Trading Ease For Transparency With Interchange-Plus

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Accepting credit cards in your business is something of a two-edged sword. On one hand, they’re extremely convenient for your customers, which generally translates into more sales. At the same time, processing a credit card transaction costs money, and the fees associated with maintaining a merchant account cost even more money. These expenses eat into your profits and increase your overall cost of doing business. Nonetheless, as customers increasingly turn away from paying with cash and use credit or debit cards whenever possible, most businesses will have to accept credit cards in order to remain competitive.

Determining in advance how much a merchant account is going to cost you with any degree of certainty is a nearly impossible task. There are literally hundreds of competing processors out there, each charging different fees and rates. Processing rates themselves are affected by a bewildering number of variables, one of which is the pricing model offered by your merchant account provider.

The overall cost of your merchant account is going to be a combination of the rates you have to pay your processor for each credit/debit card transaction and the fees that you also have to pay, usually on a monthly or yearly basis. While we’re going to focus on processing rates for this article, be aware of this: Fees are generally the same for a given merchant account provider, regardless of the size of your business. If your provider charges $99 a year for PCI compliance, you’ll pay that fee whether you have $100,000 in annual sales, or $1 million. So, for small or micro-sized businesses (or new businesses just starting up), fees are probably going to be the biggest expense you incur by having a merchant account. For larger businesses with higher sales volumes, processing rates will usually be your biggest expense.

What Types of Pricing Models Are There?

Obviously, you’ll want to get the lowest processing rates you can get, right? In theory, lower processing rates should lead to less of the money from your sales going to your processor and more of it staying with you. In actual practice, it’s much more complicated than that.

Let’s start by looking at the general types of pricing models for setting processing rates. There are four of them: 1) tiered pricing, 2) interchange-plus pricing, 3) subscription/membership pricing, and 4) blended pricing.

Tiered pricing is, unfortunately, still the most common pricing model available, and the one most processors offer to their merchants. We don’t like it. Tiered pricing simplifies a huge number of processing rates into three basic tiers: qualified, mid-qualified, and non-qualified. Which tier a particular transaction will fall into depends on a number of criteria, which are set by the processor. These criteria include things such as card-present versus card-not-present transactions, whether the transaction was processed on the same day it occurred, and which one of a host of possible categories the items purchased fall into. Tiered pricing may seem tempting, because it simplifies a lot of variables into just three tiers, making your monthly statement much easier to decipher. Unfortunately, while the numbers may be easier to understand, they’ll often be a lot higher than you were expecting. Tiered pricing models make it impossible to tell how much of a processing charge is going to the issuing bank, the credit card associations (i.e., Visa, MasterCard, etc.), and how much is going to your merchant account provider. 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.

Interchange-plus pricing, on the other hand, breaks down the charges going to the issuing bank and credit card associations, allowing you to see the markup they’re charging you for processing your transaction. This is a much more transparent pricing model, but it also makes your statements harder to read. In most cases, that will be a small price to pay, as interchange-plus pricing rates are usually lower overall than tiered rates.

Subscription/membership pricing is a little different. You’ll still pay the interchange rates that go to the issuing banks and credit card associations, but instead of paying a percentage markup to your processor, you’ll pay a monthly membership fee and a fixed per-transaction charge. Depending on the nature and size of your business, this pricing model can potentially result in even lower overall costs than interchange-plus pricing. However, very few processors currently offer it. For an example of subscription pricing, see our review of Payment Depot.

Flat/blended pricing is similar to tiered pricing, but the three tiers are blended together into a single flat rate for all transactions. This rate is, naturally, quite a bit higher than what you’d pay under a tiered plan. However, the lack of a monthly fee can make it more affordable overall for small or seasonal businesses. Square and PayPal use blended pricing.

For a more thorough discussion of these pricing models, please see our Complete Guide to Credit Card Processing Rates and Fees.

What Is Interchange-Plus Pricing?

