There are quite a few credit card processing companies now pushing Interchange Plus Pricing to merchants. We’ve all seen the ads that say process for “.5%” and that’s all you pay. The fact of matter is that NOBODY will only pay .50%
An interchange plus quote will sound like “interchange PLUS 0.50% – that’s why it’s called interchange plus. The PLUS part is the markup that the processor is making on top of interchange. It will usually be less than 0.50% of your volume. What they are quoting you is the markup. On average interchange rates are about 1.63% for retail and for e-commerce the interchange rate is higher at around 2.05%.
So, if you take a retail swiped transaction and add all the fees together you’ll have 1.63% PLUS .50% which gives you a rate of 2.13% for retail transactions or an e-commerce rate of 2.55%. What about rewards cards or corporate cards? For these types of cards the interchange is about another 1% – 1.5% on top of the qualified rate depending on the card type.
With Tiered pricing usually just one price is quoted (called a qualified rate) for each category type. For example, they will quote 1.69% for retail transactions or 2.2% for e-commerce. Most tiered pricing programs have one tier for qualified cards, another for rewards cards and another one for all other card types.
With tiered pricing you’ll get the quoted rate on most of the transactions then get charged Non-qualified charges on the transactions that don’t meet certain requirements. Some of the requirements to get a qualified transaction can be Address Verification, CVV/CVV2, or Zip Code Matches.
It is very hard to compare one tiered pricing plan to another, because even if the qualified rate, non-qualified rate and the mid-qualified rate are the same, the rules of each credit card processing company which transactions fall into each category can be different from one company to the next. For example, company “A” may charge a qualified rate when the address and zip code matches but company “B” may classify the same transaction as un-qualified if the address doesn’t match exactly.
So which is better – Interchange Plus Pricing or Tiered Pricing?
The first way to answer this is to look at which one is being pushed by the people making the money. They will push the pricing that will make them the most profit from and this is currently interchange plus pricing.
Most interchange plus pricing plans we see are not true interchange plus programs and they find some way to add hidden fees on top of the interchange or they add fees and call them interchange when they are not.
The second answer to the question is “it depends”.
If you know that most of your transactions will be “qualified” then it’s probably correct to say that interchange plus is NOT a good deal. As referenced above the average qualified rate on an interchange plus retail transaction is 2.13% or 2.55% for e-commerce so a tiered rate of 1.69% or 2.2% would save you about 45%. Yes this goes against what quite a few interchange plus sales reps say but it’s how it works.
Now what about all those “Non-Qualified” transactions?
On interchange plus pricing sales reps will tell you they still only charge .50% or whatever they charge but here’s the real deal. Many companies will have “qualified interchange plus” and ‘non qualified interchange plus” pricing which basically becomes tiered pricing anyway. Here’s how this works: on your transactions if the address, zip, name and CVV/CVV2 all match they’ll give you interchange plus their .50% but if anything doesn’t match they tack on another 3%. The way they make their money on this is to set the requirement on their processing system for everything to match (which it almost always doesn’t) then charge you interchange plus the surcharges. What we’ve seen is that most of the interchange plus pricing actually being charged to merchants is much higher then anyone thought it would be.
Non Qualified Tiered Pricing: Tiered pricing will usually have a set rate for all the non qualified transactions. The average rate runs about 3.5% which seems high but may not be. With tiered pricing you will know the highest rate but on what cards you get this rate is very hard to figure out until you process for a few months.
So which one is better?
What we’ve found is that for most merchants a tiered pricing plan will be better if most of the transactions are qualified transactions. Tiered pricing can actually be about 20%-45% cheaper for most retail merchants. For merchants who are retail and key in some of their transactions then interchange plus pricing is usually better.
The bottom line is it takes someone with experience to analyse merchant processing statements to make the best determination so if a merchant services sales rep automatically tells you they will save you money with interchange plus pricing watch out!