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Merchants can use interchange’s complexity to their advantage

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Every merchant knows that accepting credit cards is essential in today’s world. However, myriad pricing options available among hundreds of payment processors, including flat-rate, tiered pricing and interchange-plus pricing, can be complex.

It could be tempting to pick the easiest pricing option to understand and move on. But other times, more complex pricing options can really help businesses save money.

Whether you are a merchant just starting out or have some experience with credit card processors, here’s a guide that decodes the options you have for choosing a payment model, the benefits of each, and how interchange optimization could be helpful.
Flat-rate pricing tends to appeal to many business owners because of the easy-to-understand fee structure for accepting debit and credit card transactions. With this model, merchants pay a set flat rate for all transactions. For small businesses starting out, flat-rate pricing could be a simple way to begin accepting credit cards. However, if you expect your business to grow, you might want to think about other options that can save you more money in the long run.

The downside to flat-rate pricing is the markup on interchange rates. These are typically higher than other options. If your business has a high volume of transactions, this option may not be your best as it will quickly diminish profits. However, if you aren’t processing high volumes of transactions, flat-rate pricing could work well for your business.

Tiered-rate pricing (or bundled pricing) bundles hundreds of transaction types into different tiers, which fall into three basic options: qualified, midqualified and nonqualified. This processing model allows the processor to charge the merchant a set fee for any transaction that falls within one of the set tiers, regardless of what it really costs the credit card processor. Therefore, the fees include the interchange rate plus a varied markup, which might not be made clear to you.

With tiered pricing, it can be difficult to optimize interchange. If you wanted to optimize interchange, the merchant would first need to secure a processing solution with transparent markups. This isn’t necessarily possible with tiered-rate processing.

If you are trying to price out different providers, there’s not a great way to see exactly how much of a markup you might be charged per transaction. That can mean you may incur unexplained added expenses.

With interchange-plus pricing, businesses get full transparency. This model consists of paying an interchange rate and a “plus” (an additional cost). The interchange is the percentage of the transaction that is paid to the issuing bank and the credit card association. The processor passes that interchange charge to the merchant to pay. Then the merchant pays a “plus” (the additional cost) to the processor as a markup for processing the transaction. The merchant will pay this amount in addition to the interchange rate.

The advantage of interchange plus pricing is that it allows the merchant to see the real cost of each credit and debit transaction. In addition, transactions are not priced according to a tier. Instead they will each be priced out separately, which can save money, depending on a few factors.

Prices and fees are stated clearly with interchange plus pricing. Businesses will see each transaction type broken down by cost of interchange rate and then see the markup added by the processor on their statements. The markup will stay the same no matter what card is used. There are no qualified, midqualified or nonqualified rates as seen in tiered pricing. Therefore, merchants can achieve optimal interchange rates.

When processing with a provider that offers interchange plus pricing, any merchant can realize savings if they are processing transactions via a gateway that supports Level II / Level III processing. These are often merchants that specialize in business-to-business and business-to-government services.

The majority of these types of merchants accept “P-cards” (purchasing cards), which help gather Level II and Level III data. This extra data collected helps to present a more complete picture of the transaction, by giving information like customer codes, PO numbers and tax IDs. This extra information lands cheaper rates. The average merchant collects Level I data when processing a payment, which includes basic billing information. It’s important to note here that collecting Level I data is not enough data to benefit from interchange optimization.

Providing Level II and Level III data helps lessen the threat of fraudulent activity, while also significantly optimizing a merchant's interchange rates, since card associations incentivize merchants for providing this in-depth data. Merchants will find interchange optimization can help them save when using interchange-plus pricing. It can help to correct downgrades that would raise interchange costs, which is something other pricing models cannot do.

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