Everything You Need to Know About Interchange-Plus Pricing

August 18, 2020

As an entrepreneur looking to introduce cashless payments, there’s only a small chance that you still haven’t heard about the interchange-plus pricing model. But what does that exactly mean, and should you choose a payment processor that uses that model? We’ll explain all of that so you can figure out whether this model is the right one for your business or not.

For your business to stay competitive, you must accept as many payment methods as possible. That, of course, includes the evergrowing cashless solutions as well. But searching for a good payment processor and deciding which one is the best for you depends on many factors. One of them is the pricing model.

What Types of Pricing Models Exist?

The pricing model is something that determines how the processing fees are charged. The general types are tiered, subscription, flat (or blended), and interchange-plus pricing. Your merchant processing company will offer you one of these types and calculates your rate accordingly. Let’s go over each of them in a bit more detail:

  • The tiered model is a rarely used one that breaks down your monthly statement to an understandable level. Even though it’s easy to comprehend, it’s far from the cheapest one. The tiering model makes it impossible to tell how much goes to the bank, the credit card associations (like Mastercard or Visa), and what belongs to your merchant service provider. This model has three tiers (or groups), depending on the risk factor. Qualified tier is the cheapest one with the lowest risk factor, while mid and non-qualified tiers are more expensive. Merchant service providers tend to qualify the majority of cards as non-qualified (the most expensive rate) so that they can achieve maximum profit.
  • Flat or blended model is similar to tiered, but it doesn’t feature tiers, but a blended single flat rate that’s always the same.
  • Subscription or membership model charges you a monthly membership fee and a fixed fee per transaction, instead of a percentage markup that you would pay to your processor.
  • Interchange-plus is the one that provides you the most transparent charges and lower rates, which makes it highly suitable for small and up-and-coming businesses.

Simply Put – What Is Interchange-Plus Pricing?

This is a model that credit card processors use to determine the cost that is paid per transaction. It allows merchants to see how their costs vary when customers use different types of credit cards. It consists of two elements:

  • “Interchange” is a percentage of what needs to be paid to the issuing bank and the credit card association like Visa or Discover. An interchange fee is determined by the card network, and it varies from one card to another. You can look at it as a wholesale price of a credit card transaction.
  • “Plus” is a markup that your credit card processor sets and charges for processing a transaction. It’s what needs to be paid on top of the interchange costs, and that way, it covers the costs and creates a profit for the processor.

How does it work? For example, if you sold someone a pair of jeans for $100, you didn’t buy them for $100 from the manufacturer. You bought them at a wholesale price, and then you added a markup. The same exchange is carried out with your merchant service provider, or a processor.

The scheme that this model uses is very balanced, and it’s one of the most transparent and fairest ones in the industry. There’s one more thing – if you choose to sign up for this, you can expect assessment fees as well under certain circumstances. Discover, and American Express have fewer assessment fees than Visa and Mastercard.

Those that provide credit card processing services and offer interchange pricing offer you to see how much different processors charge because they display their prices as “interchange + markup” which varies from one business to another. A high-risk merchant account, for example, has to pay a higher markup than other businesses.

A Small Business Saves Money By Using This Model

Small businesses usually prefer this scheme of pricing instead of blended or tiered. That’s not only because of the transparency but also because of the small or hidden costs. When a merchant decides to use interchange-plus, they usually end up paying lower rates. The cost of the processing when using this model will depend on the markup, and the hidden fees and surcharges are eliminated, which means that you won’t be paying any more than you should.

Why Else a Small Business Owner Goes for Interchange-Plus Pricing?

It’s one of the most desirable forms of the merchant account pricing, some might even say the best. Merchants like it because it allows them to see if they are being scammed and what is the profit from the transaction that’s being made. They also like it because it guarantees fairness.

Interchange Plus Isn’t Necessarily a Solution to a High Credit Card Processing Fee: It’s a Possibility

Some merchants might think that this model is an excellent solution if they have high card processing fees, but unfortunately, it’s not true. There’s no guarantee that interchange-plus will yield competitive fees. Nevertheless, it is the best one because it treats cards separately, which means there are different prices for every single one.

Flat Rate May be the Simplest Option for Newcomers, But Interchange-Plus is the Best Chance for Growth

Brand new merchants might find flat-rate processing to be the best solution. The reason behind that is that you will always know how much you are paying – all transactions will cost you the exact same percentage and transaction fee, regardless of the wholesale cost. If you find yourself in a situation where you’ve just opened a store, and you have zero experience, know that it’s best to play safe, simple, and free of worries. Still, there is a problem with this model – you will almost always overpay for the service because most wholesale rates are really low.

On the other side, if you wish to develop your business and you search for the most optimal solution, it’s best to go with interchange. That will give you security and full control over the merchant service and its rates.

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