By carlislemerchantservices February 27, 2025
In the world of merchant services, businesses have various options when it comes to accepting payments from customers. One popular pricing model that has gained traction in recent years is interchange plus pricing. This article will provide a comprehensive overview of what interchange plus pricing is, how it works, its benefits and drawbacks, and how it differs from tiered pricing.
Additionally, we will explore the factors that affect interchange plus pricing rates and provide guidance on choosing the right interchange plus pricing provider.
Understanding the Basics of Interchange Plus Pricing
Interchange plus pricing is a transparent and straightforward pricing model used by merchant service providers to charge businesses for processing credit and debit card transactions. Unlike other pricing models, such as tiered pricing, interchange plus pricing separates the interchange fees set by card networks (Visa, Mastercard, etc.) from the markup charged by the merchant service provider.
The interchange fees are the fees paid by the merchant to the card networks for each transaction. These fees are determined by various factors, including the type of card used (debit, credit, rewards, etc.), the transaction method (swiped, keyed-in, online), and the risk associated with the transaction. The interchange fees are non-negotiable and are the same for all merchant service providers.
On top of the interchange fees, the merchant service provider adds their markup, which is usually a fixed percentage of the transaction amount plus a small per-transaction fee. This markup is where the provider makes their profit. With interchange plus pricing, the interchange fees and the provider’s markup are clearly separated, allowing businesses to see exactly how much they are paying for each transaction.
The Components of Interchange Plus Pricing
Interchange plus pricing consists of two main components: the interchange fees and the provider’s markup. The interchange fees are set by the card networks and are the same for all merchant service providers. These fees are typically expressed as a percentage of the transaction amount plus a small fixed fee.
The provider’s markup, on the other hand, is determined by the merchant service provider and can vary from one provider to another. This markup is usually expressed as a percentage of the transaction amount plus a small fixed fee. The markup covers the provider’s costs, such as customer support, fraud prevention, and technology infrastructure, and also includes their profit margin.
When a business processes a credit or debit card transaction, the interchange fees and the provider’s markup are added together to determine the total cost of the transaction. This total cost is then deducted from the transaction amount, and the remaining funds are deposited into the business’s bank account.
Benefits of Interchange Plus Pricing for Merchants
Interchange plus pricing offers several benefits for merchants. Firstly, it provides transparency and clarity in pricing. With interchange plus pricing, businesses can see exactly how much they are paying for each transaction, as the interchange fees and the provider’s markup are clearly separated. This transparency allows businesses to compare pricing between different providers and make informed decisions.
Secondly, interchange plus pricing can be cost-effective for businesses with high transaction volumes or large average transaction amounts. Since interchange fees are the same for all providers, businesses can focus on negotiating a competitive markup with their provider. This can result in lower overall costs compared to other pricing models, such as tiered pricing, where the provider has more control over the pricing structure.
Furthermore, interchange plus pricing provides flexibility for businesses. As the interchange fees are set by the card networks, businesses can be confident that they are paying the same fees as their competitors. This allows businesses to focus on negotiating a competitive markup and other value-added services, such as customer support and technology solutions.
Drawbacks and Considerations of Interchange Plus Pricing
While interchange plus pricing offers many benefits, there are also some drawbacks and considerations that businesses should be aware of. One potential drawback is the complexity of the pricing structure. Interchange fees can vary depending on various factors, such as the type of card used and the transaction method. This complexity can make it challenging for businesses to understand and compare pricing between different providers.
Additionally, interchange plus pricing may not be the most cost-effective option for businesses with low transaction volumes or small average transaction amounts. In these cases, the fixed per-transaction fee charged by the provider may have a larger impact on the overall cost compared to the interchange fees. Businesses in this situation may benefit more from a pricing model that focuses on lower per-transaction fees, such as tiered pricing.
Another consideration is the potential for rate increases. While interchange fees are set by the card networks and are the same for all providers, the provider’s markup can be subject to change. Providers may increase their markup over time, which can result in higher costs for businesses. It is important for businesses to review their pricing regularly and negotiate with their provider to ensure they are getting the best rates.
How Interchange Plus Pricing Differs from Tiered Pricing
Interchange plus pricing differs from tiered pricing in several key ways. Tiered pricing is a pricing model where transactions are grouped into different tiers or categories, and each tier has a set rate. These tiers are typically labeled as qualified, mid-qualified, and non-qualified, with qualified transactions having the lowest rates and non-qualified transactions having the highest rates.
Unlike interchange plus pricing, tiered pricing does not separate the interchange fees from the provider’s markup. Instead, the provider determines which tier each transaction falls into based on various factors, such as the type of card used and the transaction method. This lack of transparency can make it difficult for businesses to understand how much they are paying for each transaction and compare pricing between providers.
