Running a business and receiving payments means paying various transaction charges. You can make them less of a chore by choosing the payment model that best fits your needs.
The interchange-plus processing rate model offers a lot of transparency and gives you a clear overview of where your money is going. In many cases, it’s also the most cost-effective option. That said, it’s definitely not for everyone, and not all businesses can qualify for it.
To help you understand if interchange-plus is right for you, I'll tell you everything you need to know about this pricing model. I’ll also explain some other pricing models and how they all compare to each other.
What Is Interchange-Plus Pricing?
Interchange-plus is a pricing model that splits the charge incurred by merchants on card transactions into two components: the interchange fees, and the “plus.”
The interchange fees are all the costs from the card’s issuing bank and the card associations that your payment service provider passes on to you. This is generally anywhere between 1% and 3% of the cost of a transaction. However, it can vary depending on several factors, like the type of card used or whether the sale took place in person or online.
The “plus” simply refers to your processor’s mark-up for using their service.
How Does Interchange-Plus Credit Card Processing Work?
Simply put, with interchange-plus pricing, the rate you pay for card payments (often referred to as the merchant service charge) is broken down into the two components mentioned previously: the interchange fees and the provider mark-up.
Interchange rates are set and are periodically updated by Visa, Mastercard, American Express, and other credit card associations – you can usually find tables that are maintained by these associations. These charges are entirely passed on to you by your provider and go toward paying the card issuer’s bank and card associations.
Interchange fees for each transaction are calculated as the sum of a percentage of the sale amount and a fixed transaction fee. The exact rate for each transaction varies based on a few factors, such as the card network and the transaction type.
For example, Visa’s current interchange rate for a swiped consumer credit card transaction is 1.65% of the sale, plus a fixed fee of 10 cents. This same transaction, if paid using a debit card instead, would incur a lower rate of 0.85% – albeit with a higher fee of 15 cents.
Finally, in addition to the interchange fees outlined above, your provider will add a mark-up charge which can be similarly broken down into a percentage-based component and a fixed component.
Typically, this mark-up amounts to around 0.2% of the sale, plus an extra $0.10 tacked on top. This isn't universal and will vary based on your payment service provider. Pay.com gives you an oversight of the fees you’re paying, and can help ensure you’re being charged a competitive rate.
Interchange-Plus Pricing Pros and Cons
Interchange-plus is often regarded as the most transparent and cost-effective processor payment model, especially for businesses with higher processing volumes. With that said, is it the right one for you? That's for you to judge, but I’m here to make it a little easier.
Let’s take a brief look at some of the pros and cons of interchange-plus pricing.
- There’s no risk of your funds being held by the processor – a risk inherent to businesses without an individual merchant account.
- For refunded customer payments, you’ll be refunded the interchange fees.
- You’ll pay cheaper rates on debit card transactions and receive cost-effective wholesale pricing.
- Longer application process than other payment plans, since interchange-plus is tailored specifically to your business.
- Newer businesses with lower monthly card processing volumes may not qualify for an individual merchant account, which is typically a requirement for interchange-plus pricing.
- It can be more difficult to accurately forecast fee expenses.
How Does Interchange-Plus Pricing Compare to Other Pricing Models?
Interchange-plus is one of three options that are commonly available to small business owners seeking a credit card processing plan, with the other two options being tiered pricing and flat pricing.
Interchange-Plus vs Flat Pricing
Flat pricing (sometimes referred to as fixed or blended pricing) models are typically the simplest models to understand because you’re charged a flat rate for all types of card transactions. This means that regardless of the point of sale, or whether the customer pays with a debit or credit card, you’ll be charged a flat rate for all these transactions.
Flat rates are a good option for a new startup business, as you can get started accepting payments within a matter of minutes, and accurately forecast your monthly transaction costs.
Flat pricing could be a net positive or a net negative for you depending on where the majority of your card transactions come from. More credit card purchases make flat pricing a more economical plan for you, whereas more debit card transactions would favor interchange-plus.
For newer businesses with lower card transaction volume, flat pricing is often the only available option due to the individual merchant account requirement involved with interchange-plus. It's worth noting that this requirement has eased in recent years, so it’s always worth checking with your provider if you might be able to qualify.
Interchange-Plus vs Tiered Pricing
Tiered pricing is the most common card processor pricing model. This model works by breaking down all your fees into three tiers: qualified, mid-qualified, and non-qualified.
You’ll pay the lowest rate on qualified transactions; for example, debit cards. Non-qualified transactions incur the highest rate: these typically involve corporate credit cards, higher reward cards, and card-not-present transactions.
Tiered pricing models fall somewhere in the middle of the spectrum in terms of simplicity – they’re easy to read and make your monthly statements a lot easier to digest. However, this simplicity often comes at the cost of clarity when compared with interchange-plus pricing.
Tiered pricing lacks the level of transparency you get from interchange-plus, especially when it comes to breaking down all the fees. This model makes it nearly impossible to tell just how much of your processing fees are going toward interchange and how much are going toward your merchant account provider’s mark-up.
Unfortunately, this lack of transparency often results in you paying more than you expect on your credit card processing bill, and there's no real way to verify whether or not this surplus was warranted.
The Bottom Line: Is Interchange-Plus Pricing Right For You?
Having explored some of the credit card processor payment models out there, we’re now better equipped to answer the question: which pricing model is best suited to your business?
Interchange-plus pricing stands out when compared to the other commonly available options as the most transparent and fairly priced. For most businesses, it will likely also be the cheapest option overall.
If a significant portion of your business’s transaction volume comes from card payments – and even more so if a lot of that is made up from debit card payments – then interchange-plus can save you a lot of money in fees. If you can afford the costs associated with running a full-service individual merchant account, this option could be an ideal fit for you.
While Interchange-plus pricing is the most cost-effective option out there, it’s worth keeping in mind that not all providers will necessarily charge you a competitive rate – they may sometimes charge unusually high mark-ups on your transactions.
Fortunately, the transparency inherent to interchange-plus pricing makes this easy to spot – particularly if you use Pay.com, which will help you seamlessly keep track of all your payments and fees. It will also give you oversight for such cases where your provider is no longer charging you a competitive mark-up, and offer you alternative options should you need them.