Everything you need to know about Interchange plus pricing
Interchange plus can help your business’s bottom line. Learn how interchange plus pricing works, the benefits and drawbacks, and compare it to other models.
What is interchange plus pricing?
Interchange plus (IC+) is a pricing model used by payment processors to determine their credit card charges. Also known as cost plus pricing, it is widely favored for its transparency and cost effectiveness.
If you need a reminder on Interchange, take a look at our previous blog.
How is interchange plus pricing calculated?
With IC+, businesses pay a fee based on a combination of three separate components.
These are:
-
Interchange fee: This is the fee paid to the bank that issued the card.
-
Card network fee: The fee paid to the card network (Visa, Mastercard, etc.).
-
Markup fee: The fee paid to the payment processor.
These fees may be a small, fixed percentage, a flat fee per transaction, or a combination of both.
For instance, if a coffee shop processes a $20 Visa transaction through a payment processor’s POS machine, the bank claims an interchange fee of 1.65% ($0.33). Visa claims a further 0.5% ($0.10), and the payment processor claims a markup of 2% ($0.40) plus a flat fee of $0.10.
The total fees add up to $0.93, and the merchant receives the remaining $19.07.
What is the difference between interchange plus pricing, flat rate pricing, and tiered pricing?
In the comparison table below, you can see interchange plus pricing compared to alternative pricing models.
|
Pricing Model |
Pricing Calculation |
Transparency |
Cost To Merchant |
|---|---|---|---|
|
Interchange Plus |
Each transaction includes an interchange fee, card network charge, and the payment processor’s markup. |
High. |
Generally low to moderate. |
|
Flat Rate Pricing |
One fixed percentage and per-transaction fee (e.g. 2.9% + 20c) regardless of card type. |
Moderately high. |
Moderate to high. |
|
Tiered Pricing |
Transactions are grouped into “qualified,” “mid-qualified,” and “non-qualified” tiers, with different rates depending on the risk and reward for each card. |
Low. |
Potentially high. |
What are the advantages of interchange plus pricing?
IC+ pricing can be advantageous for merchants, offering certain cost and operational efficiency savings.
Advantages include:
Fee transparency
Merchants see what fees they are paying on their statements and how they are calculated. This keeps costs predictable.
Avoid overpaying
Prices fluctuate with each transaction, depending on the card network or type. Therefore, merchants can take advantage of lower fees. Unlike flat-rate pricing, IC+ passes the actual cost of each transaction to the merchant. This prevents overspending on fees and maintains secure margins.
Volume discounts
As merchants grow their businesses and transaction volumes increase, this may entitle them to volume discounts once a monthly transaction threshold is reached. The business keeps more of what it earns from each transaction.
Lower rates
Interchange rates fluctuate constantly. Merchants may benefit from lower rates when these rates drop, adding more profit to each transaction.
What are the disadvantages of interchange plus pricing?
Like any pricing model, IC+ has its advantages, but it also has some potential drawbacks. Merchants should keep these in mind to make an informed choice.
Fluctuation in fees
Because IC+ rates fluctuate with every transaction, it can make forecasting card processing costs harder. This can add uncertainty and inaccuracy to cost projections.
Complexity
Although costs are transparent, businesses need to carefully understand each fee on their statements, which can make audits time consuming.
How do interchange fees affect businesses?
While they may seem like a few cents here and there, interchange fees can have a significant effect on business operations.
For instance:
Margins
Fees can quickly add up and put a dent in profit margins. Especially in sectors that handle high volumes of credit card transactions, such as travel and hospitality.
Pricing strategies
Businesses may want to offset interchange fees by adjusting their fees, which can cost them their competitive edge.
Because fees are deducted before funds are deposited into the business account, this can impact cash flow for businesses with a lot of overhead, like brick-and-mortar retailers.
Business model
Companies may adapt their business models to reduce the impact of interchange fees. This may include adding a surcharge in sectors where it is legal to do so. Retailers, for instance, may incentivize cash payments to improve their liquidity and margins.
How can I reduce interchange fees?
Interchange fees don’t need to jeopardize your company's cash flow. You can reduce them in several ways.
Choose the right payment processor
Choose a payment processor whose fees are manageable, flexible, and transparent.
Encourage debit or cash transactions
Because debit card transactions have a lower risk profile, their interchange fees are lower. You may also want to incentivize cash transactions where practical.
Implement a surcharge or service fee
Surcharges may be levied to offset interchange fees. However, businesses should ensure it is legally permissible to do so.
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Tired of unknowable, unaffordable interchange fees? Call us today and take control of your transaction costs with Paysafe’s Interchange Plus payment program.
FAQs
What are interchange fees?
Interchange fees are the fees paid by the merchant’s bank to the customer’s bank every time a credit or debit card is used to make a payment.
What is interchange pass-through pricing?
Interchange pass-through pricing is another name for IC+ pricing, comprising an interchange fee, the card network fee, and the payment processor’s markup.
Can you negotiate interchange fees?
Interchange fees are set by payment networks and are not negotiable. However, fees can vary between payment processors, and some may provide discounts for high transaction volumes.