Interchange Plus Pricing
In one of our previous articles we talked about what you are paying for in card processing fees. This shed some light on all the parties involved, their roles and what costs are generated. Terminals, Gateways, Schemes, Interchange and Acquirers all come into play, so here is a quick recap.
(simplified version of: https://www.visaeurope.com/about-us/four-party-model/)
The question now becomes: How does this cost structure translate into what merchants pay on their card payments?
There are three different pricing structures that payment processors use to pass these costs on to the merchants:
- Interchange Plus Plus
- Tiered Pricing
- Fixed Rate
This first article in the series, we’ll focus on the Interchange Plus Plus.
What is Interchange Plus Plus Pricing?
As the name suggests, there are three components making up the Interchange Plus Plus structure.
- The Interchange
Probably the most complex of the components is the Interchange. First of all, there is not just one Interchange. Each of the Card Schemes (i.e. Visa or Mastercard) sets their own Interchange rates, and for each one they change from country to country. Here you can see the current rates charged by Visa in the various countries.
In addition, the rates also change based on:
– the acceptance method of the card: Online and phone payments are more expensive than face to face verification methods, like chip and pin
– the type of cards: Debit cards and personal credit cards are cheaper than corporate cards
– Country in which the card has been issued: Overseas cards are more expensive than UK issued cards
Finally, while it is set by the Card Schemes, it is charged by the Acquiring Bank to the Merchant Bank.
- The first Plus: Card scheme fees
This component includes the Card Scheme Fees.
The Card Scheme Fees, again, are imposed by the Card Schemes they charge these fees to the Acquirer. Each Merchant Bank negotiates these rates and thus are not public. But as a reference, Visa’s Card Scheme Fees are around 0.02% of the transaction value, while Mastercard is around 0.04%
- The second Plus: Acquirer margin
This is what makes the Interchange Plus Plus so interesting. This is the margin the Acquirer makes. All this doesn’t really explain the Interchange Plus Plus pricing structure, just yet.
The peculiar aspect is that the margin is very transparently negotiated with the merchant. If they charge 0.5% of the transaction value, this will never change, no matter what card you process.
What makes Interchange Plus Plus so interesting?
In short, it is the fairest and most transparent pricing scheme.
It’s quite obvious how it is transparent, as it is based on a pure cost basis that is being passed on at nominal value, with the addition of a negotiated and unique margin. You know quite precisely how much they earn… that doesn’t happen quite often.
And how is it fairer than other deals? Well, both the Interchange Rates and the Card Scheme Fees vary over time. The Interchange in particular has been steadily decreasing over the past years. So what happens, is that this cost reduction is passed straight through to you, allowing you to benefit from these rate changes. With the Tiered Pricing structure or the Fixed Fee, these cost savings would stick with the Acquirer.
Of course this will evoke the argument of: On the other hand, if rates increase, merchants will be charged more, while the other structures would keep them safe.
Well, this would be true as a very short term effect, as Acquirers will always have a clause allowing them to adjust their prices in case of changes in the Interchange or Card Scheme Fees. What is worse, often they go as far as adjusting the fees by more than the actual change of the cost base.
So what’s the downside?
It’s confusing and your bill will look very complicated. The reason Acquirers are so successful with fixed rates and tiered pricing, is that it allows them to simplify all this and boiling it down to one rate or three tiered rates.
It might not be the easiest structure to understand, but chances are it would save you quite a lot of hard earned money compared to the other pricing structures.