What is Interchange Plus Pricing? Everything You Need to Know

What is Interchange Plus Pricing? Everything You Need to Know

It’s no secret that consumers today value the convenience of credit card payments. The use of cash has been declining steadily for years — a trend that has accelerated during the pandemic.

Clearly, being able to accept credit card payments is no longer optional. But as many businesses know, taking credit card payments comes with a price. The rates that you’ll pay as a merchant will vary depending on your processor, though an important determining factor for your rates is the pricing model of your payments vendor.

In this post, we’ll shed light on the ins and out of interchange plus pricing, one of the most common pricing models in the real of credit card processing.

Read on to learn more about interchange plus and how it compares with other pricing models.

What is interchange plus pricing?

Interchange plus is used to describe a pricing model in which the credit card processor breaks down the fees that go to the bank or credit card issuer and the processor’s markup.

Compared with other merchant account pricing models (which we’ll touch on later), interchange plus offers more transparency because the credit card processor outlines the markup that it charges on top of the credit card issuer’s fees.

Interchange plus pricing explained

To fully understand interchange plus pricing, you need to be aware of the elements that make up the fee. There are two main components of interchange plus pricing:

  1. Interchange – First is the interchange, which is the fee that comes directly from the card networks. In other words, these are the fees charged by companies like Visa and Mastercard.  Payment processors do not control these rates, and every merchant is required to pay the interchange.
  2. Plus – The “plus” in interchange plus pricing is the markup that your credit card processor is charging on top of the interchange fee. This cost comes in the form of a percentage fee and a transaction cost.

So, when a credit card processor uses an interchange plus pricing model, it means that they’re charging a fixed markup on top of the card issuer’s fees. These rates are typically expressed as the interchange fee plus the markup.

Generally, interchange plus pricing is more favorable for small businesses compared other with pricing models such as tiered pricing and blended pricing. This is because interchange plus is not only more transparent, but businesses usually end up paying lower processing costs with this model.

Here’s how interchange plus stacks up compared with other common pricing models.

Interchange plus pricing vs. tiered pricing

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Tiered pricing is the most common pricing model when it comes to credit card processing. This model simplifies your fees by breaking them down into three main tiers — qualified, mid-qualified, and non-qualified.

Transactions that fall under the qualified category have lower fees attached to them, while your processor will charge your higher rates for non-qualified transactions. The nature of a transaction will determine the category in which it belongs. For example, debit cards and non-reward credit card transactions typically fall under the qualified rate, while transactions involving corporate cards, higher rewards cards, and card-not-present transactions would be under the non-qualified category.

According to Value Penguin, the rates across qualified, mid-qualified, and non-qualified transactions can range from 1.4% to over 4%, depending on the category.

Since your transactions are categorized into 3 main tiers, this pricing model makes your statement easier to read and understand. But there’s a major downside: unlike interchange plus pricing which displays the processor’s markup, the tiered pricing model lacks transparency when it comes to your fee breakdown.

As Merchant Maverick puts it, “Tiered pricing models make it impossible to tell how much of a processing charge is going to the issuing bank, the credit card associations (i.e., Visa, MasterCard, etc.), and how much is going to your merchant account provider.”

The result? You typically end up with a higher-than-expected credit card processing bill.

There’s another reason why this model is problematic. Many credit card processors would only advertise their lowest possible rates (i.e., the “qualified” rate) to entice businesses. The merchant is then lured to their services thinking that they’ll be paying lower fees when in reality, most of their transactions would fall under the non-qualified tier and thus would incur higher charges.

Interchange plus pricing vs. flat or blended pricing

Blended pricing (aka flat rate pricing) is the easiest model to understand because you pay a fixed rate for all types of credit card transactions. So, whether a customer is paying with a debit, credit, or premium rewards card, the merchant will have a flat fee for all these transactions.

That said, while this model charges a flat rate for all card types, higher fees could apply depending on the nature of the transactions. Card-not-present payments, for instance, may incur higher fees.