While the actual numbers can get pretty complex, at its core interchange-plus pricing is quite simple. The pricing model consists of two elements: an “interchange” and a “plus.” The interchange is the percentage of the transaction that must be paid to both the issuing bank and the credit card association. Because your processor has to pay this charge, they’ll 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 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. Helcim, one of our favorite processors, uses the term cost-plus pricing. They also provide a very handy explainer of how their pricing plan works on their website.

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. Helcim, for example, currently charges interchange + 0.18% + $0.08 per transaction for a retail transaction.

So, how much will the interchange cost you? These fees are set directly by the credit card associations, and they can get pretty complicated. There are different rates for debit and credit cards, for example, 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. Luckily, Helcim provides a handy summary of Visa and MasterCard interchange rates on their website. If you really want to dig deeper into the subject, official rate information from Visa and MasterCard is also available online.

Here’s an example of how this all works in practice:

You own a retail store and have a merchant account with Helcim. A customer comes in and purchases an item for $100.00 (including tax). He pays with a MasterCard Consumer credit card. The interchange cost is 1.580% + $0.10, or $1.68. Helcim passes this cost to you, plus they charge a markup of 0.18% + $0.08, or $0.26. Your total cost for taking the credit card is $1.94, or 1.94%.

How Will Interchange-Plus Pricing Save Me Money?

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.

What About American Express?

American Express is different! Unlike Visa and MasterCard, American Express credit cards are issued directly by American Express – a financial services company. Thus, American Express serves as both the issuing bank and the credit card association. This should lead to lower rates, right? Wrong! Remember that American Express requires its cardholders to pay off their balance in full every month. While this is a sound financial practice for consumers, it also deprives Amex of the opportunity to charge interest on the unpaid credit card balances. They make up for this by charging significantly higher processing rates than Visa or MasterCard.

Until very recently, accepting American Express cards was a real hassle, requiring merchants to sign up directly with American Express. In 2014, however, American Express introduced their OptBlue Pricing plan, which allows merchants to accept Amex cards through their regular merchant account provider. Processing rates are still higher than Visa or MasterCard, but it’s a definite improvement over the older arrangement. While not all merchant account providers support OptBlue Pricing, most of our preferred providers include it as part of their accounts.

Final Thoughts

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.

Unfortunately, that’s not always the case. Until fairly recently, interchange-plus pricing was only available to larger, more-established businesses. Processors felt that they could compensate for offering lower rates by only making it available to merchants who had a very high monthly sales volume. 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.

It’s also worth noting that interchange-plus pricing is not a 100% guarantee of lower rates. Processors are still able to make money at your expense by charging above-industry-average markups as part of their pricing plan. The difference is that it’s much easier to see that they’re doing it, at least if you shop around before signing up with a processor.

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.

Our best advice is to shop around before settling on a particular provider. If you want to save yourself a lot of time and aggravation in doing so, check out what the best providers in the industry have to offer first.

Frank Kehl

Frank Kehl

Frank Kehl is an independent writer, editor, and blogger with an endless fascination for technology and gadgets. After a long and enjoyable career of traveling around the world as an Air Force navigator, he’s comfortably settled down in the wine country of California’s Central Coast. He enjoys reading, photography, hiking, and numerous other outdoor pursuits.
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17 Comments

    Anna Reutov

    Heartland Payment Systems is the only company in this slimy industry is all about doing the right thing for all business owners. Company based on Honesty, Integrity and Full Transparency. Heartland does not need to come in to a business and say “I can give you this rate” or “what rate did they give you? I can beat it!” Heartland already has the rate. Interchange rates are set by Issuing banks and Branded Cards and no Merchant company has any control over that. The plus rate is where Merchant company has control over. Most of them are ISO’s and the pricing is usually Interchange Plus Plush is what I like to call it.
    Branded Cards and Issuing banks need to get paid, Core processor needs to get paid, then the ISO or the Bank. At Heartland Payment Systems there is no “middle man” no bank no ISO to work with. So you get Wholesale pricing.
    email me for more info. anna.reutov@e-hps.com

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    Jacob Slaffey

    I am considering joining this company as a sales rep.

