Interchange-Plus Pricing: Everything Merchants Need To Know
Also known as cost-plus, pass-through pricing, or sometimes even interchange++, this pricing model is the gold standard for credit card processing.
One of the most confusing aspects of credit card processing for merchants is understanding interchange-plus pricing: how rates are set and where the money goes once it’s deducted from their sales.
Providers rely on a variety of pricing models, which vary from extremely simple and predictable to hopelessly complex and bewildering. Interchange-plus pricing lies somewhere in the middle of the complexity scale, but also offers the most transparency to merchants on where their money is going of any processing rate model available today. It’s also frequently the most affordable option overall, particularly if you have a relatively high monthly volume of credit and debit card sales.
In this article, we’ll explain what interchange-plus pricing is, how it works, and how it compares to the other types of pricing plans you might encounter.
Table of Contents
What Is Interchange-Plus Pricing?
Interchange-plus pricing (sometimes called cost-plus pricing) is a credit card processing rate model that separates costs into two elements: (1) interchange fees, and (2) processor markup. Interchange fees (and associated network assessment fees) are passed-through to the issuing bank and credit card association, while the markup is retained by your provider.
How Does Interchange-Plus Credit Card Processing Work?
With interchange-plus pricing, your processor deducts both interchange fees, which can be highly variable, and a markup, which is generally fixed, before transmitting funds from a sale to your merchant account. Depending on your merchant services provider, you might see these fees broken down individually on your monthly processing statement, or you might see just the total fee deducted.
Although interchange fees are paid to the bank that issued the customer’s credit card, they’re set by the major credit card associations (such as Visa and Mastercard). Interchange fees can get very complex, but generally reflect the overall level of risk presented by a given type of transaction. Factors affecting interchange fees include the following:
- Card brand (Visa, Mastercard, etc.)
- Credit or debit card (debit cards generally cost much less than credit cards)
- Card type (rewards card, corporate card, etc.)
- Card-present vs card-not-present transactions
- Payment security features used (tokenization, encryption, etc.)
- Merchant Category Code (MCC)
For a more in-depth look at this subject, please read our guide to merchant account & credit card processing fees. You can also look at the official interchange rates published online by Visa and Mastercard.
Here’s a quick example of how processing fees are calculated for a transaction under interchange-plus pricing:
You own a restaurant and have a merchant account. A customer comes in and orders $100.00 (including tax and tip) in food and drinks. He pays with a Mastercard World Elite Consumer credit card. The interchange cost is 2.00% + $0.10, or $2.10. Your merchant account provider passes this cost to you, plus it charges a markup of 0.20% + $0.10, or $0.30. Your total cost for taking the credit card is $2.40, or 2.4%.
Note that in this example, interchange fees account for a whopping 87.5% of your total processing cost.
In contrast, your merchant account provider only makes $0.30 on a $100 sale. This ratio is fairly typical of any credit card transaction, regardless of the pricing model being used.
What Does Interchange-Plus Look Like?
A properly-formatted interchange-plus pricing example quote will look like this:
Interchange + X% (percentage-based markup) + $Y (fixed markup, or authorization fee)
Your processor’s markup is properly broken down into both its percentage-based and fixed amount components. With most interchange-plus pricing plans, the markup is the same for all transactions, making it very easy to determine how much you’re paying to your provider and how much is going to the issuing banks and credit card associations on every transaction.
One thing to be aware of, however, is that it’s very common for merchant account providers to advertise the availability of interchange-plus pricing on their websites, but provide quotes that only list the percentage-based markup and the fixed authorization fee. This is somewhat misleading, as you will always have to pay the relevant interchange fees in addition to your provider’s markup, and those interchange fees will make up the bulk of your overall costs.
You should also understand that the interchange fees are set by credit card associations, and your provider has absolutely no control over them. Any sales agent who tells you that they can get you “discounted” interchange fees either doesn’t understand how these fees work or is simply lying to you.
How Does Interchange-Plus Compare To Other Pricing Plans?
Interchange-plus pricing is one of four methods of determining processing costs in use by the payments industry today. The other three methods are (1) tiered pricing, (2) flat-rate pricing, and (3) subscription (or membership) pricing. Let’s examine how it compares to the other pricing methods that you may encounter:
Interchange-Plus VS Tiered Pricing
The tiered pricing model is, unfortunately, still the most common one available, and the one most processors offer to their merchants.
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 is a better option for the following reasons:
- Provider markup is clearly disclosed
- Interchange fees are passed through at cost
- Debit card transactions are not charged the same costs as credit cards
- It’s almost always less expensive overall
Interchange-Plus VS Flat-Rate Pricing
Flat-rate (or blended) pricing is similar to tiered pricing, but the three tiers are blended together into a single flat rate for all transactions. (Note that almost all providers offering flat-rate pricing usually have different rates for card-present, online, and keyed-in 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. With flat-rate pricing, provider markup is not disclosed, and varies from one transaction to another. For high-volume merchants, interchange-plus pricing will be a better choice overall because:
- Provider markup is the same for all transactions
- Interchange fees are broken down on your monthly processing statement
- Debit card transactions are significantly less expensive due to lower PIN debit fees
- It will usually be less expensive overall, even when monthly account fees are included
Interchange-Plus VS Subscription Pricing
Subscription (or membership) pricing is basically a variation of interchange-plus pricing, but with a few significant differences. 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 providers currently offer it. For an example of subscription pricing, see our review of Stax by Fattmerchant. Subscription pricing can save a lot of money on processing costs for very high-volume merchants. However, interchange-plus pricing will still be a better alternative for everyone else for the following reasons:
- It doesn’t require a high, up-front monthly subscription fee
- It will cost less overall if your provider keeps recurring fees to a minimum
For an example of a high-quality provider that offers interchange-plus pricing without charging a monthly fee, see our review of Helcim.
Should You Always Choose Interchange-Plus Pricing?
Interchange-plus pricing stands out as the most transparent and fair pricing model in the payments processing industry.
For the majority of our readers, it will also be the least expensive overall. Once available only to established, high-volume businesses, it’s now offered by most providers — although it’s not always advertised and you may have to ask for it.
Interchange-plus pricing isn’t perfect, however. Your processor can still tack on an abnormally high markup on your transactions, although this will be easy to spot if you shop around and compare rate quotes from several providers before deciding which one to sign up with. Most providers also offer discounted rates to higher-volume businesses, so if you only process a modest monthly volume of credit/debit card sales, you might be stuck paying a higher markup. Overall, interchange-plus pricing works best in the following situations:
- Your business runs year-round and isn’t seasonal
- You process at least $5,000/month in credit/debit card sales
- You accept a lot of PIN debit transactions
- You can afford the monthly and annual fees that usually come with a full-service merchant account
As we’ve noted above, subscription pricing can be a better option for very high-volume merchants, as it eliminates the percentage-based markup on your transactions in exchange for a single monthly subscription fee. However, there are currently only a few providers in the industry that offer this type of pricing.
Finally, remember that 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 small business credit card processing companies have to offer first.