What is interchange plus pricing?
Here's the boring technical answer:
Interchange plus pricing for credit card acceptance is where a merchant service provider's fee is added to Visa, MasterCard or Discover's actual rate for each transaction. This price model is the most transparent form to utilize when processing credit cards.
Here's the plain English answer:
Now that we have that out of the way, here's a better explanation with a clear example that will help you to visualize why interchange plus is an inexpensive, transparent way to process credit cards.
Before we get into the details of how the pricing works, make sure that you're comfortable with your understanding of exactly what interchange is. If you're not sure, or you'd like a refresher – take a look at interchange reimbursement fees the section below.
On an interchange plus pricing model, a fixed markup in the form of a percentage (or basis points) is added to the actual interchange rate for a given transaction. This ensures that the same markup is applied to all transactions.
There are no mid-qualified or non-qualified surcharges on an interchange plus pricing system because all transactions are charged at cost with a flat markup.
Most merchant service providers offer interchange plus pricing but they may not advertise it because it's not as profitable as tiered or enhanced recover reduced (ERR) models. When searching for a merchant service provider that offers this type of pricing, be sure to ask for it specifically.
What are interchange reimbursement fees?
Interchange reimbursement fees are the underlying rates and fees on which all credit card processing charges are based. Think of these fees as the wholesale rates and fees for processing credit cards.
Interchange fees are set by Visa and MasterCard and can be updated or changed twice yearly in April and October. There was a time when they were kept under lock and key and weren't visible to the public, but these days they're public knowledge and can be downloaded directly from Visa and MasterCard's respective websites by following these links:
When a merchant accepts a credit card as payment from a customer, they pay something called merchant discount to their merchant service provider. Merchant discount is a fancy industry term that's used to refer to the collective fee that a business pays when they accept a credit card.
The merchant discount fee is comprised of the provider's fee, Visa and MasterCard assessments and other fees – but the bulk of it is the interchange reimbursement fee.
It's easiest to explain interchange by describing how money moves around during a credit card transaction. When a customer uses their credit card to pay for products or services, the bank where the business has their merchant account has to pay the issuing bank of the customer's credit a fee.
The fee that the merchant's bank must pay the issuing bank varies depending on the type of card that the customer used (I.E. - corporate card, rewards card, etc.) and also on how the transaction was processed (I.E. swiped through a machine, taken via the Internet, etc.).
There are currently over 500 different fee categories between Visa, MasterCard and Discover. The sheer number of categories is enough to intimidate even the most seasoned merchants – but you don't need to be an expert on the subject to understand enough to help save yourself a lot of money of credit card processing.
Interchange reimbursement fees are largely based on risk and cost. The more risk associated with a transaction – the greater the fee will be. The more expensive a transaction is for the issuing bank of the customer's credit card (rewards cards) – the greater the fee will be.
For example, a merchant would obtain the lowest interchange fee for a transaction where they swiped a customer's debit card through their terminal. A swiped debit card transaction, called signature debit, is a low risk transaction because the customer and the card were present and because a debit card is being used, funds are known to be available in the cardholder's account.
On the opposite end of the spectrum would be a card-not-present (Internet, mail-order) corporate rewards card transaction. This type of transaction would be charged at the highest interchange category because there is more risk involved, the card being used is expensive for the issuing bank (rewards) and it's not a personal card.
Business type also has an impact on interchange reimbursement fees. Take a look at the links above and you'll see special categories for supermarkets, gas stations and business that typically have small-ticket sales. These special interchange categories exist because the profit margins in these businesses are typically very low and can't support higher fees.
Is interchange really the best?
Yes. Interchange plus pricing is the most transparent and potentially inexpensive merchant account pricing model. I say potentially inexpensive, because the costs associated with interchange plus pricing depend on the provider's markup. Interchange plus rates are the most transparent form of pricing because the provider's markup is consistent and is always added to actual interchange rates and fees.
A common comparison is that of interchange and tiered merchant account rates. On a tiered model, it's virtually impossible to tell what you're paying in fees because the provider can control which transactions fall into the more expensive mid and non-qualified surcharge categories. These categories don't exist on an interchange model, and all transactions are charged at actual cost plus the provider's markup.
Important:
When comparing merchant accounts on an interchange plus pricing model, don't become fixated on the provider's interchange markup. There are many different ways that providers can make money from merchant accounts. Becoming fixated on the interchange markup can cause you to miss other inflated charges such as monthly fees, transaction fees and cancellation fees.
Always look at the big picture when comparing merchant accounts. Never ask a provider what their rate is. Their interchange markup only accounts for a portion of total processing charges. Instead, give them a copy of your recent processing statement and ask them to tell you exactly how much their proposed rates and fees would cost opposed to what you're currently paying.
How do I know if I already have it?
The easiest way to tell if you already have interchange plus pricing is to look at your monthly credit card processing statement. If you see the terms mid-qualified or non-qualified, you don't have interchange plus pricing. If you see a bunch of acronyms like CPS and EIRF, you probably have a form of interchange plus pricing.
There are different ways to portray an interchange plus pricing model on a merchant account statement. Calling and your existing merchant service provider and asking them what type of pricing your merchant account is based on is also a sure-fire way to determine your rates and fees.