In today’s fast-evolving payment processing landscape, businesses have numerous options when it comes to choosing the best pricing model for accepting card payments. One of the most transparent and potentially cost-saving models is Interchange Plus Pricing. For businesses that accept credit and debit cards, understanding this pricing model is essential for maximizing savings and managing operational costs.

In this comprehensive article, we’ll explore everything you need to know about interchange plus pricing, from its definition and breakdown to its benefits, drawbacks, comparison with other pricing models, and how to choose the right payment processor. We’ll also address frequently asked questions to give you a solid understanding of this payment model and help you decide whether it’s right for your business.

What Is Interchange Plus Pricing?

Interchange plus pricing is a payment processing model where the fees paid by merchants for credit and debit card transactions are divided into two distinct parts:

1. Interchange Fee: This is the base fee that card networks like Visa and Mastercard set, and it’s passed directly to the card-issuing bank.
2. Plus (or Markup): This is the fee charged by the payment processor for their services, on top of the interchange fee.

Unlike other pricing models, interchange plus pricing provides transparency by clearly itemizing the fees, showing the merchant exactly what they are paying to the card networks and what they are paying to the payment processor.

Understanding Interchange Fees

Interchange fees are the largest component of the total processing cost and are set by card networks such as Visa, Mastercard, Discover, and American Express. These fees are charged by the issuing bank (the bank that issued the customer’s credit or debit card) to cover the risk and operational costs involved in facilitating the transaction.

Interchange fees vary depending on several factors, including:

• The type of card used (credit, debit, rewards card).
• The nature of the transaction (card-present or card-not-present).
• The industry in which the transaction occurs.
• The size and type of the business.

For instance:

• Credit cards typically have higher interchange fees than debit cards because credit card transactions involve greater risk for the card issuer.
• Card-present transactions, where the card is physically swiped, dipped, or tapped, tend to have lower fees compared to card-not-present transactions, such as those processed online or over the phone.

Interchange fees are non-negotiable, and they are structured as a combination of a percentage of the transaction value plus a flat fee (e.g., 1.50% + $0.10).

What is the “Plus” in Interchange Plus Pricing?

The “plus” refers to the payment processor’s markup or fee. This is the amount charged by the processor on top of the interchange fees, and it covers the services provided by the processor, such as:

• Payment gateway integration.
• Fraud protection.
• Data security compliance.
• Customer support.
• Settlement and reporting.

The “plus” component is usually expressed as a percentage (e.g., 0.20%) plus a fixed per-transaction fee (e.g., $0.10). Unlike interchange fees, which are non-negotiable, the processor’s markup is negotiable and can vary depending on the processor and the merchant’s transaction volume.

How Interchange Plus Pricing Differs from Other Pricing Models

Interchange plus pricing stands out for its transparency. Unlike flat-rate or tiered pricing models, which bundle all fees together, interchange plus pricing breaks down the costs so merchants can see exactly where their money is going.

The two main pricing models that are often compared to interchange plus pricing are:

1. Flat-rate pricing, where the merchant pays a single fee for all transactions.
2. Tiered pricing, where transactions are grouped into different categories (qualified, mid-qualified, and non-qualified), each with different rates.

We’ll explore these pricing models in more detail later in this article.

How Interchange Plus Pricing Works

Interchange plus pricing is straightforward: the merchant pays the interchange fee, which is determined by the card network and the issuing bank, plus a processor markup. This pricing structure is typically presented in the form of:

• Interchange rate: This is a percentage of the transaction amount plus a flat fee (e.g., 1.8% + $0.10).
• Processor markup: This is an additional percentage and/or flat fee charged by the processor for their services (e.g., 0.30% + $0.15).

Let’s break this down with an example:

If a merchant processes a transaction for $100, the costs might look like this:

• Interchange fee: 1.80% + $0.10 = $1.90.
• Processor markup: 0.30% + $0.15 = $0.45.

Total fee: $1.90 (interchange) + $0.45 (processor) = $2.35.

In this scenario, the merchant is paying $2.35 to process a $100 transaction.

Transparency in Billing Statements

One of the main advantages of interchange plus pricing is the transparency it offers. Merchants receive itemized billing statements showing exactly what they paid in interchange fees and what they paid in processor fees. This transparency allows merchants to track their costs more effectively and identify opportunities to reduce fees.

In contrast, other pricing models, such as tiered pricing, can make it difficult to understand the true cost of processing each transaction since fees are bundled together and not clearly itemized.

Negotiating the Processor’s Markup

While interchange fees are non-negotiable, merchants can negotiate the processor’s markup in interchange plus pricing. The ability to negotiate depends on factors such as:

• The volume of transactions the business processes.
• The average ticket size (the average dollar amount of transactions).
• The industry in which the business operates.

Merchants that process a high volume of transactions or have large average ticket sizes can often negotiate lower markup fees, reducing their overall processing costs.

How Interchange Plus Pricing Benefits Merchants

There are several reasons why merchants, especially those with a high transaction volume, prefer interchange plus pricing over other pricing models:

Cost Savings

Because interchange plus pricing breaks down the fees, merchants often end up paying lower overall processing costs compared to flat-rate or tiered pricing models, especially when they can negotiate lower processor markups.

Transparent and Predictable

Interchange plus pricing provides full visibility into where the fees are going, allowing merchants to predict their processing costs more accurately. This transparency is particularly beneficial for businesses that want to understand and manage their costs better.

Scalable for Growing Businesses

For businesses that are scaling up, interchange plus pricing can be advantageous. As transaction volumes increase, merchants can often negotiate even lower markup fees, making it a cost-effective solution for long-term growth.