Furthermore, tiered pricing can be less cost-effective for businesses with high transaction volumes or large average transaction amounts. Since the provider has more control over the pricing structure, they can assign transactions to higher tiers, resulting in higher overall costs for the business. Interchange plus pricing, on the other hand, allows businesses to focus on negotiating a competitive markup and ensures that they are paying the same interchange fees as their competitors.
Factors Affecting Interchange Plus Pricing Rates
Several factors can affect interchange plus pricing rates. Firstly, the type of card used can impact the interchange fees. Debit cards typically have lower interchange fees compared to credit cards, as they are considered lower risk. Rewards cards, on the other hand, often have higher interchange fees due to the additional benefits and perks associated with these cards.
Secondly, the transaction method can also affect interchange fees. Swiped transactions, where the card is physically present, usually have lower interchange fees compared to keyed-in or online transactions. This is because swiped transactions are considered lower risk, as the cardholder is present and can verify their identity.
Additionally, the risk associated with the transaction can impact interchange fees. Transactions that are considered higher risk, such as those involving international cards or large transaction amounts, may have higher interchange fees. This is to account for the increased potential for fraud or chargebacks.
Lastly, the industry in which the business operates can also affect interchange plus pricing rates. Some industries, such as travel and hospitality, have higher interchange fees due to the higher risk associated with these businesses. On the other hand, industries with lower risk, such as grocery stores or gas stations, may have lower interchange fees.
How to Choose the Right Interchange Plus Pricing Provider
Choosing the right interchange plus pricing provider is crucial for businesses to ensure they are getting the best rates and service. Here are some factors to consider when selecting a provider:
1. Pricing Structure: Compare the markup rates and per-transaction fees offered by different providers. Look for providers that offer competitive rates and transparent pricing.
2. Contract Terms: Review the contract terms and conditions, including the length of the contract and any early termination fees. Ensure that the contract is flexible and aligns with your business needs.
3. Customer Support: Evaluate the level of customer support provided by the provider. Look for providers that offer 24/7 support and have a reputation for excellent customer service.
4. Technology Solutions: Consider the technology solutions offered by the provider, such as point-of-sale systems, online payment gateways, and mobile payment options. Ensure that the provider’s technology solutions align with your business requirements.
5. Reputation and Reviews: Research the provider’s reputation and read reviews from other businesses. Look for providers with a track record of reliability, transparency, and excellent customer service.
6. Additional Services: Consider any additional services offered by the provider, such as fraud prevention tools, reporting and analytics, and integration with other business systems. These value-added services can enhance your overall payment processing experience.
Frequently Asked Questions about Interchange Plus Pricing
Q1: How do interchange fees work in interchange plus pricing?
A1: Interchange fees are set by the card networks and are the same for all merchant service providers. These fees are determined by various factors, such as the type of card used, the transaction method, and the risk associated with the transaction. The interchange fees are added to the provider’s markup to determine the total cost of each transaction.
Q2: Can businesses negotiate interchange fees with the card networks?
A2: No, interchange fees are non-negotiable and are the same for all providers. Businesses can focus on negotiating a competitive markup with their provider to ensure they are getting the best rates.
Q3: Is interchange plus pricing suitable for small businesses?
A3: Interchange plus pricing can be cost-effective for businesses with high transaction volumes or large average transaction amounts. However, small businesses with low transaction volumes or small average transaction amounts may benefit more from a pricing model that focuses on lower per-transaction fees, such as tiered pricing.
Q4: Can interchange plus pricing rates change over time?
A4: While interchange fees are set by the card networks and remain the same, the provider’s markup can be subject to change. Providers may increase their markup over time, which can result in higher costs for businesses. It is important for businesses to review their pricing regularly and negotiate with their provider to ensure they are getting the best rates.
Q5: Can businesses switch from tiered pricing to interchange plus pricing?
A5: Yes, businesses can switch from tiered pricing to interchange plus pricing. However, it is important to carefully review the terms and conditions of the existing contract and consider any early termination fees before making the switch.
Conclusion
Interchange plus pricing is a transparent and straightforward pricing model that separates the interchange fees set by card networks from the markup charged by the merchant service provider. This pricing model offers transparency, flexibility, and cost-effectiveness for businesses with high transaction volumes or large average transaction amounts.
However, businesses should carefully consider the complexity of the pricing structure, potential rate increases, and their specific business needs before choosing interchange plus pricing. By understanding the basics of interchange plus pricing, considering the factors that affect pricing rates, and selecting the right provider, businesses can optimize their payment processing and ensure they are getting the best rates and service.