If your business is finally set up to accept credit card payments, you’re probably bracing yourself for the influx of predominantly cashless customers. Between chip and PIN or card not present (CNP) transactions, you won’t have to deal with counting coins any longer, and neither will your customers.
But though the grass might seem greener, there’s always a couple of weeds you just can’t get rid of. With card processing, this appears in the associated costs of processing the transactions and holding a merchant account.
Fortunately, you can regulate and keep track of these costs through the pricing model. Interchange plus, and interchange plus plus, are two of the most transparent pricing models available. Here we’ll run through how they work, and help you work through the “technobabble” to see if it’s right for you.
How does Interchange Plus pricing work?
Interchange Plus pricing basically breaks down your Merchant Service Charge (MSC) – the total rate you will pay – into 2 elements. Your card rate is then contractually the sum of both:
- The interchange – A pass through cost from the issuing bank to your acquirer to you.
- The plus – Your acquirer’s fee for processing the transaction, and card network scheme fees.
If card networks like Visa or Mastercard change the rate of interchange fees on a particular card, then the interchange element of your Merchant Service Charge is adjusted automatically, either up or down reflecting changes to your card acquirer’s cost base.
Interchange Plus Plus Pricing
For Interchange Plus Plus, the acquirer doesn’t just contractually pass on the interchange, but also passes on the scheme fees from card networks.
This means the card rate is then made up from:
- The interchange
- The plus (1) – Acquirer’s fee.
- The plus (2) – Card scheme fee.
Scheme fees are usually much lower than interchange (<10%), and determined by different factors like the card and transaction type.
Interchange Plus Plus is less frequently used, but some larger retailers insist on it to give them total transparency, as they can see exactly what they’re being charged for.
What about other pricing models?
Interchange plus and interchange plus plus aren’t the only models available, and you can also choose from tiered, subscription, or blended pricing.
For blended pricing, the total rate you pay (your MSC) is represented by just one rate that includes the interchange, processing fee and scheme fees.
Though its simplicity is appealing, blended pricing comes with a lack of transparency. If Visa or 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.
When interchange does materially change, acquirers will often change their blended rates. However, they are under no contractual obligation to do so. The amount of the change can be more (or less) than the change in interchange, and can therefore include an additional profit margin.
Interchange Plus or Interchange Plus Plus: Which is best?
Theoretically, when initial rates are set, Interchange Plus, Interchange Plus Plus, and Blended rates would be the same.
For example, say on a particular card type, interchange was 0.8%, the processing fee was 0.2%, and the card scheme fee was 0.2%. The Interchange Plus Plus rate of “interchange plus 0.2% plus 0.2%” would be equivalent to both:
- Interchange plus 0.4%
- Blended rate of 1.2%.
Over time though, these equivalent rates are likely to diverge. If Visa or Mastercard increase interchange by 0.1% then the 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%, it’s not uncommon for acquirers not to pass this onto merchants on Blended pricing, thereby improving their own margins by 0.1%.
Interchange+ and Interchange++ pricing are very transparent and merchants can clearly see the margin/profit element – that’s why larger retailers like Tesco, Asda, etc insist on them.
Blended pricing on the other hand is opaque and it’s easy for acquirers to squeeze in additional profit, blaming Visa/Mastercard for interchange increases. This is pretty unlucky for the Blended pricing merchants, but unfortunately standard practice in the card processing industry.
Why don’t SMEs get Interchange Plus pricing?
Acquirers prefer Blended pricing because it gives them more opportunity and flexibility on profit margins as demonstrated above. As SMEs have no real negotiating leverage, Blended pricing is often 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 an up-to-date “Interchange Table’ within their card processing and billing platform, whereas Blended pricing doesn’t. This can be problematic as some SMEs may use older processing platforms with less flexible technology.
Some argue that Blended pricing can “shelter” merchants from interchange increases as acquirer’s may not pass these on. However, this doesn’t happen in practice as all material interchange increases are passed on in order for the acquirer to maintain their margins. The other key factor is that the EU legislated to cap interchange at broadly 0.2% on debit cards and 0.3% on credit cards, meaning increases are fairly unlikely in the foreseeable future.
What should you do?
If you are a small SME, the chances of successfully negotiating Interchange Plus (or Interchange Plus Plus) pricing with your acquirer are pretty slim. But anytime your prices go up or down due to interchange, it’s important to check what the actual interchange movement was. If you find out that your acquirer has increased their own margin, then you’re best to shop around as you will find acquirers who don’t do this.
There are also a few ISO’s (independent sales organisations licensed as reseller’s by acquirers) who will offer capped Interchange Plus pricing to SMEs. These are not yet available on our website, but feel free to get in touch with us and we can provide details and quotes directly.
If you’re a mid-market sized business currently on Blended Pricing, it’s well worth your time to consider requesting Interchange Plus or Interchange Plus Plus pricing. They’re likely to be the most transparent and cost effective model for your business. Though it’s not necessarily guaranteed to work out cheaper, you can analyse exactly how you’re being charged and even target specific payment methods accordingly.
Here at Cardswitcher, we are passionate about helping businesses save big bucks on their card processing costs – check out our card processing fee comparison tool to help you slash your outgoing fees by 40%