Interchange Cost Plus Processing
There are literally hundreds of competing credit card processing companies and each company charges different fees and rates. Processing rates are affected by a bewildering number of variables. The overall cost to process credit cards is a combination of the rates you have to pay your processor for each credit/debit card transaction and a multitude of fees that you also have to pay on a monthly or yearly basis.
Unfortunately, tiered pricing is still the most common pricing model available, and the one most processors offer to their merchants. Tiered pricing seems like it simplifies the huge number of processing rates into three basic tiers: qualified, mid-qualified, and non-qualified.
Tiered pricing may seem tempting, because it simplifies a lot of variables into just three tiers, making your monthly statement much easier to decipher. However, the tier that a particular transaction will fall into is determined by the processing company, but unfortunately, while the numbers may seem like they are easier to understand, they are often a lot higher than the merchant may be led to believe. Tiered pricing also leads to a very deceptive marketing gimmick: the provider will advertise the lowest possible (i.e., qualified) rate, but most transactions won’t actually be qualified, and will process at a much higher rate.
On the other hand, interchange cost plus pricing breaks down the charges going to the issuing bank and credit card associations, allowing you to see the actual cost that they are charging you for processing your transaction. This is a much more transparent pricing model and in most cases it offers rates that are lower than tiered rates. Interchange cost plus pricing is sometimes referred to by alternate names, such as interchange pass through pricing or cost-plus pricing. These different terms all refer to the same thing.
Interchange cost plus pricing is quite simple. The pricing model consists of two elements: the “interchange” fee and a “plus.” The interchange fee is the percentage of the transaction that must be paid to both the issuing bank and the credit card association. Because your credit card processor has to pay this charge, they will pass it on to you. The “plus” is the amount over and above the interchange costs that you’ll also have to pay to your processor. It’s their markup for processing your transaction, and it’s designed to cover their costs of doing business – and also to generate a profit.
Interchange-plus pricing rates are usually expressed as the interchange rate plus a markup, which can be a percentage, a flat, per-transaction fee, or both. For example: interchange + 0.18% + $0.08 per transaction for a retail transaction.
Interchange fees are set directly by the credit card associations, and they can get pretty complicated. There are different rates for debit and credit cards as well as different rates for different types of credit cards. Card-present and card-not-present transactions also have different rates, as they reflect the level of risk the issuing bank is taking in extending credit for a given transaction.
The fundamental flaw with the traditional tiered-pricing model is that it hides the interchange costs and allows processing companies to charge more of a markup. By consolidating a wide variety of rates into a smaller number of tiers, processors can essentially “round up” to the highest rate in each tier. While this may make your monthly statement a lot easier to read, it also means you’ll be paying higher rates for a lot of transactions – and you probably won’t be able to tell which transactions are being charged abnormally high rates.
By showing you the actual interchange costs, interchange-plus pricing allows you to more easily see what the markup is. This in turn encourages processors to set more reasonable markups. The credit card processing industry is highly competitive, and processors know that many merchants will sign up with the company that offers them the lowest rates. This transparency in separating out interchange and markup costs generally results in lower overall rates, and most interchange-plus pricing plans will cost you less money than a tiered-pricing plan. However, you should be aware that there’s nothing stopping a processor from charging you an unreasonably high markup. The difference is that it will be a lot easier to spot, especially if you shop around.
In general, we really like interchange-plus pricing. It has the potential to save you a lot of money, and it’s definitely much more transparent than traditional tiered-pricing plans. Most of our preferred providers offer it. In fact, many of the best and most innovative processors in the industry (such as Dharma and Helcim) offer it exclusively.
Until fairly recently, interchange-plus pricing was only available to larger, more-established businesses. Traditional small businesses were stuck with tiered pricing plans, and forced to pay a premium for being small businesses. Today, getting interchange-plus pricing is easier than it’s ever been. However, it’s not a guaranteed thing. Some processors still don’t offer it at all. Many other processors offer both tiered and interchange pricing, and they usually don’t disclose this fact in their advertising. A lot of these processors also rely on independent sales agents, who will – naturally – try to sign you up with a more expensive tiered pricing plan. If you want interchange-plus pricing, you’ll have to ask for it.
You also need to consider the overall cost of your merchant account, especially if you’re a smaller business. As we’ve noted above, your rate plan is only one part of the equation. While it might be the largest part of that equation, you also need to look closely at monthly and annual fees before signing up with any processor. The availability of interchange-plus pricing is not a guarantee that you’ll be getting the best overall deal. - See more at: http://www.spendlessoncreditcardprocessing.com/interchange-cost-plus-processing.html#sthash.O42Ue2KF.dpuf