When business owners decide to accept credit cards as forms of payment, they need to sign up with a processor for services, such as a high-risk merchant account. As they search for a credit card processor, merchants hope to secure the best terms possible. Understanding interchange-plus pricing and its benefits are critical. When thinking about fees, each credit card processor decides how to structure the costs and how to pass those costs along to merchants. Learn more about interchange-plus pricing and why this form of pricing works well for business owners.
Three categories of fees come with processing payments through a high-risk merchant account: interchange, assessment, and processor services. Initially, the concept of interchange centered on the idea that credit card issuers lose interest during the time they allow consumers to borrow money and pay it back without interest. Most people are familiar with this concept as a grace period. Since the credit card issuers set the interchange, processors can’t adjust this fee. In most cases, the interchange is the highest fee a merchant pays for each transaction.
Next, assessment fees go to the credit card companies, such as Visa and MasterCard. Even though these companies are separate from the issuing banks, they maintain much of the infrastructure that enables credit card usage. Each company establishes its assessment fee, and processors can’t change that fee.
Finally, the processor charges a service fee. Whether you have a traditional or high-risk merchant account, you must reimburse the processor for handling each credit card transaction. While processor fees vary, the fee amounts are usually a percentage of each sale, plus a small per-transaction fee.
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If you compare different processors, you’ll see a variety of price structures. Some companies use tiered pricing, which relies on processor-set criteria to decide the fee for each transaction. For example, the processor may bump a transaction into a higher-fee tier if the credit card isn’t physically present. With this approach, online companies and other businesses that have a high-risk merchant account find themselves paying higher fees.
Another pricing structure concerns membership fees. Rather than paying a percentage of each transaction, business owners agree to a monthly membership payment along with a per-transaction fee that doesn’t vary.
With flat pricing, merchants pay the same set price for all transactions. Flat fees work best for seasonal companies and those that need to process only a small number of payments.
For many businesses, the best option is interchange-plus pricing. Processors and merchants view this pricing structure as mutually beneficial.
Think of the interchange-plus pricing model as the most transparent way to do business with a provider of high-risk merchant account services. With this fee model, the processor passes along the interchange and assessment fees to merchants. Also, the processor requires a service fee that’s a small per-transaction payment, plus a percentage of the transaction amount.
The interchange, assessment and service fees are all clearly outlined in the monthly statement the processor gives the merchant. By explicitly stating where the merchant’s money is going, the processor makes it easy for business owners to verify that the interchange and assessment are “pass-through” costs.
One advantage of interchange-plus pricing is its competitiveness. Since the service fees are transparent in this fee structure, business owners can quickly estimate how much they’ll pay each month. You also have an easier time comparing quotes from different processors if you’re comparing interchange-plus pricing packages. The only variance will be the service fees.
With interchange-plus pricing, you have to consider the number of transactions you process each month and whether or not the processor has a monthly minimum you must pay. If you expect to have only a few transactions, a monthly minimum may cost you more money over time compared to a plan that has no monthly minimum, but holds back a higher amount from each transaction.
To calculate the value of interchange-plus pricing, figure out your effective rate. Divide gross fees by gross sales to find out what percentage you’re paying for credit card processing in total. With the effective rate, you can decide which largest merchant processor is offering you the best deal for your company.