Everything You Need to Know About Interchange-Plus Pricing

If you’re shopping around for a credit card processor then you’ve likely come across interchange-plus pricing. This is a term that’s 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.

If you’re leaning towards a payment processor that uses interchange pricing, read on. In this post, we’ll take an in-depth look at what interchange-plus pricing entails and whether or not it’s right for your business.

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 issuer. 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 — e.g., 2.1% + $0.10 per transaction.

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

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. fixed or blended pricing

Blended pricing (aka fixed 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.

Finding the right interchange-plus deal

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%

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!

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 (Payment Depot 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.

Bottom line

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.

Need help doing that? Get in touch with the Payment Depot team — we’re happy to assist you.