What merchants need to know about Interchange Plus Pricing.

What merchants need to know about Interchange Plus Pricing.

When you’re looking for a merchant services provider, you of course want to find the lowest credit card processing rates possible. Trying to make sense of different fee structures can be confusing. Interchange Plus Pricing provides a more transparent, straightforward option, though it might not always be the most cost-effective. Here’s how to decide if it’s the best choice for your business.

Credit card processing fee structures.

While payment technology companies charge credit card processing fees in various ways, with every transaction you’ll pay a small fee to the card association (Visa, Mastercard, etc.), the bank who issued the credit card, and the merchant services provider.

Interchange Plus Pricing is one of four common fee structures. You may also come across:

  • Tiered pricing, a model in which transactions are classified as either qualified, mid-qualified, or non-qualified depending on the perceived level of risk. Processors set criteria for each level and usually advertise the lowest “qualified” rate. It can be hard to estimate costs on a tiered plan because the product category, the type of transaction, and even the date of processing can determine the category a transaction falls in.
  • Flat pricing, also called blended pricing, combines fees from all three tiers into one flat rate. You pay only this rate per transaction with no other monthly fees or payments. Although it’s more straightforward than tiered pricing, this option can make overall transaction costs higher.
  • Subscription pricing involves paying a flat monthly fee plus a fixed charge for each transaction.

With any of these pricing models, you should expect to pay additional fees for chargebacks, batch processing, or non-sufficient funds.

Interchange Plus Pricing: the details.

How is Interchange Plus Pricing more transparent? This structure breaks transaction charges down into interchange fees and markup, allowing you to see exactly how much you’re paying each party involved.

What is an interchange fee?

Issuing banks and credit card associations need to make money, so they charge merchants a non-negotiable transaction fee known as an interchange fee. This is made up of the bank’s interchange rate and the card association’s assessment fee, and is expressed as a percentage of the total transaction. The amount varies based on the card brand and type, the way transactions are processed, and your industry’s risk level.

Interchange fees change over time. You can find the latest fees on the card associations’ websites or you check with your credit card processor.

Why the “plus” fee?

The company providing your merchant services also has to turn a profit. This is where the “plus” in Interchange Plus Pricing comes in. You’ll see it expressed as a percentage of the transaction with a small per-transaction fee.

Markup is blended into tiered and blended pricing structures and included in subscription pricing, so it’s still there even though you don’t see it outright. In the Interchange Plus Pricing model, you can see exactly what your service provider charges.

How does this help you choose a processor? While interchange fees are the same across the board, the markup differs between service providers. 

Why do transaction fees differ?

Several factors influence the total cost of a transaction when it comes to Interchange Plus Pricing:

  • Card-present transactions have lower fees than card-not-present transactions, because there is less risk of fraud. 
  • Each card association charges different assessment fees.
  • Debit cards are cheaper to process than credit cards.
  • Business and premium credit cards cost more to process than standard.

This is where it can get tricky for your bottom line. If most of your customers pay with debit cards, you’ll lose less of each sale to fees. However, your cash flow could suffer if you sell mostly to other businesses or customers with luxury credit cards.

How to compare credit card processors.

Should you choose a processor simply because they offer the transparency of Interchange Plus Pricing? It depends. The Interchange Plus Pricing model does make it easier to compare services because you can clearly see how much markup each provider charges. However, you never want to sacrifice customer experience in favor of low prices. You also can’t put yourself in a position where most of your profits wind up going toward fees. Ultimately, a lot goes into the decision of which merchant services provider to partner with so be sure to do your research. 

What’s the best way to find the lowest card processing rates?

The solution to this dilemma lies in something called the “effective rate.” This shows the percentage of your total sales volume going toward fees in any pricing model. You can figure out your current effective rate by adding up gross fees and sales for a given period of time and dividing the fees by the sales. Multiply the result by 100 to get the percentage. You can then compare other processors’ pricing using this percentage as a baseline.

The benefit of determining your effective rate is the percentage takes into account all fees, not just what you pay per transaction. This allows you to figure out the total cost of using a particular card processor instead of relying only on the Interchange Plus rate for your comparison. Average effective rates run between 2.9% and 3.3%.

What other features are important?

In addition to a competitive effective rate, your service provider should also offer low-cost hardware and a user-friendly interface. If you sell online as well as in a physical store, look for ecommerce tools you can integrate seamlessly into your website. A virtual terminal is also useful for taking orders over the phone or through the mail. 

Ultimately, you’ll want to choose a merchant service provider who offers a low effective rate, allowing you to accept credit cards without significantly curtailing your cash flow. Because Interchange Plus Pricing breaks down fees to show what the provider charges on top of interchange rates, it’s easier to compare options and see where you can find a better deal. Aim for a balance between fair pricing and usability to minimize the amount of profit lost to fees while providing an optimal customer experience.