A female employee taking a credit card as payment from a customer.

what is interchange plus pricing

Monday, December 01, 2014

Exploring one of the credit card processing models

In today’s economy, credit cards are the standard payment method for many consumers. As a small business owner, you know how important it is to cater to your customers for a frictionless experience. Therefore, accepting credit cards is a necessary part of doing business. When it comes to credit card processing, there are a few common ways a merchant like you can pay a payment service provider. One of these ways is interchange plus pricing. In this article, we’ll take a closer look at interchange plus pricing to define what it is before briefly contrasting this method with other popular credit card processing fee structures. Let’s dive in to define interchange plus pricing.

What is interchange plus pricing?

Interchange plus pricing is a common pricing model for credit card processing. As one of the most common credit card processing fee structures, it’s important to understand because it may be the best structure for your business. In this pricing model, there are two components: interchange and plus. By detailing each, you’ll see how credit card processors come to the interchange plus pricing model.

Interchange: When someone swipes a credit card at your business, the bank that issues the card gets paid a fee. This fee – called an interchange fee, interchange rate, or discount rate – covers handling costs, fraud and bad debt costs, chargeback fees, and reissuing compromised cards. Each credit card network – Mastercard, Visa, Discover, and American Express – set their own interchange fees. Payment processors have no control over these interchange costs since the card associations are the ones setting them. In the interchange pricing structure, the merchant is the one responsible for paying the interchange.

Plus: This is the extra amount a payment processor charges a company to process transactions. The plus amount is a fixed markup that normally includes a percentage charge and a transaction or processing fee. The percentage charge is expressed in basis points, which is a calculation of a variety of factors, including the business type, processing method, owner credit worthiness, and more. Then, a per-transaction fee is added to the basis point calculation to get the “plus” number calculation. Essentially, the “plus” amount is a fixed cost on top of the interchange fee. Generally, the payment processor’s markup is on a business-by-business basis. That’s because each business has different processing volumes, average ticket sizes, and overall processing risks.

As you can see, interchange plus pricing seems pretty straightforward. That’s because it generally is. Once you understand how the “plus” portion of the charge structure works, it’s easy to see how straightforward this pricing model can be for small businesses. Next, let’s take a brief look at how interchange plus pricing compares to tiered pricing.

Interchange plus pricing vs tiered pricing

One of the most common payment processing pricing plans is tiered pricing. In this pricing model, the merchant services provider divides transactions into various buckets and charges a different processing rate for each tier. Transactions get placed into different buckets based on factors, including the card type and method of payment. The card brands do not have a say in this pricing model. There are three tiers in this model – qualified, mid-qualified, and non-qualified.

  • Qualified – this tier is the safest tier of transactions. It consists of swiped or inserted debit card and non-reward credit card transactions. As you can imagine, these transactions are the least risky for the reasons listed above.
  • Mid-Qualified – this tier of transactions consists of transactions not fully qualified. These could be rewards credit cards, loyalty cards, and keyed-in cards (instead of swiped or inserted).
  • Non-Qualified – this tier of transactions has the highest rates. Higher rewards credit cards, corporate cards, or cards used in ecommerce transactions are all cards that could fall into this category.

In comparison to interchange plus, tiered pricing can help simplify your bill by breaking down each of the transactions you process into one of these tiers. If your business does a lot of in-person, non-reward transactions, this model can provide low processing fees. Next, let’s look at another fee structure: flat-rate pricing.

Interchange plus pricing vs flat-rate pricing

The third common type of credit card processing pricing model is flat-rate pricing or blended pricing. Flat-rate pricing works as you’d expect. The merchant services provider charges the merchant a fixed percentage, or flat fee, for each transaction. Transactions are usually split up into card present (in-store), card-not-present (ecommerce), and manually entered (mail and telephone orders) transactions. In each category, the transaction type determines the flat fee. The issuing bank and credit card issuer have no bearing on the fee. In other words, the rate is based on the method used to charge the card.

For most, this is the easiest pricing model to grasp because it doesn’t matter what the transaction amount is; it’s still just a single fee. Those businesses that don’t process many transactions may benefit from this type of pricing, while others that process a higher volume of transactions would probably benefit from interchange plus pricing.

When it comes to discovering the right payment processing partner and method for your business, it’s important to crunch the numbers. Then, you’ll be able to compare those numbers to other payment processing companies and to other pricing models. The bottom line is that your business is unique and you should understand your needs before deciding on a processing method. While payment processing is an inevitable part of doing business, the right payment processing pricing plan can ensure you’re getting the most out of your business.


Ready to work with a payment processor who can help you determine which payment processing method is best for your business?

Heartland is the point of sale, payments and payroll solution of choice for entrepreneurs that need human-centered technology to sell more, keep customers coming back and spend less time in the back office. Nearly 1,000,000 businesses trust us to guide them through market changes and technology challenges, so they can stay competitive and focus on building remarkable businesses instead of managing the daily grind. Learn more at heartland.us.