    How are they rated

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    Kate Marshall

    Hi,
    We are launching up online store and searching for merchant service.
    Without physical store, only online card processing and occasional swipes at conventions are expected.

    Have you heard about Uswipe- http://www.uswipe.com? They were offering special no monthly fees for wholesale pricing (0.20% plus pass through) during convention and wondering if they are reliable company. Any of your recommendations and thoughts would be really appreciated. Thanks!

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    Tom DeSimone

    Hi Kate,

    Unfortunately a bunch of the links on the uSwipe site are dead, including the pricing page and features page, so I’m not able to look over their info. A 0.20% markup with no monthly fee would be a tremendously good deal, especially for a mobile processing app, which makes me very suspicious. (You know what they say about things that seem too good to be true…) It wouldn’t be possible for uSwipe to make money on your account with that kind of pricing, so you should expect other hidden fees to be involved.

    Since you will only need to swipe on the go occasionally, you should focus on finding a good provider for e-commerce. Any good provider will include free access to a virtual terminal (so you can take orders over the phone, entered into any internet-connected computer). Most processors will also be glad to set you up for mobile processing at little added cost if you’re already doing business with them for e-commerce. (You might have to buy the card reader in some cases.) Or you could just get the mobile processing account from a separate company like Flint or PayPal Here.

    One way or another, I don’t think uSwipe is right for you. I’d probably recommend CDGcommerce. Ten bucks per month, access to free in-house payment gateway and virtual terminal, 0.30% plus $0.15 per transaction, plus I’m pretty sure they’ll give you a free mobile reader. Check out the review!

    Good luck,
    Tom

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    Chris Smith

    Hi,

    I am hoping you can clarify something for me about Eliot Management. I signed a contract; however at the time did not have my business account open. They basically said to just send it in when I got it open. Unfortunately in the hurry of trying to get everything done for my business, I didn’t properly check into them. I have two questions. One since I haven’t given them my account information, but have signed a contract, is it possible for me to cancel? I’m sure they will tell me I have to pay the fee, but not sure how they could enforce that without my account information. Second, above you talk about interchange plus where the fee charged by Visa (often 1.50%) is passed on to the merchant. The rates they gave me: 1.69% standard rate, do you know if that includes the charged from Visa or is that on top of. Thanks for your help.

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    Tom DeSimone

    Hi Chris,

    If you have not formally accepted the service or run any transactions, there is still a chance you have legal ground to cancel without paying the fee. You’d have to check your contract. Usually information about the initiation of the term will be in a “Term/Termination” section. If you try to cancel and they want to collect the fee, bring the BBB into it immediately. This doesn’t always work, but sometimes is enough to sway the situation in your favor.

    Even if you haven’t linked your account, they can send the unpaid fee to collections which may impact your credit.

    For the interchange fee, processors can be very tricky about this. Interchange-plus rates will usually not exceed 0.4% (more often around 0.25%). The 1.69% “standard” or “qualified” rate quote is part of a tiered system. It will only apply to certain transactions, perhaps only a small amount of your overall volume. Interchange rates are included in this fee. But since interchange rates average at 1.79%, you can see that it’s impossible for them to really only charge you 1.69% most of the time, because they would be losing money.

    My advice: Stay FAR away from Eliot Management, and try to get an interchange-plus plan with no monthly minimum. Let us know if you need more help!

    Good luck,
    Tom

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    Deborah King

    Our company has been getting constant calls from a Merchant Services company called National Exchange Interchange. They insist in speaking to the owner about an important banking matter. From what little they have told us we have been doing business long enough that we have now a lower credit risk due to minimal fraud or charge backs and we now qualify for a lower rates. They will not mail us anything and don’t have a website but they are willing to send someone to our office, of course they aren’t “Selling” us anything. They are very persistent calling us on the phone. Is this real or a scam?

