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What Is Interchange Plus? An Easy-to-Understand Guide

Payment processing is – well let’s just face it – confusing. Surprisingly, many business owners don’t even know what type of pricing plan they’re on right now!

We’re here to change that.

Today’s blog is an important one. We’re going to explain what interchange plus pricing is why it’s considered one of the most transparent structures, as well as how you find an interchange plus program that complements your business. Let’s find out!

What Is Interchange Plus?

Interchange plus is a specific type of pricing plan that many payment processors offer. Here’s how it works:

Interchange Fees + Discount Fees = Interchange Plus

Interchange plus is actually made up of two main fees: interchange fees and discount fees. You pay a fee – an interchange percentage – every time your business conducts a transaction with a customer.

Here’s a quick rundown of each of those components:

  • Interchange Fees – Set by Visa, Mastercard, and Discover; mandated fees that will fluctuate depending on the nature of the transaction (in-person vs over-the-phone, regular credit card vs business credit card, etc); fees are paid to issuing banks
  • Discount Fees (also called the Markup) – Set by the payment processor; this is the “plus” part of the “interchange plus” equation; this is the fee they choose to charge merchants for the volume they process; made up of a rate and a per item fee on top of interchange fees

Interchange fees should be the same regardless of which payment processor you choose, which means discount fees should be the only thing that differentiates one processor’s interchange plus pricing program from another. It’s important to note that the card companies – Visa, Mastercard, etc – change their interchange rates twice a year, so it’s always worth evaluating your payment processing plan. As mentioned above, card companies also determine the fees they charge on a transaction based on the details of that transaction, such as card presence and the type of card used.

How to Tell Good and Bad Programs Apart

Why is interchange considered the most transparent pricing structure? Because the bulk of these rates are set by the credit card companies, and the banks set rates from processor to processor so it’s relatively easy to see how much you are paying for your credit card processing. Compare that to other types of pricing like tiered or ERR pricing. The processor determines these pricing programs, and these programs can hide many surprises that you won’t expect to see on your statement.

A processor could sell you on tiered pricing at a low rate, but little do you know that your transactions will rarely fall into that low-price bucket, so you’ll have to pay a premium to process most transactions.  Or, a processor could sell you on a flat-rate program (like Square), but realistically you’re paying way above the market average on EVERY transaction you process.

At the end of the day, some processors charge a high markup to process credit cards; however, there are ways you can safeguard your business against falling victim to costly credit card processing fees. Use our shortcut formula below to calculate how much you SHOULD be paying to process credit cards.

 

The Interchange Plus Shortcut

Now all you have to do is pick apart the good interchange plus programs from the bad ones. Usually, interchange rates are expressed in the form of a percentage fee and a flat transaction fee. Written out, it looks like this:

 

Interchange Plus Rate = _______% + $_______

 

So, for instance, 0.20% + $0.15. That means you’re paying a 0.20% rate on the volume processed plus an extra $0.15 per transaction fee.

Cool trick: you can use this to forecast what you’d be spending in processing fees per month! Let’s say your average ticket is $10 and that, for the sake of this example, you process 200 transactions a month. The interchange plus rate being offered to you by a processor is 0.20% + $0.15 per transaction. How do you figure out you monthly processing costs under interchange?

Here’s a quick shortcut:

  • Take the average ticket and multiply it by the total transaction amount to get your monthly processing total

$10 x 200 = $2000/month

  • Plug that monthly total into the percentage part of the interchange plus equation (first half of estimated interchange plus costs per month)

0.20%($2000)

0.0020 x $2000 = $4

  • Multiply the flat rate part of the interchange plus equation by your monthly processing volume to get your flat rate (second half of estimated interchange plus costs per month)

$0.15 x 200 = $30

  • Add the results from steps 3 and 4 together

$4 + $30= $34

So, per month, you’d pay an estimated $34 in discount fees under that processor. If you want a more accurate number, you can add up all your tickets for the previous month and then begin at step 2.

Being able to forecast your potential savings? That’s huge. Take charge of your bottom line – use this shortcut to avoid paying more than you deserve to pay in processing fees.

 

So…What Now?

On the hunt for a new payment processor? Trying to cut costs and maximize your revenue? Click here for a free merchant statement analysis, and see if you qualify for one of our low-cost programs.