Learn why interchange plus pricing is one of the fairest and affordable pricing models available.
If you run a business, you know that accepting credit and debit cards is extremely important. Many consumers no longer even carry cash. Therefore, accepting credit and debit cards directly influences your bottom line. On the other hand, credit and debit card processing costs money. Processing and merchant account fees make the overall cost of doing business much higher. They also eat into your profits. Regardless of this, the days of paying cash for things are long gone. It is a huge inconvenience to customers when businesses do not accept credit cards. Many will turn to competitors who do accept them. Therefore, it is imperative that business do have the ability to process debit and credit cards if they want to stay competitive.
Credit card processing fees can seem like quite a mystery to business owners. Basically, everyone who is involved in the transaction gets paid, including the credit card associations, the issuing bank and the payment processor. The total price of a merchant account is a mix of the rates that you pay for the account and the amount of fees that are paid to the processor for each card transaction. Here is a breakdown of the fees that you pay every time that you process a credit or debit card transaction.
- Issuer – Takes a percentage, or interchange amount, of each sale. This fee varies depending upon the sale amount, industry and type of card used.
- Merchant bank – Charges a markup fee for their cut. This also varies by amount of sale, industry and monthly processing volume.
- Associations – MasterCard and Visa also get a percentage.
- Processor – Another percentage goes to the company that processes the transaction.
- Refund – If the buyer requests a refund, another percent of the transaction amount is taken. This is taken with every transaction, regardless of type.
Typically, all of the fees are added together as percentages and quoted as a single rate. The transaction fee is quoted separately.
How Are the Fees Packaged?
There are a variety of pricing models for processing debit and credit card transactions. It is important to understand how these models work so that you can choose the best one for your business. This will help keep unnecessary costs from weighing you down. Here are the most common rate structures.
Flat-Rate Pricing
With flat-rate pricing, which is sometimes called blended pricing, businesses pay a flat fee for all debit and credit card transactions. All of the fees outlined above are blended into a single flat rate. Although this might seem like the easiest option, it is more costly than the other two pricing models, which can really take a chunk out of profits, especially if you process a lot of cards.
Tiered Pricing
The most common pricing model is tiered pricing. This is also the pricing model offered the most to businesses. In this pricing model, the processor takes all of the interchange rates and lumps them into three pricing tiers. The tiers are: non-qualified, mid-qualified and qualified. These tiers are based on many factors, including the amount of risk with each transaction. Although this might seem like the best option, it is often really quite expensive as the processor can design each tier however it likes. Most often, the processes advertises the lowest price, which is based on the qualified rate and most transactions do not fall under this category. In the end, tiered pricing is quite deceptive and many business owners end up frustrated when their monthly statement arrives, not expecting the large fees associated with tiered pricing.
Interchange Plus Pricing
As was noted above, any time a customer pays with a debit or credit card, the card issuer charges an interchange, which is a percentage of the amount. The credit card associations, such as MasterCard or Visa, also add on a fee. The interchange plus model lumps together these two elements, the plus, or amount going to the payment processor and an interchange. This breaks down the charges going to the credit card association and issuing bank. Therefore, you can see the markup that you are being charged by the processor and associations for processing your transaction. This is a much more transparent pricing model, as you can see the exact breakdown of rates being charged. In addition, interchange plus pricing rates are often lower than tiered and flat rates.
How Does Interchange Plus Pricing Save Businesses Money?
The problem with the conventional tiered pricing model is that it is deceptive. It covers up the interchange costs. This facilitates processing companies in charging a larger markup. Processors basically charge the highest rate that they can in each tier. This means that you pay higher rates for most transactions. In addition, you will not be able to see what transactions are being charged these high rates.
Interchange plus pricing allows you to see exactly what the markup is by showing you the actual interchange costs. This practice motivates processors to set lower markups. Credit card processors know that businesses will choose the company that offers the lower rates. Having transparency in processing costs creates competition, leading to lower rates for businesses that care to shop around.
How Can I Get Interchange Plus Pricing? Do All Processors Offer This Model?
Interchange plus pricing has the potential to save companies a lot of money, and it is more transparent than traditional pricing models. Until recently, interchange plus pricing was not readily available to companies, especially smaller businesses. This meant that many smaller businesses were forced to pay excessive credit and debit card processing fees. Luckily, it is becoming much more common and is offered by some of the best processors in the industry. It is definitely worth asking a potential processor if they offer interchange plus pricing. This will help you get the best overall deal with it comes to payment processing.