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    Tom DeSimone

    Hi Deborah,

    I’d advise you not to give them any information about your business, and in fact not to speak with them at all. Tell them you’re not interested and that you’d like to be placed on their “Do Not Call List.” If your business profile has indeed changed and you do qualify for better rates, your current processor can lower your rates. Just ask for a rate reassessment. If you’re interested in switching processors, I’d suggest any of our highest rate providers, most of which use interchange-plus as their go-to pricing model. I’ve never heard of National Exchange Interchange, and can’t find anything about them. I wouldn’t trust them.

    Good luck!
    Tom

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    Joy

    Hello Tom. I was doing some searching online and found Deborah’s question which is exactly the same as mine. I’m getting persistent calls from EMV merchant services. They are trying to tell me that they are not a merchant company but the actual EMV that determines the interchange level prices and that I have qualified for lower rates due to no chargebacks. They are saying that I cannot try to buy this price but that only they can give it to me and they want to send someone to show me what I can save. Sounds weird to me. Thanks for your help!

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    Tom DeSimone

    Hi Joy,

    Understanding card processing rates is difficult to begin with, and when sales reps from various companies twist the truth things get even more confusing!

    To some extent the risk your business poses to a processor could have an effect on your rates (if you had a lot of chargebacks, this would be one indication that you pose a high risk), but this is just one of many attributes that can impact your rates. Your monthly processing volume has a large impact, as does the way you process cards (be it online, over the phone, in person, etc.), among other things.

    The person you spoke with is a sales representative from a credit card processing company. The “EMV” (aka, the credit card networks, although EMV actually represents the Europay, MasterCard and Visa chip-card standard) will not ever call a business about their processing rates. Never ever. This is a somewhat common trick among less ethical sales people from various processing companies.

    If you are interested to see if you could in fact be paying lower rates than you are now, then definitely check out some of our top-rated providers. Otherwise, if you are happy with your current service, you should stick with them.

    Good luck, and let us know if we can help you further.

    Best,
    Tom

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    Robin

    Hi Joy,

    I had exactly, exactly the same call. The person was super pushy, wouldn’t give me any information about the company except what they told you, they didn’t have a website, etc. I found them HIGHLY suspicious and said so…the individual I was speaking with hung up.

    I was not shopping around at all and felt targeted.

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    harry mcgugin

    Im in the convenient store business and branded. im getting ready to change to an unbranded gas and need to pick a great processor. currently doing 7 million a year in card transactions who and what do i need? Help!

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    Amad Ebrahimi

    Thank you for the question Harry, I’ll send you an email shortly so we can discuss.

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    Paul Ringstrom

    Have you ever reviewed United Payment Services? If so, can you send me your review.?

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    Tom DeSimone

    Hi Paul. We have not reviewed United Payment Services yet, so I can’t give you any definitive information. I can tell you that they are an ISO who uses First Data for their processing. I’ve also heard that they have three-year, auto-renewing contract and charge an early termination fee of about $250-400. Overall, I don’t get a great vibe from them. I’d recommend one of our higher rated processors instead. Best of luck!

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    KRM

    I work in the industry and the problem stems from business owners still stuck in the “low sticker rate” mentality. I try to explain the “effective rate” or total cost of processing but when my cost + model shows them a qualified rate of 1.80, they don’t get that a fraction of their transactions will fall under that and the real savings comes in the form of reducing the non-qualified surcharges that they will end up paying because company xyz offered them a qualified rate that’s actuall BELOW COST! Not understanding that where i can potentially keep their total cost of processing in the 2% range, they will probably end up paying over 3% on average.

    I would suggest business owners negotiate fairly with their merchant services provider based on the interchange plus model.

    Always review your statements!!

    What acquirers pay is public information. Contact me to review your statement and for an explanation of charges.

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    Christina Aguilar

    Thank you so much for making this so easy to understand! I will be reposting on my facebook to share with my merchants!

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