Interchange refers to the fee charged to a business owner or a merchant every time a customer swipes his/her card. A more significant percentage of the merchant’s fee goes to the issuing bank. The rest goes to the acquiring bank.
As interchange fees are a flat fee and a percentage of the total transaction. As a result, customers’ small purchases can be costly to a business owner. At times, you will notice businesses request a minimum transaction sale to ensure it makes financial sense. For owners, an interchange rate is a tax they pay to the banks for their customers to have the convenience of paying through a credit or debit card.
The interchange fee is different depending on the card and the service provider. Some payment systems have lower interchange fees making them more preferred and popular among business owners. Interchange forms a crucial part of any bank’s revenue.
Interchange Fees Aren’t Static.
Based on money moving costs, and it’s value in a given time due to current relative risks and the interest rates, credit card companies set and can adjust these fees.
How do Banks Calculate Interchange Fees?
Many complex variables determine the current interchange fees. Credit card companies calculate interchange into a percentage of a particular business’s total sales plus a flat rate (including taxes). Every year, billions of dollars are paid to these companies by business owners as interchange fees. The average interchange rate in the United States is about 2% of the purchase amount. Specifics can be found at the following links Visa, MC, Discover, and AMEX.
Below are some of the factors that affect interchange:
1.The Type of Transaction
Card-not-present (CNP) transactions are riskier than point-of-sale (POS) transactions. In POS transactions, you can scan the chip, take a signature, or enter a pin. Credit card companies consider both online orders and mail-order-telephone-order (MOTO) to be CNP and charge them a higher interchange rate.
2.The Business Size and Industry
Businesses in different industries and those that are of different types do not pay the same interchange rate. For example, supermarkets do get charged a higher interchange rate than gas stations. Furthermore, large enterprises often get charged lower rates since they can negotiate with these credit card companies and banks successfully as they have enough “clout.”
3.The Type of the Card
Debit cards having PINs often get charged lower rates than credit cards as they are safer. However, each bank or credit card company charges differently from the other. Reward cards usually charge a higher interchange fee to enterprises.
Interchange Plus Pricing
Interchange Plus Pricing is a pricing model that credit card companies and banks use to establish the cost per transaction paid by business owners It has two main components – a markup set by the credit company itself and the interchange fee that the card networks determine. This model is among the most balanced and fair schemes of pricing applied in the payment processing industry.
With the numerous and different retail payment solutions, it may be a daunting task for you to know the one that is best for your business. However, you can choose the one that perfectly suits you and your business with the right guidance.
The best pricing model that your business can settle for is the interchange-plus pricing. It is known to be the best and most transparent credit card processing pricing model in the payment industry. Interchange plus is the most straightforward model a credit card processor can offer to a merchant.
How Does Interchange Plus Pricing Work?
The plus in “Interchange Plus Pricing” refers to your business’ card’s cost plus the additional small fixed service fee charged to the merchant. It is the actual fee the business owner pays the credit card processing company or bank for allowing him/her to use their service to take payments.
Simply put, this model works by applying a fixed markup to Discover, Visa, AMEX, or MasterCard’s interchange fees. A credit card transaction’s markup consists of two components: one is expressed as an authorization fee and basis points.
In this pricing model, you can know the exact amount that each transaction costs your business. This is irrespective of the credit card type your customers are using to pay you for the goods or services you are selling.
One key factor to consider is the card type being used (business, personal, credit, debit, etc.). Next is the way the credit card gets processed (swiped through a machine, online, etc.). This determines where the interchange category that a particular transaction qualifies to, and eventually the final amount the merchant gets charged.
Regardless of the interchange category that a transaction becomes eligible for, the markup assessed is the same. The markup and interchange charges form the merchant discount fee. The merchant’s discount fee is the cost paid by a merchant to process a particular transaction.
What are the Benefits?
1.It is the most cost-effective and transparent pricing model of a business owner’s account pricing.
2.It allows for interchangeable expenses optimization due to the model’s separation of interchangeable plus processing costs.
3.This pricing model eliminates the hidden costs and surcharges as the interchange fees are passed directly to a business owner with a fixed markup. Using this, the business owner can help save on the unnecessary expenses associated with the other pricing models and use the money to grow his/her business.
4.This pricing model yields a substantial saving over the same processing volume as other pricing models, such as enhanced recover reduced (ERR). Other pricing methods it beats include Flat Rate, Tiered, and Bill Back.
5.This pricing model compels credit card processing companies to set more reasonable markups as the merchant can see what the markup is. The credit card processing industry is very competitive. Many companies know that more business owners will opt to use the company offering the least rates, compelling them to set reasonably low rates.
From the above benefits, it is evident that the best pricing model for many business owners is the interchange pricing plan. Payline is an excellent and a leading company in the credit card processing industry. In conclusion, we work on Interchange Plus Pricing because it is the most cost-effective and most transparent pricing method in the industry.