Drawbacks of Interchange Plus Pricing

While interchange plus pricing has numerous benefits, it’s not without its drawbacks. Merchants should be aware of the following potential downsides:

Complex Billing

Interchange plus pricing statements can be more complex than flat-rate or tiered pricing models, as each transaction is itemized with its corresponding interchange fee and processor markup. Merchants must be prepared to analyze detailed statements, which can be time-consuming.

Fluctuating Costs

Interchange fees vary depending on the card type and transaction method. This means that merchants using interchange plus pricing may see their processing costs fluctuate from month to month, making it harder to predict expenses.

Not Ideal for Low-Volume Merchants

For small businesses or merchants with low transaction volumes, interchange plus pricing may not be as cost-effective as other pricing models. The per-transaction fees can add up, making flat-rate pricing a more attractive option for low-volume merchants.

Comparing Interchange Plus Pricing to Other Models

To fully understand the value of interchange plus pricing, it’s important to compare it to other common pricing models: flat-rate pricing and tiered pricing.

Interchange Plus vs. Flat-Rate Pricing

Flat-rate pricing is a simple pricing model where merchants pay a fixed percentage for all transactions, regardless of the card type or transaction method. For example, a processor might charge 2.9% + $0.30 per transaction, whether the customer pays with a debit card or a rewards credit card.

Advantages of Flat-Rate Pricing:

• Simplicity: Flat-rate pricing is easy to understand, and there are no surprises when it comes to transaction costs.
• Predictability: Merchants know exactly how much they’ll pay for each transaction, making it easier to predict expenses.

Disadvantages of Flat-Rate Pricing:

• Higher Costs: For businesses that process a lot of debit card transactions (which typically have lower interchange fees), flat-rate pricing can end up being more expensive since the same fee is applied to all transactions, regardless of card type.
• Lack of Transparency: Flat-rate pricing doesn’t provide insight into the interchange fees being paid to the card networks, which can make it difficult to optimize costs.

Interchange Plus vs. Tiered Pricing

Tiered pricing is a model where transactions are grouped into different categories, usually qualified, mid-qualified, and non-qualified, each with different fee structures. The processor decides how transactions are categorized, and the fees vary depending on the risk level of the transaction.

Advantages of Tiered Pricing:

• Potential for Lower Fees: If most of your transactions fall into the “qualified” category, you might pay lower fees compared to other pricing models.

Disadvantages of Tiered Pricing:

• Lack of Transparency: Tiered pricing is often criticized for being opaque, as it’s difficult to know exactly why certain transactions fall into different categories.
• Unpredictable Costs: Since non-qualified transactions can have significantly higher fees, tiered pricing can lead to unpredictable costs, making it harder for merchants to manage their expenses.

Who Should Use Interchange Plus Pricing?

Mid- to Large-Sized Businesses

Interchange plus pricing is ideal for mid-sized and large businesses that process a high volume of transactions. These businesses can benefit from the cost savings and transparency offered by this pricing model.

Businesses in High-Volume Industries

Industries such as retail, eCommerce, and hospitality, where businesses process thousands of transactions daily, can benefit greatly from interchange plus pricing due to the ability to negotiate lower processor markups.

Businesses Seeking Transparency

Merchants who want to see a clear breakdown of their processing fees and understand exactly where their money is going will appreciate the transparency offered by interchange plus pricing.

Choosing a Payment Processor for Interchange Plus Pricing

Look for Transparent Pricing

When selecting a payment processor, make sure they offer full transparency in their interchange plus pricing model. Some processors advertise interchange plus pricing but may add hidden fees or unnecessary markups. Always ask for a sample statement to ensure transparency.

Negotiate the “Plus” Component

Remember, the interchange fees are non-negotiable, but the processor’s markup is. Don’t hesitate to negotiate the processor’s markup, especially if your business processes a high volume of transactions. Many processors are willing to lower their fees to win your business.

Consider Technology and Support

In addition to pricing, consider the quality of the processor’s customer support and the technology they offer. A good payment processor should provide robust reporting tools, reliable customer service, and a seamless payment experience for both you and your customers.

FAQs About Interchange Plus Pricing

Q.1: What is interchange plus pricing?

Interchange plus pricing is a payment processing model where the fees merchants pay are split into the interchange fee (set by card networks) and a processor’s markup, providing a transparent breakdown of costs.

Q.2: Is interchange plus pricing cheaper?

Interchange plus pricing can be cheaper for businesses that process a high volume of transactions. However, the total cost depends on your transaction mix and your ability to negotiate the processor’s markup.

Q.3: Can small businesses benefit from interchange plus pricing?

Small businesses with low transaction volumes may find interchange plus pricing less cost-effective due to the per-transaction fees. In such cases, flat-rate pricing may be a better option.

Q.4: How do interchange fees differ?

Interchange fees vary based on several factors, including the type of card used (credit vs. debit), the transaction method (in-person vs. online), and the risk level of the transaction.

Q.5: How can I lower my processing costs with interchange plus pricing?

While you can’t lower interchange fees, you can negotiate the processor’s markup. Additionally, optimizing your transaction methods to reduce card-not-present transactions can lower your overall processing costs.

Conclusion

Interchange plus pricing is a transparent and flexible payment processing model that allows businesses to better understand their processing costs. By breaking down fees into the interchange fee and the processor’s markup, this pricing model offers clarity and the potential for cost savings, especially for high-volume merchants.

While interchange plus pricing may be more complex than flat-rate pricing, its transparency and scalability make it an ideal choice for businesses that prioritize understanding and controlling their costs. By selecting the right payment processor and negotiating the processor’s markup, businesses can maximize the benefits of interchange plus pricing, ensuring they’re not overpaying for payment processing services.

Ultimately, interchange plus pricing empowers merchants to make informed decisions about their payment processing strategy, helping them optimize their costs and grow their businesses.