Interchange Plus pricing – what is it ?

Interchange Plus pricing or Blended pricing ?  These are the 2 options for card acquirers when setting the basis of customers’ pricing.  Is there a material difference? Does it matter to card accepting businesses or is it all just industry “technobabble” ?

How does Interchange Plus pricing work?

Your card acquirer’s main cost is interchange (90% of total costs), is set by Visa/Mastercard and is payable to the bank who issued the card being processed.

Interchange Plus pricing breaks down the total rate you will pay (your Merchant Service Charge or “MSC”) into 2 elements and your card rate is contractually the sum of both:

  1. The interchange which is a pass through cost from the issuing bank to your acquirer to you
  2. Your acquirer’s margin

If Visa/Mastercard change the rate of interchange on a particular card then the interchange element of your MSC is adjusted automatically, both up or down reflecting changes to your card acquirer’s cost base.

How does Blended pricing work?

The total rate you pay (your MSC) is represented by just one rate which has no contractual link to interchange.  if Visa/Mastercard change the interchange rates then whilst your card acquirer’s costs change, this is not automatically passed onto you as a change in your MSC.

Frequently when interchange does materially change then acquirers will change their blended rates but they are under no contractual obligation to do so and the amount of the change can be more (or less) than the change in interchange, ie can include an additional profit margin.

Which is best?

Theoretically, when initial rates are set both Interchange Plus rates and Blended rates would be the same.  For example if on a particular card type, interchange were 0.8% and the acquirer was looking to earn a margin of 0.4% then the Interchange Plus rate expressed as “interchange plus 0.4%” would be equivalent to a Blended rate of 1.2%.

Over time though, these equivalent rates are likely to diverge.  If Visa/Mastercard increase interchange by 0.1% then MSC for the merchant on Interchange Plus goes up to 1.3%.  For the merchant on Blended pricing, the acquirer has the opportunity to increase MSC by more than just 0.1% and earn additional margin.  Often the acquirer will slip in an additional 0.05% taking the MSC rate to 1.35%.  Conversely if Visa/Mastercard decrease interchange by say 0.1%, its not uncommon for acquirers NOT to pass this onto merchants on Blended pricing, thereby improving their own margins by 0.1%.

Interchange Plus pricing is very transparent and merchants can clearly see the margin/profit element – thats why larger retailers like Tesco, Asda, etc insist on Interchange Plus pricing.  Blended pricing on the other hand is opaque and its very easy for acquirers to squeeze in additional margin/profit and blame Visa/Mastercard for interchange increases (standard practice in the card processing industry).

Why don’t SME’s get Interchange Plus pricing?

Acquirer’s prefer Blended pricing because it gives them more opportunity and flexibility on profit margins as demonstrated above.  As SME’s have no real negotiating leverage then Blended pricing is the default position for almost every card accepting SME in the UK.

Blended pricing is also easier to administer for the acquirer because Interchange Plus requires them to maintain and keep up to date an “Interchange Table’ within their card processing and billing platform whereas Blended pricing doesn’t.  This can be problematic if the processing platform is older and has less flexible technology.

Recent and future changes to interchange

In recent months, some UK SME’s have been on the receiving end of rate increases far in excess of interchange increases on Visa debit in particular.  This wouldn’t happen were they on Interchange Plus pricing as any increase in the acquirer’s margin would be completely transparent.  Going forward, Mastercard credit card interchange will decrease by more than 0.5% in 2015/16 and whilst the large retailers on Interchange Plus will receive these cost reductions immediately and in full, we’re willing to bet that SME’s on Blended pricing will receive a lower benefit and probably delayed.

Some argue that Blended pricing can “shelter’ merchants from interchange increases as acquirer’s may not pass these on.  This doesn’t happen in practice and all material interchange increases are passed on in order for the acquirer to maintain their margins.  The other key factor is that the EU have just legislated to cap interchange at broadly 0.2% on debit cards and 0.3% on credit cards and Visa/Mastercard are in processing of adjusting interchange to their maximum level under the cap.  Increases in the foreseeable future therefore seem remote.

We said there are 2 options for pricing, but there is a third – “Interchange Plus Plus” whereby the acquirer doesn’t just contractually pass on the interchange but also passes on the scheme fees from Visa/Mastercard.  Scheme fees are currently much lower than Interchange (<10%).  Interchange Plus Plus is less frequently used but again some larger retailers insist on it to give them total transparency. Interchange Plus Plus will receive more prominence in the UK going forward because it is widely expected that Visa/Mastercard will materially increase scheme fees in 2015, giving acquirers further scope for “margin management” of merchants on Blended pricing.

What should you do?

  1. If you are a small SME, the chances of you successfully negotiating Interchange Plus pricing with your acquirer are slim.  But anytime your prices go up or down due to interchange, do check what the actual interchange movement was.  If you find out your acquirer has increased their own margin then shop around because you will find acquirers who don’t do this.
  2. There are now a few ISO’s (Independent Sales organisations licensed as reseller’s by acquirers) who will offer capped Interchange Plus pricing to SME’s.  These are not yet available on our website but we can provide details and quotes to merchants directly through the Cardswitcher contact form below.
  3. If you are a mid-market sized business on Blended Pricing, do consider requesting Interchange Plus pricing.  One immediate benefit is you will automatically receive the Mastercard credit card reductions in 2015/16 in full and on time.  No negotiation required with your acquirer.

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