North American Bancard - Interchange Plus Pricing: Interchange Plus Pricing Model: Interchange Plus Credit Card Processing

Interchange Plus Pricing

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The Benefits of Interchange-Plus Pricing

Thursday, December 07 2023

For many merchants, credit card processing fees can be a source of confusion and frustration. The lack of transparency in traditional pricing models often leaves business owners in the dark about the true cost associated with credit card processing. Fee transparency is essential for merchants as it empowers them to make informed decisions about their payment processing partners. By better understanding the credit card fees they are paying, they can:

Accurately Predict Expenses – By knowing the exact fees associated with credit card transactions, merchants can better forecast their financials and manage budgets.
Compare Processors Effectively – When fees are clearly presented, it's easier for merchants to evaluate different payment processors and select the best fit for their business.
Negotiate Better Deals – Armed with a comprehensive understanding of fees, merchants can negotiate more effectively with payment processors to secure lower rates.

Interchange-plus pricing is an option that can provide merchants with this much needed clarity to help them make smart business decisions. In this article, we’ll explore what interchange-plus pricing is, how it works, its advantages and disadvantages, and why it's essential to choose a credit card processor that prioritizes transparency.

How Does Interchange-Plus Pricing Work?

Interchange-plus pricing (also referred to as cost-plus or pass-through pricing) is a more transparent and cost-effective model for merchants who process credit card transactions. This pricing structure separates the fees into two distinct components – the interchange fee and the markup fee.

Interchange Fee – The interchange fee is a percentage or fixed amount paid to the issuing bank or credit card company (such as Visa or Mastercard). These fees are highly variable and change depending on a variety of factors including the card brand, card type (credit or debit), whether the card is present during the transaction or not, payment security features, the merchant category code (or MCC), and if the card was run as a debit or credit card.
Markup Fee – The markup fee is a percentage or fixed amount charged by the payment processor that the business hired to facilitate the transaction.

This approach allows merchants to understand and predict their overall expenses. It also provides a level of detail that helps merchants clearly see the individual fees for each transaction, making it easier to compare payment processors and understand processing costs. To see how interchange-plus pricing works, let’s look at an example of how this model works in the real world.

Example: Imagine you own a retail store and have a merchant account. A customer comes in and purchases items worth $150.00 (including tax). They pay with a Visa Signature Preferred Consumer credit card. The interchange cost for this card is 2.10% + $0.10, which amounts to $3.25 ($3.15 from the percentage fee and $0.10 from the fixed fee). Your merchant account provider passes this cost to you, and in addition, charges a markup of 0.30% + $0.15, or $0.60 ($0.45 from the percentage fee and $0.15 from the fixed fee). Your total cost for processing the credit card is $3.85, which is 2.57% of the transaction amount.

In this example, interchange fees make up 84.4% of your total processing cost, highlighting the significance of interchange fees in the overall expense associated with credit card transactions.

It’s important for businesses to be aware of some of the misleading practices that some processors use to sell this model. While many providers advertise interchange-plus pricing on their websites, their quotes often only list the percentage-based markup and the fixed authorization fee. As you can see in the example above, interchange fees usually make up the bulk of the total processing costs. Businesses should always validate that the quote provided by credit card processors includes both interchange and markup fees.

Another key point to understand is that interchange fees are set by credit card associations. Some salespeople with credit card processors will claim they can negotiate a discounted rate. This is untrue. Credit card processors have no control over these fees.

The Downsides of Interchange-Plus Pricing

No fee structure is perfect. While there are numerous advantages to using an interchange-plus model, there are some disadvantages depending on the size and type of business that you operate. It’s important to carefully consider the downsides of interchange-plus pricing to confirm if it is the right fit for your business.

Complexity – The separation of interchange fees and markup fees can make the pricing model more challenging to understand initially, particularly for merchants accustomed to bundled or flat-rate pricing models.
Variable Fees – Interchange fees can vary depending on the type of card and transaction, making it difficult for merchants to predict their exact costs upfront.
Processor Markups – While markup fees are typically a fraction of the overall processing fee, processors can still impose high markups on transactions. Comparing quotes from multiple providers can help merchants identify processors who charge excessive fees.
Requires Higher Volume – Smaller businesses with lower monthly transaction volumes may not benefit as much from interchange-plus pricing compared to other pricing models, as they could face higher markups.

How Interchange-Plus Pricing Compares to Other Pricing Models

The interchange-plus pricing model isn’t the only option available in the payment processing industry. In addition to interchange-plus pricing, there are three other options that are the most common including bundled, flat-rate, and subscription-based pricing. Here's a brief overview of each alternative pricing model.

