In the world of payment processing, understanding the fees that come with accepting credit and debit card payments is crucial for business owners. One of the most important fees to understand is the interchange fee, which makes up a significant portion of the costs associated with card payments.

In this blog post, we’ll explain Interchange Plus Pricing and how it works, delve into the specifics of interchange rates, and explore the reasons why the interchange plus pricing model can save your business money and increase profitability. By the end of this post, you will have a clearer understanding of how interchange fees work and why the Interchange Plus model is the best choice for your business.

Key Terms You Need to Know

Before we dive deeper into the details of interchange fees and the Interchange Plus Pricing model, let’s first define some key terms you’ll need to understand.

Issuing Bank

The issuing bank is the financial institution that issues a credit or debit card to a cardholder. This is the bank with which the cardholder has an account and from which they borrow or deposit money to use for making payments.

Acquiring Bank

The acquiring bank is the financial institution that enables merchants (business owners) to accept credit and debit card payments for goods and services. This bank works with businesses to facilitate card payment processing and makes sure that the payments are routed to the appropriate accounts.

Merchant Service Provider (MSP)

A Merchant Service Provider (MSP) is a company that provides businesses with the technology and services needed to accept credit and debit card payments. These providers work with acquiring banks and payment processors to set up businesses with point-of-sale (POS) systems and online payment gateways.

Credit Card Network

A credit card network is a system that connects card issuers (banks) and acquiring banks. Examples of card networks include Visa, MasterCard, American Express, and Discover. The network ensures that credit card transactions are securely processed between cardholders, merchants, and financial institutions.

What Are Interchange Fees?

Interchange fees are the fees that merchants must pay when accepting credit and debit card payments. These fees are set by the card-issuing companies (such as Visa and MasterCard) to cover the risk and handling charges associated with card transactions. Interchange fees are non-negotiable, which means merchants don’t have control over them.

In fact, interchange fees make up the most significant portion of the fees that businesses pay when processing credit card transactions. These fees are typically hidden within your payment processor’s charges but play a crucial role in determining the overall cost of accepting cards.

Visa and MasterCard publish their interchange fee tables that list dozens of interchange categories. These categories determine the rate applied to a given transaction based on factors like the card type and the merchant’s industry. Discover and American Express, however, do not disclose their fees publicly.

How Do Interchange Fees Work?

Here’s how interchange fees operate:

  • Every time a customer makes a payment with a credit or debit card, the acquiring bank (the merchant’s bank) pays the interchange fee to the issuing bank (the customer’s bank).

  • The acquiring bank then charges the merchant the same amount as the interchange fee plus additional fees (such as a markup for processing).

Fees vary based on several factors, including the type of card used (credit or debit), the transaction size, and the industry in which the business operates. Generally, interchange fees range from:

  • 1.5% – 3% for credit card payments

  • 0.1% – 0.25% for debit card payments

  • Plus, a flat fee of around $0.05 – $0.07.

It’s important to note that interchange fees are a foundation for all card processing charges and remain constant regardless of which processor a business uses.

Interchange Fees: Who Pays Them and How Are They Determined?

Who Pays the Interchange Fees?

Ultimately, the merchant pays the interchange fees. Before reaching the merchant, these fees flow from the acquiring bank to the issuing bank.

How Are Interchange Fees Determined?

Interchange rates are determined by a variety of factors, including:

  • The merchant’s industry: Different industries may face different rates based on the perceived risk and the transaction volume typical for their sector.

  • Card type: Interchange rates differ depending on whether the transaction is made with a credit card, debit card, or even premium cards (e.g., rewards cards).

  • Transaction method: The fee can be affected by whether the transaction takes place in person (card present) or online (card not present).

  • Transaction size: Larger transactions may attract higher interchange fees.

While these factors help determine the rate for a given transaction, the merchant can do little to alter the fees, as they are set by the credit card networks.

Why Interchange Plus Is Better Than Flat Rate Pricing

Now that we’ve covered the basics of interchange fees, let’s examine why Interchange Plus Pricing is a better option than traditional flat-rate pricing.

What is Flat Rate Pricing?

In flat-rate pricing, the merchant pays a fixed percentage of each transaction, regardless of the interchange fees set by card networks. Businesses often pay more than necessary, as the flat-rate fee covers the merchant’s processor’s markups and hidden fees.

Why Choose Interchange Plus Pricing?

Interchange Plus Pricing provides a more transparent and cost-effective model. Here’s why it’s better than flat-rate pricing:

  • Transparency: In Interchange Plus, the fees are broken down into two clear components: the interchange fee (set by the card issuer) and the processor’s markup. This allows businesses to clearly see what they are paying for.

  • Lower Overall Costs: Because the Interchange Plus model charges a lower fixed markup compared to flat-rate models, merchants often save on processing fees. Over time, this can lead to significant savings.

  • Customization: Interchange Plus offers flexibility. It allows businesses to customize fees based on their transaction volume, card type, and business needs. Flat-rate pricing doesn’t offer this level of control.

  • Fairer Pricing: In Interchange Plus, businesses only pay the actual interchange fee plus a fixed markup. With flat-rate pricing, the processor often overcharges businesses by charging a high, uniform rate for all transactions.

Cathedral: Helping You Transition to Interchange Plus Pricing

If you’re considering switching to Interchange Plus Pricing, Cathedral can help. Our team of experts can assist you in transitioning to a more transparent and cost-effective pricing model, ensuring that your business maximizes its savings on payment processing.

We specialize in helping businesses like yours navigate the complexities of payment processing, providing guidance on structuring your fees for maximum profitability.
To learn more about how Interchange Plus Pricing can benefit your business, check out The Smart Choice: Interchange Plus Pricing for Nutraceutical Business.

Conclusion: Maximizing Your Profitability with Interchange Plus Pricing

Understanding interchange fees and how they work is critical for any business that accepts credit and debit card payments. By switching to Interchange Plus Pricing, you can gain better control over your payment processing costs, save money, and increase profitability.

At Cathedral, we help businesses like yours transition to more flexible and transparent pricing models, ensuring that your business benefits from lower fees and improved financial health.

If you’re ready to switch to Interchange Plus Pricing or want more information, reach out to our team at Cathedral today to schedule a consultation.