in basis points, together with an authorization fee, which is the transaction’s cost. This processor markup, which contrasts with non-negotiable interchange fees, can be negotiated and constitutes the processor’s profit. It typically includes a set percentage of the transaction value and a fixed fee per transaction. For instance, a processor could apply an extra charge of 0.30% and $0.10 for each transaction above the interchange fee.
If a card network adjusts the interchange fees for a card, this automatically alters that portion of the merchant service charge. The costs associated with card transactions differ based on the type of card used by customers, as the interchange fee, which is a key part of the cost formula, varies between cards.
Typically, the pricing structure known as interchange plus also includes assessment fees. These fees are forwarded to the card networks and vary depending on the card used.
How Interchange Plus Pricing Works?
In interchange plus pricing models, credit card brands and issuing banks determine the base interchange fees, while the credit card processor adds a markup to manage its costs. This pricing method delineates the recipients of processing fees and often results in financial savings for businesses due to its transparency.
With this pricing structure, the processor subtracts the interchange fee and markup before transferring the remaining funds to the merchant’s account. Merchants receive a detailed breakdown of the costs, allowing them to see precisely what they pay to the issuing bank and the processor. This level of detail helps merchants identify and understand the specific fees applied to each transaction, potentially leading to lower costs.
Interchange fees, though set by credit card associations like Visa and Mastercard, are paid to the bank that issued the customer’s card.
What Does Interchange Plus Look Like?
Interchange-plus pricing is a credit card processing model that separates the interchange fees and the processor’s markup into two distinct parts. This format is often presented as “Interchange + X0% + $X1,” where “X0%” represents the percentage markup and “$X1” is a fixed fee per transaction. This method is valued for its clarity, allowing merchants to understand precisely how much they pay their processors and the amount going to credit card companies for each transaction.
The processor’s markup is detailed as a percentage-based and a fixed-amount component. In most interchange-plus pricing plans, the markup remains consistent across all transactions, simplifying the calculation of payments to your provider and to the credit card companies for every transaction.
However, it’s common for merchant account providers to promote the availability of interchange-plus pricing on their websites yet only provide quotes that list the percentage-based markup and the fixed authorization fee in basis points. A basis point is 1/100th of 1%, meaning a quote of 150 basis points corresponds to 1.5%.
Although rates can vary, opting for interchange-plus pricing can often lead to savings on credit card processing fees, depending on factors such as the industry, business experience, and business credit score. Businesses in higher-risk industries (like Gambling, Pharmaceuticals, Dating, Telemarketing, Adult entertainment, Cryptocurrency, Travel Agencies, and Electronic cigarettes) may face higher interchange-plus pricing than those in more secure sectors. Partnering with a merchant account provider specializing in high-risk businesses can reduce payment processing rates due to competitive pricing.
Comparison of Interchange-Plus Pricing to Other Pricing Models
Several pricing models are available, and you may wonder how interchange-plus compares to the most popular alternatives.
Interchange-plus, tiered, flat-rate, and subscription (or membership) pricing models have distinct characteristics, making them suitable for different business needs in credit card processing.
Interchange Plus vs. Tiered Pricing
Interchange-plus pricing is known for its transparency. It itemizes the interchange fees and the processor’s markup on your statement, allowing businesses to see precisely what they are charged for each transaction. However, its detailed nature can make statements complex, and it may be better for those who prefer a detailed financial breakdown.
Tiered pricing, in contrast, categorizes transactions into different tiers (qualified, mid-qualified, non-qualified), with costs varying per tier. This model tends to be less transparent and misleading because processors often advertise the lowest tier rate, which may not always apply, leading to unexpectedly high actual costs.
Interchange Plus vs. Flat-Rate Pricing
Flat-rate pricing offers a consistent rate for all transactions, simplifying business budgeting and accounting. It is prevalent among new businesses and those with lower transaction volumes, as it avoids the complexity of interchange fees for different card types. However, this pricing may not be the most cost-effective for businesses with higher transaction volumes or those that process many low-cost transactions, as they end up paying a higher overall percentage.
Interchange Plus vs. Subscription Pricing
Like interchange-plus, subscription pricing also clarifies the actual costs per transaction but replaces the percentage markup with a flat monthly fee and a per-transaction charge. This model can be particularly beneficial for businesses with large transaction values or high volumes, potentially leading to considerable savings on processing costs.
The appropriate pricing model for your business depends on several factors, including the volume and size of transactions and your financial management preferences. Businesses with higher transaction volumes might find interchange-plus or subscription models more beneficial due to their lower incremental costs.
On the other hand, businesses dealing with smaller, more frequent transactions could find flat-rate pricing more suitable due to its predictability and simplicity. For those prioritizing detailed financial tracking and optimization, interchange-plus offers the detailed granularity needed. It’s crucial for businesses to fully understand the terms and potential fees of each pricing model to prevent unexpected costs and ensure the model chosen is well-suited to their operational and financial strategies.
Why Is Interchange Plus Considered the Best Pricing Model?
Interchange plus pricing is often considered the superior choice for businesses handling diverse transaction types and large volumes. It differentiates itself from flat-rate or tiered pricing models through its transparency and potential for cost savings.
Higher processing volumes typically justify a move away from flat fee pricing, which is more suited for smaller operations. For instance, if a business processes $15,000 annually, a 0.5% saving would only yield $75, which might not noticeably affect the budget. However, if processing amounts to $400,000 annually, a 0.5% saving equates to $2,000, which is more substantial.
Flat-rate pricing, while simpler as it applies a consistent rate to all transactions, can lead to excess payments, particularly for businesses that process many debit card transactions, which tend to have lower fees than credit transactions. Tiered pricing categorizes transactions into different rates, which might simplify billing but often obscures actual costs and can lead to higher fees, as it is not always apparent into which category a transaction will fall.
One common issue with tiered pricing is the potential for excessive markups. Merchants often encounter rates as high as 4% or 5% without realizing it until a pricing comparison reveals the truth. Merchants are sometimes misled by claims of low rates like 1.49%, which do not reflect additional non-qualified fees.
Interchange plus pricing stands out by clearly disclosing interchange fees, allowing merchants to see exactly what they are being charged over the cost. This structure promotes more reasonable markups by processors.
Interchange Plus provides a balanced and cost-effective approach for businesses that handle significant volumes or diverse transactions. It ensures transparency from payment processors and gives merchants detailed insights into their processing fees, facilitating easier comparisons and selection of the most economical processor.
Conclusion
Understanding and choosing the right credit card processing model is crucial for businesses aiming to optimize their payment systems. Interchange-plus pricing is a highly transparent option that delineates the costs associated with each transaction, helping businesses track and manage their finances more effectively. This model benefits merchants handling diverse transaction types and large volumes, offering lower incremental costs and potential savings.
Frequently Asked Questions
How does interchange plus pricing compare to other credit card processing models?
Interchange plus pricing offers more transparency by separating interchange fees set by card networks from the processor’s markup. Unlike tiered pricing, which categorizes transactions into unclear tiers, or flat-rate pricing, which charges one rate for all transactions, interchange plus lets businesses see and predict exact costs.
What factors should a business consider when deciding if interchange plus pricing suits them?
Businesses should assess transaction volume, average transaction size, and transaction types. High-volume or diverse transactions benefit from the transparency of interchange plus. However, businesses must be prepared to manage detailed billing statements using this model.
Are there any hidden fees or costs associated with interchange plus pricing that businesses should be aware of?
While Interchange Plus is transparent, businesses may face additional fees like gateway charges, PCI compliance fees, and setup costs. Reviewing all terms with providers can help businesses avoid unexpected expenses.
