Interchange Plus Pricing

What is Interchange Plus Pricing?

Interchange plus pricing is a credit card pricing structure that clearly displays the difference between a payment processor’s unique markups and the wholesale credit card processing fees every merchant has to pay. The transparency of interchange plus plans allows businesses to closely monitor their processing costs each month and take concrete steps to keep those costs low.

Note that interchange plus pricing is only available to merchants who apply for a dedicated merchant account with a payment processor. Merchants processing payments through a payment aggregator (like Square or Stripe) will be limited to flat rate pricing plans.

How Interchange Plus Pricing Works

Interchange plus pricing works by passing a payment processor’s wholesale costs directly to merchants instead of bundling those fees with the processor’s markups and other service fees.

These wholesale costs include:

• Interchange rates and fees set by the credit card networks but paid to the banks that issued your customers’ credit or debit cards. Interchange fees apply to individual transactions and vary widely depending on the details surrounding the transaction.
• Assessments or card brand fees paid to the credit card networks like Visa and MasterCard.

These fees are included in the “interchange” component of the term “interchange plus.” The “plus” part is the rate markup and other service fees your payment processor adds into the mix.

Interchange Plus Pricing in Action

Suppose you’re on an interchange plus plan and two customers make $20 purchases using Visa debit cards with an interchange rate of 0.05% + $0.21. Your total interchange costs for the two transactions would be 44 cents or 0.05%($40) + $0.21(2) = $0.44.

That 44 cents is only part of your transaction costs. The other part is your payment processor’s rate or markup. Let’s imagine that rate is interchange + 0.30% + $0.08. Your processor’s rate would then tack on 28 cents or 0.30%($40) + $0.08(2) = $0.28. The combined total of 72 cents is your real transaction cost in this scenario and amounts to 1.8% of your $40 in sales.

Other scenarios will generate different overall costs because the processor’s markup will stay the same while the interchange rate fluctuates. You’ll pay more when the interchange fee is higher. You’ll pay less when the interchange fee is lower. It’s that simple.

Interchange-Plus vs. Flat-Rate Pricing

Flat rate pricing plans apply one or more set rates to every credit or debit card payment you receive—often a lower rate for card-present transactions and a higher rate for card-not-present transactions. This means flat rate pricing always appears simpler than interchange plus pricing on the surface because there aren’t a lot rates and fee categories to dig through on your merchant statements.

That simplicity is an illusion. Payment processors that use flat rate pricing plans still have to cover their wholesale costs because the interchange rates and card brand fees in the background don’t disappear. The processor simply sets the flat rates high enough to cover these costs. That’s largely why flat rate pricing models are more expensive than interchange plus pricing for most businesses.

Interchange-Plus vs. Tiered Pricing

Tiered pricing is a lot like flat rate pricing. Tiered pricing works by categorizing transactions into various rate tiers or “buckets” (usually three) and charging different fees for each type. So-called “qualified” transactions get the lowest rates. “Mid-qualified” transactions bring higher rates. “Non-qualified” transactions bring the highest rates of all.

Note that the processor defines the rate categories and decides which transactions fall into which category. Card-present transactions involving ordinary consumer cards might be “qualified.” Rewards cards might be “mid-qualified.” Online card-not-present transactions might be “non-qualified.” The variations don’t stop there and won’t always be consistent from processor to processor.

We aren’t fans of tiered pricing in general and don’t recommend it. Tiered pricing is usually more expensive than interchange plus pricing, and it’s always more opaque. In our view, that’s reason enough for most merchants to get an interchange plus pricing plan if they qualify.

Is Interchange Plus the Cheapest Pricing Model?

Interchange plus pricing is usually the cheapest pricing plan for merchants, but that isn’t always true. Hobby-sellers and other low-volume businesses often benefit more from flat rate pricing because they don’t generate enough sales each month to justify paying the monthly fees most traditional merchant account providers charge for interchange plus plans.

That said, the key to saving money on payment processing in the long run is understanding how your costs work and adjusting your business practices to lower those costs as much as possible. Neither flat rate nor tiered pricing plans allow you to do that because they conceal the relationship between the processor’s fees and the processor’s wholesale costs.

In the payment processing game, in other words, simplicity (usually) = you pay more. That’s why we typically recommend interchange plus pricing to the bulk of our clients, large or small.

Put differently:

• We never recommend tiered pricing because it’s usually more expensive than other pricing models and always conceals how your costs work.
• We’ll occasionally recommend flat rate pricing for merchants who don’t generate enough sales to justify getting an interchange plus pricing plan.
• For everyone else—businesses large or small—we think interchange plus pricing is the best option. That’s why we focus on interchange plus pricing when we negotiate low-cost merchant agreements for our clients.