Interchange plus pricing

October 18, 12:17 PMAustin Merchant Services ExaminerTom Wenneson

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Previously, we discussed tiered pricing for a merchant services account. In this article, we examine Interchange Plus pricing.

Interchange plus pricing

Interchange Plus pricing is a simple pricing model where the interchange cost is marked up by a fixed amount on every transaction.

How much markup? This is often entirely up to the sales representative who is selling card processing services.  In a later article we’ll discuss what is reasonable (this author’s opinion), but for now we will use a markup of 0.40% (40 basis points) and $0.05/per transaction. 

In the example used previously, the cost of a non-premium, swiped, retail transaction (official name: ‘Consumer Credit, Merit III’) was determined to be 1.68% + $0.10/transaction.  Adding the markup (0.40% + $0.05) to this gives a total price to the merchant of 2.08% and $0.15/transaction.

This number may be startling to a merchant used to qualified-tier pricing in the 1.68% to 1.75% range + $0.20/transaction.  However, it may actually represent a substantial discount to what is paid, in aggregate, for all card types under a tiered program. 

Let’s dig a little deeper and demonstrate this by including offline debit (no PIN used) and premium cards and comparing prices under both interchange plus and a three-tiered pricing system (Qualified, Mid/Non-qualified; 1.72%, 2.64%, 2.99% + $0.22/transaction, respectively).  Again, all pricing used will be MasterCard®. 

Note that the processor in this example accepts a loss in the Credit Merit III category, while making their profit in other categories.  With the above pricing and 100 sales at $10 each ($1000 total), interchange pricing is 20% less expensive than tiered pricing.  (Dust off your algebra and see if you can come to the same conclusion.  To cheat and receive a small spreadsheet with this comparison, use the contact email link above.)

Pros and Cons to interchange pricing models

As with any system, there are positives and negatives associated with its use.  Here are a few of each:

Pros:

-         The actual cost and markup of the services provided are clear; the merchant pays true cost plus a fixed markup.

-         More detailed information regarding cards accepted is generally available.  This information can potentially be used to help drive selected customers towards other (less expensive) options.

-         For businesses that pay more Mid/Non-Qualified surcharges (due to reward, business/corporate or key-entered), interchange plus can save a significant amount of money.

-         For high volume, low transaction value businesses (e.g. fast food restaurants) interchange plus can save a significant amounts by greatly reducing the per transaction fees.

Cons:

-         Billing statements can be long and confusing.  If the merchant has a diverse distribution of clients, there could be 50-100+ different pricing categories listed on the billing statement.

-         One size does not fit all.  Depending on business environment and card mix, interchange based pricing may actually cost a merchant more.

Have a question? Email tom@surechecks.com for an answer or to have it included in a future article.

Next: Pass-Through pricing