This pricing model is certainly more favorable than tiered pricing, though you may still end up overpaying particularly if most of your customers use debit cards.

Interchange fees

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A common question on the topic of interchange pricing is how much are the interchange rates? There’s one “right” answer to this because the interchange is calculated based on how much it costs to process specific cards. As we discussed in our post on interchange rates, basic credit cards (e.g., those without rewards or bells and whistles) are less expensive to process, while cards that come with miles and cashback have higher interchange fees.

And it’s not just about card types. The following are also factored into the interchange fee:

  • Whether the card swiped or keyed in
  • The transaction size
  • Whether or not the card is a member of a rewards program

That said, if you’re looking for some benchmarks here are some general interchange fees from the top card networks:

Visa

Swiped transactions: 1.65 percent + $.10 to 2.3 percent + $.10

Keyed transactions: 1.8 percent + $.10 to 3 percent + $.10

(Keep in mind that these fees are set to increase in the near future)

Mastercard

Swiped transactions: 1.6 percent + $.10 to 2.5 percent + $.10

Keyed transactions: 1.9 percent + $.10 to 3 percent + $.10

(Keep in mind that these fees are set to increase in the near future)

Discover

Swiped transactions: 1.6 percent + $.10 to 2.3 percent + $.10

Keyed transactions: 1.9 percent + $.10 to 2.4 percent + $.10

American Express

Transaction charges range between 2.5 to 3.5 percent

Finding the right interchange plus deal

Everything You Need To Know About Interchange Plus Pricing Featured

Now that we’ve established the advantages of interchange plus over other pricing models, let’s talk about how to find the right interchange plus deal or setup for your business.

Remember that not all interchange plus deals are created equal. Some processors tack additional charges such as monthly statement fee, monthly PCI fee, surcharges, etc., and you need to be aware of these costs before signing on the dotted line.

Run the numbers

The most important step you can take when determining the right interchange plus deal is to do the math. If you’re already signed up with a credit card processor, look at your statement and calculate your effective rate.

Figuring out your effective rate shows you how much you’re actually paying overall. Once you know your effective rate, you’ll be able to make an informed decision about which interchange plus deal is actually the best one.

Here’s how to figure it out:

Step 1. Identify the total amount of fees charged by your credit card processor

Step 2. Find your total amount of credit and debit card transactions.

Step 3. Divide the total number of fees charged by the total amount of credit/debit sales. Once you get the answer, move the decimal two places to the right. This is your effective rate.

Here’s an example:

total amount of fees charged by your processing company: $325

Your total amount of credit/debit card sales: $17,300

325/17,300= 0.018786

Now,  move the decimal two places to the right: 1.8786%. If we round up, the effective rate is 1.88%

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If you’re still shopping around…

It’s a little trickier to calculate your effective rate when you aren’t signed up with a processor yet. Since you aren’t currently processing with them, you will have to use some averages which means your effective rate will be an estimate.

Here’s the info you need to gather:

  1. Your total amount of credit/debit card sales–use your last months total or the average monthly total you sell __________
  2. Find the interchange plus deal they are offering to you (interchange + ?%) ____________
  3. Add up all of the monthly fees you would be charged (i.e. monthly fee, equipment lease, statement fee, etc.) _________
  4. Find the per transaction cost and multiply it by the number of transactions you usually do per month  _________

Now that you have all of those blanks filled in,  you’re ready to do your calculations.

Step 1. You’ll need to take your info from B and figure out your dollar amount. To do this, multiply your total sales times the decimal value of your total interchange plus percentage.

The average interchange rate is 1.5%, so whatever the “plus” that they’re offering is added to the 1.5%. Don’t forget to make the percent a decimal when you multiply it by your sales.

For example:

your sales = $15,000;

interchange plus offer = 1.5%+0.36%  

15,000 x .0186 = $279

Step 2. Add up the dollar amount you just found in step one to the dollar amounts you filled in the blanks on C  and D.