Bundled Pricing

Bundled pricing (also known as tiered rate pricing) combines the interchange fee and markup fee into a single rate, often categorized into tiers (e.g., qualified, mid-qualified, and non-qualified). While this model simplifies the fee structure, it obscures the true costs associated with each transaction and makes it difficult for merchants to compare payment processors.

Example: Imagine you own a boutique and have a merchant account that uses bundled pricing. A customer comes in and buys clothing worth $200.00. They pay with a Visa Rewards Consumer credit card. Your merchant account provider charges a qualified rate of 1.70% + $0.25 for this card, resulting in a total processing fee of $3.65 ($3.40 from the percentage fee and $0.25 from the fixed fee). In this case, it's difficult to determine how much of the fee is the interchange cost and how much is the markup fee.

Flat-rate Pricing

With this model, the payment processor charges a fixed percentage or per-transaction fee, regardless of the underlying interchange fees. Although simple to understand, flat-rate pricing may not always be the most cost-effective option, as merchants may end up overpaying for certain types of transactions.

Example: Suppose you run an online store and have a merchant account with a flat-rate pricing model. A customer places an order worth $120.00 and pays using a Mastercard Platinum Consumer credit card. Your payment processor charges a flat rate of 2.75% per transaction, making your total processing fee $3.30. With this model, the processing fee remains the same regardless of the card type and underlying interchange fees, which could result in overpaying for some transactions.

Subscription-Based Fee Models

Under subscription-based models, merchants pay a fixed monthly subscription fee and a small per-transaction fee, which often includes the interchange fee and a nominal markup. This model provides more predictable costs for merchants, as the monthly fee remains constant, regardless of the volume of transactions. However, businesses with lower transaction volumes may not benefit as much from this model, as the fixed monthly fee could result in higher overall costs compared to other pricing structures.

Example: Imagine you operate a gym and have a merchant account that uses a subscription-based pricing model. A customer signs up for a membership costing $80.00 per month and pays with an American Express Gold Consumer credit card. Your payment processor charges a monthly subscription fee of $49.00 and a per-transaction fee of 0.10% + $0.25. In this case, the processing fee for the transaction would be $0.33 ($0.08 from the percentage fee and $0.25 from the fixed fee). Your total monthly cost for this single transaction, including the subscription fee, would be $49.33. However, as the number of transactions increases, the average cost per transaction decreases, making the subscription-based model potentially more cost-effective for high-volume businesses.

Interchange-plus pricing, known for its transparency and fairness, is often the most cost-effective option for businesses. However, it may not always be the ideal choice, especially for small businesses with lower transaction volumes. It's crucial to compare rate quotes from multiple providers and consider all associated fees before selecting a pricing model. While interchange-plus pricing works well for many businesses, high-volume merchants might find subscription pricing more advantageous. Ultimately, it's essential to explore various options and choose the one that best suits your business's unique needs.

Go With the Credit Card Processor People Trust

In the world of credit card processing, transparency is crucial for merchants to make informed decisions. At Shaw Merchant Group, we understand the importance of offering a wide range of options to our clients including interchange-plus pricing. Our goal is to provide you with the right credit card processing approaches to help you take control of your payment processing costs and ultimately improve your bottom line. Contact us today to learn more about our interchange-plus rates and fees.

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Applying for a Merchant Account for Small Businesses

If you are a merchant, then you will undoubtedly need a merchant account. Merchant accounts are accounts that your business holds with a payment processor or merchant services provider that give you access to the critical tools that your business needs to succeed and accept payments. Without a merchant account, your business will be unable to complete the most important part of any transaction--the receipt of the funds for the goods or services that were rendered. If you want to get a merchant account for your business, then the first thing you need to know is how to apply for a merchant account and what is involved in the process of the application. This insight will give you the knowledge and information that you need to be successful in the merchant account application process and provide you with a competitive edge when applying for your merchant account.

Information needed for applying for a merchant account

If you’re hoping to have success in the merchant account application process, then one of the first things that you will need to know is about the requirements for applying and gaining approval for a merchant account. There are several pieces of information and documentation that you will need if you’re going to have success in your application. Providing these pieces of documentation and information will greatly increase your chances of being successful, but that’s not all that matters. You will also need to display several traits and factors that prove yourself to be a reliable and trustworthy merchant.

