Interchange Plus Pricing: Transparent Fees on Merchant Accounts
The cost of credit card processing seems complicated, but this post outlines the different payment structures for merchant services. We’ll cover traditional TIERED merchant account rates, as well as INTERCHANGE PLUS pricing, the differences between the two, and our recommendations for finding a transparent pricing structure that works for you and your business.
Tiered Pricing: An Attempt To Keep Things Simple
In an effort to simplify the pricing system for credit card processing, many merchant account providers have established a system of “tiered pricing,” in which transactions are typically sorted into 2 or 3 categories (or tiers) based on the type of card, the type of transaction, and other traits. Each tier has a flat pricing rate assigned to it. These are usually called “Qualified Discount Rate, Mid-Qualified Discount Rate, & Non-Qualified Discount Rates,” and an example of this pricing would be 2.39%, 3.39% and 3.89%, respectively. In grouping transactions into tiers, the complexity of interchange rates is simplified, but the transparency of the pricing is lost. Under the tiered system, many merchants are left wondering why some transactions don’t meet the criteria for the lower discount rate (tier).
Read our full length blog article about this pricing structure HERE.
Interchange Plus Pricing: Making Payment Processing As Transparent As Possible
We truly believe that INTERCHANGE PLUS pricing offers the most transparent pricing available to merchants. This pricing structure also has the potential to save you a considerable amount on your merchant account rates.
SET RATES BY VISA AND MASTERCARD
Each year (usually two-three times), Visa and MasterCard set processing “buy rates.” Processors, or the acquiring banks must pay these rates in order to process your customers transactions. Interchange therefore is the “cost” charged to your processing bank by Visa or MasterCard to process each transaction. Any merchant can view these interchange rates online, as these numbers are fixed and are the same for all processors.
WHAT FACTORS DETERMINE INTERCHANGE FEES?
The interchange fee is determined by a number of factors, and there literally are several dozen different card types with hundreds of possible transaction fee rates. This maze of transaction types led to the tiered pricing system, simply because understanding interchange plus pricing can tax even the sharpest accountant!
With interchange plus pricing however, there is no categorizing of transactions. The “transparency” here is that the same interchange rate set by Visa & MasterCard, is “passed through” directly to you the merchant, by the processing bank & itemized on your merchant account statement. As such, your monthly statements will grow by a few pages if you switch from tiered rates to interchange plus pricing! But, you can now easily see the “buy rates” based on basis points that the bank was charged by Visa & MasterCard. Of course, the processing banks exist to make a profit, and do carry considerable risk in underwriting your business as well as costs in servicing your account, so in addition to the interchange rates passed through to you, a flat % and transaction fee is charged by the processing company to cover the costs and risks associated with facilitating the transaction. Voila! This explains the “PLUS” in the phrase “Interchange Plus Pricing.”
Now that the merchant can easily see what the processing banks “costs” are (the interchange rates) and what the processing banks “profits” are (the flat % and transaction fee), the merchant can now easily & transparently see the processing bank’s markup for their services and assuming the risk for underwriting the merchant’s business. The merchant cannot be charged more for a transaction simply by dropping it into a less-qualified tier with a higher rate, because the exact interchange rate set by Visa & MasterCard is used to determine the transaction charge, and the flat % and transaction fee in addtion to interchange from the bank is not variable.
WHY IS INTERCHANGE PLUS PRICING MORE TRANSPARENT?
“Interchange Pass Through” (also known as “Cost Plus” pricing) was originally only offered to bigger companies that processed large volumes of credit transactions, as processors needed to worry less about the profit they would make from each individual transaction. Now interchange plus pricing is becoming more widely available to merchants regardless of their transaction volume (some restrictions still can be found to exist), leveling the playing field and making smaller businesses more able to compete with industry giants. When the cost of the transaction is passed directly on to the merchant rather than being obfuscated by an inflated tier system, merchants can be confident that they are getting the best rate possible for transaction processing.
With a merchant account statement that makes it clear where each charge is coming from, it’s easier to identify the necessary costs and separate out the bank’s fees, which are often more negotiable. The transparency of interchange plus pricing reinforces the merchant’s confidence and trust in their account provider, that the rates being charged for their transactions are fair.
IF INTERCHANGE PLUS PRICING IS MORE TRANSPARENT, WHY DO SOME PROCESSORS PREFER TIERED PRICING?
It’s the 21st century! That means your customers expect that you and your business will accept credit and debit cards. Whether you conduct business at a brick-and-mortar store, over the phone, online or some combination of the above, we know your Merchant Account is important to the day to day operation of your business.
If you are interested in additional information or working with a dedicated account manager, get in touch! We’re experts on interchange plus pricing and are happy to help.