Interchange Plus Pricing Explained

Understanding Interchange Plus Pricing

Interchange plus pricing, often referred to as "cost-plus" pricing, is a transparent pricing model in the payment processing industry. This model separates the costs of processing a payment into two distinct parts: the interchange fee and the processor's margin. This separation provides a clear and honest view of what you’re being charged, making it easier for merchants to understand their payment processing costs and save money.

What is the Interchange Fee?

The interchange fee is the cost set by card networks (Visa, Mastercard, Discover, and American Express) for processing credit and debit card transactions. This fee is paid by the merchant’s bank (acquiring bank) to the cardholder’s bank (issuing bank) every time a card is swiped, dipped, or tapped. Interchange fees vary based on several factors, including the type of card used (credit or debit), the nature of the transaction (in-person or online), and the merchant’s industry. This process is called an open-loop system, and it is used by Visa, Mastercard, and Discover. However, American Express uses a closed-loop system, where it functions as the issuer, acquirer, and the network combined.

For instance, debit card transactions have lower interchange fees compared to credit card transactions. A standard debit card transaction might have an interchange fee of around 0.5% plus $0.22 per transaction, while a credit card transaction could have an interchange fee of 1.8% plus $0.10 per transaction.

The “Plus” in Interchange Plus

The “plus” refers to the fixed margin added by the payment processor. This margin covers the processor’s costs and profit and is usually a small, fixed percentage or a flat fee per transaction. For example, a processor might charge an interchange plus fee of 0.2% + $0.08. This means you’ll pay the interchange fee set by the card network plus 0.2% and $0.08 on every transaction.

Real-World Example: Comparing Pricing Models

To illustrate how interchange plus pricing can benefit merchants, let’s compare it with a common pricing model called flat rate pricing.

Flat Rate Pricing

In flat rate pricing, the processor charges a single fixed rate for all transactions, regardless of the card type or transaction method. For example, a flat rate processor might charge 2.5% + $0.10 per transaction.

Flat Rate Pricing

Let’s consider a merchant with the following monthly transaction volume:

• Debit card transactions: $10,000 * 2.5% + ($0.10 * number of transactions)

• Credit card transactions: $20,000 * 2.5% + ($0.10 * number of transactions)

Interchange Plus Pricing

For this example, let's say the "Plus" margin is 0.2% and $0.08.

• Debit card transactions: $10,000 * (0.5% + $0.22) + (0.2% + $0.08) * number of transactions

• Credit card transactions: $20,000 * (1.8% + $0.10) + (0.2% + $0.08) * number of transactions

Cost Savings with Interchange Plus

With interchange plus, the cost is lower due to the actual interchange fee being much lower than the flat rate. When we break down the costs, it’s clear that interchange plus pricing can lead to significant savings. Let's calculate an example using $10,000 in debit card sales:

• Debit card transactions: For $10,000 in debit transactions with 100 transactions:

  
  

  Flat Rate:

  Model = $10,000 × 2.5% + (100 × $0.10)

  Total Cost = $250 + $10 = $260

  
  

  Interchange Plus:

  Interchange Fee = $10,000 × 0.5% + (100 × $0.22)

  Total Interchange Fee = $50 + $22 = $72

  Processor Margin = $10,000 × 0.2% + (100 × $0.08)

  Total Margin = $20 + $8 = $28

  
  

  Therefore, the total interchange plus cost is $72 + $28 = $100. This is $160 less than the above flat rate example.

Transparency: The Advantage

Interchange plus pricing offers unparalleled transparency by clearly detailing interchange fees and the processor’s margin, allowing merchants to see exactly where their money is going.

By adopting interchange plus, merchants can avoid overpaying for lower-cost transactions. Whether you run a small coffee shop or a large retail chain, switching to interchange plus pricing can lead to significant savings.

Interchange Plus with PayAcre

Here at PayAcre, we’re always working hard to keep our merchants in the loop with cost-saving practices. That's why we offer transparent interchange plus pricing with a small, clear margin for businesses of any size, supported by powerful, cost-effective POS systems

To learn more about interchange plus pricing and how PayAcre can help you reduce costs, contact our team of experts for a friendly, no-obligation conversation.