The Interchange Plus model is a pricing structure used in credit card processing that aims to provide transparency and fairness to businesses. To understand the Interchange Plus model, let’s break it down in simpler terms.
- Interchange: Interchange refers to the fees that credit card associations (such as Visa, Mastercard, or Discover) charge for processing transactions. These fees are set by the associations and are paid to the card-issuing banks.
- Plus: The “plus” in Interchange Plus represents the additional costs added by the payment processor or merchant service provider (MSP) for their services. This includes the costs associated with processing transactions, managing the payment gateway, providing customer support, and other related services.
Now, let’s see how the Interchange Plus model works:
- Interchange Rates: The credit card associations set different interchange rates for various types of transactions, such as swiped or keyed-in transactions, debit or credit cards, rewards cards, or corporate cards. These rates can vary based on factors like transaction type, risk level, and card brand.
- Markup: In the Interchange Plus model, the payment processor adds their markup or margin on top of the interchange fees. This markup covers the payment processor’s costs and allows them to generate revenue. The markup can be a flat fee per transaction or a percentage of the transaction amount.
For example, let’s say the interchange rate for a particular transaction is 1.5%, and the payment processor’s markup is 0.25%. If a customer makes a $100 purchase, the interchange fee would be $1.50 (1.5% of $100), and the payment processor’s markup would be $0.25 (0.25% of $100). In total, the merchant would pay $1.75 for that transaction.
The advantages of the Interchange Plus model include:
Transparency: The Interchange Plus model provides businesses with transparency regarding the actual interchange fees charged by the credit card associations and the payment processor’s markup. This allows businesses to understand the exact costs associated with processing credit card transactions.
Fair Pricing: Since the interchange rates are set by the credit card associations and are the same for all payment processors, the Interchange Plus model ensures a level playing field. Businesses are charged based on the actual interchange rates and the payment processor’s transparent markup, eliminating hidden fees or unexpected costs.
Flexibility: The Interchange Plus model allows businesses to have more control over their pricing. As interchange rates may vary, businesses can negotiate with their payment processor to adjust the markup, ensuring competitive rates and potentially reducing costs.
While the Interchange Plus model offers transparency and fair pricing, it’s essential for businesses to carefully evaluate and compare different payment processors to ensure they receive competitive interchange rates and reasonable markups. By understanding the Interchange Plus model, businesses can make informed decisions when choosing a credit card processing solution that best suits their needs.
Interchange Plus is a pricing model that breaks down the costs of accepting credit cards into two parts:
- Interchange: These are fees set by credit card associations and paid to banks. Think of it as the base cost for processing transactions.
- Plus: This is the additional cost charged by the payment processor for their services, like transaction processing, customer support, and payment gateway management.
In simple terms, Interchange Plus works like this:
- The credit card associations set the interchange fees.
- The payment processor adds their own markup on top of the interchange fees to cover their costs and make a profit.
- The total amount you pay for credit card processing is the interchange fee plus the payment processor’s markup.
The advantages of Interchange Plus are:
- Transparency: You can see the actual interchange fees and the payment processor’s markup separately, so you know exactly what you’re paying for.
- Fairness: Interchange rates are the same for all payment processors, ensuring a level playing field. You only pay for the actual interchange fee and the transparent markup.
- Flexibility: You have some control over the markup, allowing you to negotiate competitive rates and potentially reduce costs.
By understanding the Interchange Plus model, you can make informed decisions about credit card processing and choose the best solution for your business needs.