Do you speak more than one language? With enough fluency to converse about many topics, and understand native speakers from around the world?
If so, lucky you!
Becoming multilingual stretches the mind and expands your worldview. Proficiency attracts career options — and certainly adds to the richness of foreign-language movies and far-off travel opportunities.
While choosing to study a new language reflects a personal choice for most people, online merchants aren’t always so lucky.
Because they owe it to themselves to learn the basics of one specific — and sometimes confusing — payments language: INTERCHANGE.
eCommerce merchants first encounter the language when doing research on payments processing options, or when talking to merchant account sales agents. Air turns blue as Interchange this and Interchange that fly around.
Then there’s the talk of different card programs — and interchange plus pricing vs. tiered pricing. Other terms like card not present transactions, chargebacks and cross-border fees also bewilder many a new merchant.
Before eCommerce merchants shy away, let’s take a gentle look at the basics of interchange rates and interchange plus pricing vs. tiered pricing.
Definitions 101: Interchange Rates
Why should you care? Because understanding credit card processing costs and choosing among different processor pricing models affects your bottom line. And to choose between interchange plus pricing vs. tiered pricing, eCommerce merchants need to know the basics of interchange.
Interchange applies to the money transferred between banks: from your acquiring bank to the issuing bank for each payment card transaction. The card brands establish interchange rates twice annually, and these rates account for the bulk of credit card processing costs.
(Visa uses the term “interchange reimbursement fees” because the fees are charged to reimburse issuing banks for interest lost during the grace period between when a charge occurred and when it’s settled with the bank.)
When a consumer uses a payment card, the cardholder’s issuing bank pays the merchant’s acquiring bank for the purchase, minus the interchange fee for the transaction. The acquirer then pays the merchant from the remaining balance minus their markup fee for processing the transaction.
Without getting too far into the weeds, just remember that when you hear interchange, it’s the portion of an eCommerce sale that goes to the issuing bank (the bank that issued the customer’s card).
Interchange fees are the backbone of payment processing, and therefore represent the pricing pillar of all payment processing models employed, including interchange plus pricing vs. tiered pricing.
Interchange Rates: Both Consistent and Variable
All payment transactions attract interchange fees, regardless of the transaction type. An example to consider: “Transaction” may represent a completed sale, or a result of card refused. Both attract an interchange rate, regardless of the processing outcome.
Consistent interchange rates mean that every processor pays the same interchange rate, for every transaction that’s categorized the same way.
Variability results from various factors that lead to a specific categorization pointing to an interchange rate for a given transaction.
Each transaction goes through the interchange qualification process to be categorized and to qualify for a particular interchange rate.
Factors that go into this categorization include:
- Your type of business and the industry (MCC code);
- Processing method (card swiped, keyed by merchant, ecommerce);
- Transaction data submitted (must be proper and complete);
- The type of payment card used (consumer credit, debit, business, and rewards).
As of this writing, categories of interchange fees among Visa, MasterCard, and Discover number more than five hundred in the U.S. alone.
Both Visa and MasterCard provide transparent documentation of their interchange rates (referred to as pass-through fees). This summary from Wells Fargo lays it out well, with more detail here. Discover and American Express don’t publish details.
It helps to understand that neither the card brands nor your processor earn a penny from interchange rates, even though interchange represents the largest portion of the processing fees you pay.
That’s why Visa distinguishes between “interchange reimbursement fees” (paid from the acquiring bank to the issuing bank) and the “merchant discount” paid by merchants to their financial institution, to cover the interchange rate plus other processing services you receive from them.
Changes to the interchange rates may occur in April and October each year. Work with your processing partner to understand any impacts to your costs.
Interchange Plus Pricing vs. Tiered Pricing
Now that you understand interchange basics, let’s review two common pricing models: interchange plus pricing vs. tiered pricing.
Interchange Plus Pricing (sometimes called cost-plus or interchange pass-through pricing) works exactly as named. Since processors all pay the same interchange rate for the same transaction, they pass that along to the merchant plus a markup — which is where things vary among processors.
The markup may be stated as a percentage of the transaction amount, a flat per-transaction fee, or it could be a combination of both. When shopping around for interchange plus pricing, focus on the markup.
In the very competitive payments industry, interchange plus pricing is both competitive and transparent.
Tiered Pricing (aka bucket pricing, standard pricing, packaged rate pricing, or qualified pricing) allows each processor to set pricing tiers by combining hundreds of interchange rates into single tiers. Usually, they name three pricing tiers “Qualified” “Mid-Qualified” and “Non-Qualified” (but it varies).
Regardless of the actual interchange rate for a specific transaction, the processor places merchants’ transactions into one of their defined tiers, and charges accordingly. Processors usually structure tiers to ensure they make a profit on every rate put into their tiers.
With no industry regulation, merchants seldom know the markup being charged over the actual interchange rate. It may be easier to understand, but merchants pay more for many of their sales transactions.
A key take-away for all eCommerce merchants: Though every processor pays the same interchange rates, markups charged vary.
The best advice for eCommerce merchants is to shop around, ask about monthly and annual fees as well as per-transaction pricing, and insist on answers to your questions before signing up with a processor for interchange plus pricing vs. tiered pricing. Buyer beware.
Let PayArc Experts Optimize Your Interchange Charges
PayArc industry experts act as your payments advisor and consultant, not only your processor. For example, we’d be happy to work with you to optimize your interchange charges and reduce your payment costs.
At PayArc, our mission is to bridge the gap between online merchants and payment solutions — for all types and sizes of merchants and app developers. We provide merchants with the latest technology and pay options, allowing them to focus on growing their businesses.
Our industry leading payment processing solution gives you all the tools you need to start accepting payments while lowering your risk to fraud and giving you some of the lowest rates in the industry.
Because you have a business to run… Our business is to help you run it better. And we’re fluent in Interchange. Give PayArc a shout today.