Here are the pieces of information that you will need when applying for a merchant account:

At least 3 months of bank statements
At least 3 months of processing statements, if applicable
Valid identification
EIN or SSN for the account
A functioning website that has information about your business

Before you apply for a merchant account, you should be sure to have each of these pieces of information available and ready to send with your application. The absence of any of these pieces of information could prevent you from getting a merchant account or getting good rates if you are granted a merchant account. This could delay the process and make getting a merchant account take that much longer.

Getting approval for a merchant account: factors explained

When you are applying for a merchant account, one of the most important concepts that you should understand beforehand is that there are a variety of factors that go into your approval or rejection as a merchant for a merchant account. Being familiar with these factors can increase your chances of success when applying for a merchant account because it will enable you to optimize your application and make it much more attractive to the merchant services that you hope to work with. Here are some of the most important factors in getting approved for a merchant services account and why they are considered to be important.

Bank history

The bank history is one of the required pieces of information for your business if you hope to get a merchant services account. The merchant services provider that you apply with will ask for at least documentation of 3 months of bank history. The reason that merchant services providers ask for this information is pretty obvious--they want to ensure that your business is reputable and is in good standing with your bank. Without this verification, they might not be able to establish confidence that you are a trustworthy financial partner to work with. Merchant services companies want to verify that you are a legitimate business with a verifiably good relationship with your banking provider. By verifying this, they can guess that you will be a good partner to them, as well. Always provide the most comprehensive statement information that you can and be sure to not just provide the bare minimum, if possible. Applications will ask for at least 3 months, but if you are comfortable you should supply up to 6 months of statements.

Processing history

Another thing that will factor heavily into the decision that is made regarding your merchant services account status is the processing history documentation that you are able to provide. When you apply for a merchant processing account, the company that you apply with will very likely want to see at least 3 months of processing history. Again, the more information that you can provide, the better. Those that are able to provide up to 6 months of documentation will likely have more success. The reason that merchant services companies request this information is also clear--because they want to know that you will be a good partner to them in your merchant services and credit card processing relationship. Being involved with a company to provide credit card transactions is no small matter, and the companies that you work with want to protect themselves just as much as you do. When you provide this information, they will look into your past success, chargeback ratios, and any concerns that have arisen in your past relationships with processing companies.

It is possible that you are not able to provide this information, in the event that you are a new business. Still, you should answer as many questions as they have and provide them with answers to the questions that you are able to such as what your expected volume will be. Going the extra mile to provide this information could certainly be the difference between denial and acceptance for your merchant services account.

Credit score

When evaluating your application for a merchant services account, your merchant services partner will very likely want to see your credit score. This is a piece of information that you will likely not have to provide yourself, as many merchant services companies have a way to check this. Your business credit score will tell the underwriter, the person who approves and denies processing accounts, about your financial history and whether there are any red flags. If there are blips on your credit score, that doesn’t mean that you will not be eligible to get a merchant services account. However, it might mean that there are more hoops to jump through or that you don’t get as good of a processing rate that you were hoping for. The best way to handle a poor credit score as a business is to apply to a merchant services program that approves businesses that are in a similar situation and works with businesses to overcome challenges that they might have struggled with in the past.

Industry

Even though you might not have given much thought to it in the past, one of the most relevant factors in your approval or rejection for a merchant services account is the industry that your business is in. It is very important to consider the industry that your business is in because some businesses are at higher risk than others for chargebacks and fraud. If you are in a very normal and ordinary industry, then you probably don’t need to worry that much about the specifics. However, if you are in a high-risk industry that is known for chargebacks and fraud, then you likely want to start looking at ways to bolster your application and show that you can stand out above the rest as a merchant that will not cost the services provider money in the long run.

How long does it take to get approval for a merchant account?

One of the most common questions that is asked when applying for a merchant services account is how long the process takes. The answer is not so straightforward, as there are dozens of factors that go into the decision-making process of either approving or rejecting a merchant for a merchant account. If nothing goes wrong in the process and the underwriters don’t need any more information, then it’s possible that you receive an answer within 24-48 hours, when working with the right merchant account provider. However, this is not always the case. Oftentimes, your merchant account provider will require additional information including clarification on the business plan, more documentation, or just general questions about your business. You can help to reduce the amount of time that it takes to get approved by being upfront with all of the information that you will need for the application and having it on-hand for clarification if needed.

Be selective in who you choose for a provider

One thing that you should know if you want to get the most out of your merchant account is that merchant processing is a serious business. There is a lot of money at stake, and that is why merchant account providers are so selective in who they approve for a merchant services account. You should be equally as selective when choosing a provider. Make sure that you know what you are looking for in a merchant services provider because they are going to have a large impact on your business and what you are able to achieve with your merchant solutions.