In the last blog post, we introduced interchange fees and explained what they are, who pays them, and how they are determined. We explained that interchange rates vary for several reasons, including the type of card used, the transaction's size, and the merchant's category. 

In this second part of this blog post, we will explore the pros and cons of using the interchange plus option and why it is better than the flat rate pricing model. 

What is Interchange Plus Pricing?

Interchange plus pricing is a pricing model for credit card processing where the processor adds a fixed markup on top of the interchange fee charged by the card network. The processor adds a fixed fee that covers the costs of processing and managing the transactions to the fee charged by the card network for each transaction. With interchange plus pricing, the transaction cost is transparent and predictable, making it easier for merchants to compare and negotiate rates with different processors.

Here's how it works:

1. A fee is charged by the credit card network (such as Visa or Mastercard) called the "interchange fee." This fee is the same for all merchants.

2. A set markup is added on top of the interchange fee. This markup is a fixed amount agreed upon between the merchant and the processor.

3. The total cost to the merchant is the sum of the interchange fee and the markup.

In other words, interchange plus pricing is a transparent and predictable way for merchants to process credit card transactions. Instead of paying a vague percentage of each transaction as a markup, merchants know exactly what they're paying for and can budget accordingly.

‍

Pros and Cons of using Interchange Plus Pricing

Pros:

• Transparent costs: Interchange plus pricing provides a clear understanding of the cost of processing a transaction, making it easier for merchants to compare and negotiate rates with different processors.
• Lower costs: The fixed markup in interchange plus pricing is typically lower than the flat rate charged by other pricing models, which can result in lower overall processing costs for merchants.
• Flexibility: Interchange plus pricing allows merchants to customize their processing costs based on their specific needs and volume of transactions.

Cons:

• Acquiring: It may be difficult to find a processor that offers interchange plus pricing, as it is more beneficial for merchants and requires more effort from the processor to implement.

Interchange plus pricing is a game changer for merchants. With this pricing model, you know exactly what you're paying for each transaction, which makes it a breeze to compare and negotiate rates with different processors. Not only that, but the fixed markup in interchange plus pricing is usually lower than the flat rate charged by other pricing models, meaning you could end up paying less for your credit card processing. And the best part? You can tailor your processing costs to suit your specific needs and transaction volume with interchange plus pricing. 

‍

What is Flat-Rate Pricing?

Flat-rate pricing is a pricing model where the merchant pays the same percentage rate for all card types. The rate charged by the processor is not based on the Interchange rates set by Visa and MasterCard. Instead, it's a single fixed percentage rate that applies to all cards, regardless of the Interchange category. 

Unlike the interchange plus pricing structure, the flat-rate option doesn't allow merchants to save money on processing costs. The card networks set interchange rates, so they will always be the same regardless of which processor you use. 

Now that we've explained what flat-rate pricing is and how it works let's take a look at the pros and cons of this type of pricing. 

Pros and Cons of using Flat Rate Pricing

Pros:

• Consistent: Flat-rate pricing is straightforward and predictable, making it easier for merchants to budget for their processing costs.

Cons:

• Overpriced: The flat rate charged by this pricing model can often lead to merchants overpaying for fees.
• Hidden: Flat rate pricing can be manipulated by the processor, who may mislabel certain transactions as high risk, resulting in a higher flat rate.
• Misleading: Flat rate pricing often charges more for debit card transactions, leading to confusion and unexpected costs for merchants.
• Ambiguous: The lack of transparency in flat rate pricing can make it difficult for merchants to fully understand the costs of processing each transaction.

Some businesses default to flat-rate because it's easy to budget. But simplicity comes at a cost. Here’s why. Flat-rate pricing ignores all of the hundreds of different interchange rates, which results in overpaying for fees.

It becomes obvious pretty quickly. Flat-rate pricing is a less dynamic, one-size-fits-all model. Additionally, be aware! Processors mislabel businesses as high-risk. Sometimes by accident because they aren't familiar with the industry. But more often, it's because they make more money. Here’s how. 

High risk = high rates. With flat-rate, the rates are hidden, so a business can’t review them. Leading to increased profit for them and increased costs for you.

Also, an important note. With Flat rate, debit cards cost more with flat-rate pricing. Debit cards cost a fraction of what Credit Cards cost. If you are being charged the same for both Credit and Debit, you are losing money. 

Flat-rate pricing is not transparent. I mentioned this before, but it is essential to remember. Payment processors use this model not to disclose the breakdown of fees. This means you won’t see interchange rates on the credit card statement. How can you understand what you are paying for if you can’t see the interchange and mark up separately? You can’t. 

In conclusion, flat-rate pricing may seem easy, but weighing the potential downsides before settling on a pricing model is important. Consider a dynamic pricing structure that aligns with your business's specific needs, and be aware of processors who may be overcharging you with lack of transparency in fees. Do your due diligence and find the best fit for your business.

Why Interchange plus Pricing is better than Flat Rate Pricing

The Interchange Plus Pricing model offers numerous benefits for businesses, including transparency and affordability. With this pricing model, businesses can easily see the fees associated with each transaction, allowing them to ensure they are paying a fair price and shop around for the best rates. Additionally, this pricing model makes certain transactions, such as debit card transactions, more affordable.

Interchange plus pricing is more transparent than flat rate pricing because businesses can see the Interchange rates on their credit card statement. This allows businesses to understand what they're paying for and how much Interchange costs them. 

In addition, with interchange plus pricing, companies only pay Interchange on the transactions they process.

This is especially possible for businesses that opt for a merchant services provider like Cathedral Payments and not a large payment processor like Square. 

If you wish to change to the interchange plus pricing structure, please schedule an appointment with Cathedral Payments and we will help you get started.