Step 3. Divide the dollar amount you just found in step 2 by your total monthly credit/debit card sales. This will give you your estimated effective rate for the interchange plus deal you are looking into!

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Consider memberships as an alternative to interchange plus pricing

If you have a hard time swallowing the traditional interchange plus pricing fees, then you should consider processors that charge membership fees instead of markups (Stax Payments is a good example).

While these types of processors may technically fall under the interchange plus model, the “plus” component of their fees are actually membership costs.

So rather than charging you an interchange fee + markup for every transaction, you only have to pay for a flat membership fee every month.

Membership-based processors such as Payment Depot don’t take a cut out of your sales. You get direct access to interchange with no added percentage markup, and this typically means lower overall costs.

Think of it as Costco for payment processing.

Costco’s business model serves as a great analogy for how membership pricing works. Costco sells merchandise at wholesale rates (i.e., without the high markups) and then passes along those savings to the customer in exchange for an annual membership fee.

Similarly, companies that provide membership-based pricing offer members wholesale credit card processing rates — i.e., fees that are charged by the credit card issuers. Instead of taking a percentage out of a merchant’s sales, these companies earn revenue through flat membership fees. The downside is the monthly membership fee.

Bottom line

Highest Rated Payment Processor In The Market

Minimizing your credit card processing costs requires doing your research and crunching some numbers, but the effort is well worth it. Hidden charges and markups can cost you hundreds of dollars per month, and as a small business, those are expenses that you’re better off reinvesting in your company.

So take the time to evaluate your options around credit card processors and see to it that you’re getting the best deal possible. Interested in us doing the work for you? We can provide you with a no-cost quote and comparison of the rates you would pay under different plan types and guide you to what would be the most cost-efficient for your business.


FAQs about Interchange Plus Pricing

Q: What is interchange plus pricing?

Interchange plus pricing describes a pricing model in which the credit card processor breaks down the fees that go to the bank or credit card issuer and the processor’s markup. It offers more transparency as businesses can see the markup charged over the issuer’s fees.

Q: What are the main components of interchange plus pricing?

There are two main components; the interchange, which is the fee from the card networks such as Visa and Mastercard, and the “plus,” which is the markup that the credit card processor charges on top of the interchange fee. This comes as a percentage fee and a transaction cost.

Q: How does the interchange plus pricing model compare with the tiered pricing model?

Tiered pricing is another common pricing model for credit card processing, simplifying fees into three main tiers; qualified, mid-qualified, and non-qualified. However, it lacks transparency and merchants can end up with higher than expected processing bills.

Q: How does the interchange plus pricing model compare with flat or blended pricing?

Flat or blended pricing charges a fixed rate for all types of credit card transactions, but higher fees could apply depending on the nature of the transactions. While it’s simpler, businesses may still end up overpaying particularly if most customers use debit cards.

Q: What are interchange fees?

Interchange fees are the fees that come directly from the card networks, like Visa and Mastercard. They are charged on every transaction and every merchant is required to pay these. Factors such as the type of card, the size of the transaction, and whether or not the card is part of a rewards program, can influence the interchange fee.

Q: How can one find the right interchange plus deal?

Not all interchange plus deals are equal. Consider the price you’ll be offered and any additional charges such as monthly statement fees, monthly PCI fees, and surcharges. Do the math by looking at your statements and calculating your effective rate to understand what you’re actually paying overall.

Q: What is the concept of memberships as an alternative to interchange plus pricing?

Membership-based processors offer an alternative where instead of charging an interchange fee + markup per transaction, merchants are charged a flat membership fee every month. Hence, instead of taking a cut from sales, such businesses earn revenue through flat membership fees, much like Costco’s business model.

Q: What are the important steps to minimize credit card processing costs? 

Minimising credit card processing costs requires research and number crunching. Avoid hidden charges and markups that could be costing you hundreds of dollars per month, evaluate your payment processing options, and ensure that you’re getting the best possible deal.


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