Interchange Plus
Interchange-plus pricing (sometimes called cost-plus pricing) is a credit card processing rate model that separates costs into two elements: (1) interchange fees, and (2) processor markup. Interchange fees (and associated network assessment fees) are passed through to the issuing bank and credit card association, while the markup is retained by your merchant account provider.
HOW DOES INTERCHANGE-PLUS CREDIT CARD PROCESSING WORK?
With interchange-plus pricing, your credit card processor deducts both interchange fees, which can be highly variable, and a markup, which is generally fixed, before transmitting funds from a sale to your merchant account. Depending on your merchant services provider, you might see these fees broken down individually on your monthly processing statement, or you might see just the total fee deducted.
Although interchange fees are paid to the bank that issued the customer’s credit card, they’re set by the major credit card associations (such as Visa and Mastercard). Interchange fees can get complex, but generally reflect the overall level of risk presented by a given type of transaction. Factors affecting interchange fees include the following:
- Card brand (Visa, Mastercard, American Express, etc.)
- Credit or debit card (PIN debit cards generally cost less than credit cards)
- Card type (rewards card, corporate card, other similar card types)
- Card-present vs card-not-present transactions
- Payment security features used (tokenization, encryption)
- Merchant Category Code (MCC)
What Does Interchange-Plus Look Like?
A properly formatted interchange-plus pricing example quote will look like this:
Interchange + X% (percentage-based markup)
+ $Y (fixed markup, or authorization fee)
Infinity Data’s markup is properly broken down into both its percentage-based and fixed-amount components. With most of our interchange-plus pricing plans, the markup is the same for all transactions, making it very easy to determine how much you’re paying to your provider and how much is going to the credit card companies on every transaction.
One thing to be aware of, it’s very common for merchant account providers to advertise the availability of interchange-plus pricing on their websites but provide quotes that only list the percentage-based markup and the fixed authorization fee. This is somewhat misleading, as you will always have to pay the relevant interchange fees in addition to your provider’s markup, and those interchange fees will make up the bulk of your overall costs. Infinity Data believes in complete transparency in all services we provide to our clients.
You should also understand that the interchange fees are set by credit card associations, and your provider has no control over them. Any sales agent who tells you that they can get you “discounted” interchange fees either doesn’t understand how these fees work or is simply not being transparent.
HOW DOES INTERCHANGE-PLUS COMPARE TO OTHER PRICING PLANS?
Interchange-plus pricing is one of four common methods of determining processing costs in use by the payments industry today. The other three methods are:
(1) Tiered pricing
(2) Flat-rate pricing
(3) Subscription (or membership) pricing
Let’s examine how it compares to the other pricing methods that you may encounter:
Interchange-Plus VS Tiered Pricing
The tiered pricing model is, unfortunately, still the most common one available, and the one most processors offer to their merchants.
Tiered pricing simplifies a large number of processing rates into three basic tiers: qualified, mid-qualified, and non-qualified. Which tier a particular transaction will fall into depends on a number of criteria, which are set by the processor. These criteria include things such as card-present versus card-not-present transactions, whether the transaction was processed on the same day it occurred, and which one of a host of possible categories the items purchased fall into.
Tiered pricing may seem tempting, because it simplifies a lot of variables into just three tiers, making your monthly statement much easier to decipher. Unfortunately, while the numbers may be easier to understand, they’ll often be higher than you were expecting.
Tiered pricing models make it impossible to tell how much of a processing charge is going to the issuing bank, the credit card associations ( AMEX, Visa, etc.), and how much is going to your merchant account provider. Tiered pricing also leads to a very deceptive marketing gimmick: the provider will advertise the lowest possible qualified rate, but most transactions won’t be qualified and will process at a much higher rate. Interchange-plus pricing is a better option for the following reasons:
- Provider markup is disclosed
- Interchange fees are passed through at cost
- PIN debit card transactions usually cost less than credit cards
- It’s generally less expensive overall
Interchange-Plus VS Flat-Rate Pricing
Flat-rate (or blended) pricing is similar to tiered pricing, but the three tiers are blended into a single flat rate for all transactions. (Note that almost all providers offering flat-rate pricing usually have different rates for card-present, online, and keyed-in transactions.) This rate is, naturally, quite a bit higher than what you’d pay under a tiered plan. However, the lack of a monthly fee can make it more affordable overall for small or seasonal businesses. With flat-rate pricing, provider markup is not disclosed and varies from one transaction to another. For high-volume merchants, interchange-plus pricing will be a better choice overall because:
- Provider markup is the same for all transactions
- Interchange fees are broken down on your monthly processing statement
- Debit card transactions are less expensive due to lower PIN debit fees
- Interchange-Plus is generally less expensive overall
Interchange-Plus VS Membership Pricing
Membership (or subscription) pricing is basically a variation of interchange-plus pricing, but with a few significant differences. You’ll still pay the interchange rates that go to the issuing banks and credit card associations, but instead of paying a percentage markup to your processor, you’ll pay a monthly membership fee and a fixed per-transaction charge. Depending on the nature and size of your business, this pricing model can potentially result in even lower overall costs than interchange-plus pricing. However, very few providers currently offer it. Subscription pricing can save a lot of money on processing costs for very high-volume merchants. However, interchange-plus pricing will still be a better alternative for everyone else for the following reasons:
- Interchange-Plus does not require a traditionally high, up-front monthly subscription fee
- Interchange-Plus costs less overall compared to membership pricing
