Consumers love their plastic, right? Credit and debit payment cards provide a quick and easy way to make purchases and are more convenient than carrying around cash or a checkbook. Over the past two decades, using plastic has become the payment method of choice for a majority of consumers throughout North America.
Most merchants today accept one or more payment cards, but there was a time not that long ago when many businesses—especially small ones—refused to accept them at all. One reason was because of the costly fees associated with accepting card payments, such as industry-defined interchange fees. While fees associated with card acceptance are an unavoidable part of the overall cost of doing business, it’s important for you to understand how they work so you can make sure you’re not paying more than you need to as a merchant.
In this article we explain interchange fees and describe the different interchange pricing structures offered by payment processing services. Read on to discover which pricing model can save you the most in card processing fees.
What Are Interchange Fees, Anyway?
Interchange fees, also known as interchange rates, are what a card issuing bank charges a merchant to compensate for the costs and risks associated with processing credit and debit card transactions. The fee is calculated as a percentage of the total amount of each transaction, so there is no such thing as a “standard” fee amount. Interchange rates are set by payment card issuers such as Visa, Mastercard, and Discover, in conjunction with the card issuing banks and these fees change over time.
The rate you pay depends on a variety of factors. For example, the type of payment card the customer uses, the geographic location of your merchant account, the size of the transactions, the merchant category (supermarket, airline, hotel, etc.), and the type of transaction (card present or card not present), all affect the interchange rate. How transactions are treated under different interchange pricing models can have a big impact on your bottom line, so it’s important to work with a merchant services provider that helps you understand how the system works. Knowledge is empowering.
The three pricing structures most used in Canada and the United States are flat-rate pricing, bucket pricing, and interchange plus pricing. As a merchant, here’s what you need to know about the difference between these pricing models and what it means to your bottom line.
Flat-Rate Pricing
Flat-rate pricing is exactly what it sounds like: one flat rate for all transactions plus a transaction fee. This is the pricing model used by Stripe, Square, PayPal, Worldline/Bambora and many others.
The main advantages with this pricing model are simplicity and predictability, it takes the guesswork out of how much you are paying in fees. Knowing in advance what you’ll pay for each transaction type makes it easier to predict expenses and plan your budget. This pricing model can be a good choice for small, low-volume businesses that want a simple, easy to understand pricing plan.
There are also disadvantages to this pricing structure. The main disadvantage is that flat-rate pricing costs more on a per-transaction basis than other pricing models. For example, debit card transactions have a very low fixed cost because interchange fees are much lower for debit cards than for credit cards. As a merchant, if you are paying a flat fee, the difference between the cost and what you are paying is very large. If you pay the same flat rate for all transactions, you won’t save any money when a customer uses a debit card.
What flat-rate pricing offers in simplicity; it lacks in flexibility. For this reason, large, high-volume businesses might want to consider other alternatives.
Bucket Pricing
Bucket pricing—also known as tiered pricing, qualified pricing, or packaged rate pricing—is a rate structure that groups hundreds of interchange rates into separate pricing buckets. The bucket pricing model can be confusing, but the basic idea is that transactions are grouped into three different levels, or buckets, that have different rates depending on the characteristics of a transaction. The three buckets are Qualified, Mid-Qualified, and Non-Qualified. Here’s how they work.
Qualified – This bucket applies to transactions using cards that are swiped at a terminal (card-present) and cards that do not offer consumer rewards programs. These transactions are typically assigned to the Qualified rate bucket, and receive the lowest interchange rate.
Mid-Qualified – This bucket applies to swiped consumer rewards cards and transactions where the card information is keyed-in to a terminal instead of being swiped. Mid-Qualified rate are higher than Qualified rate.
Non-Qualified – This bucket may include commercial business cards, high-end rewards cards, international cards, and keyed-in or online eCommerce (card-not-present) transactions entered without authenticating the card with the Address Verification Service (AVS). This bucket has the highest rate.
The established rate for any bucket is typically based on the card with the highest rate within that bucket and consists of the interchange rate plus a markup. This allows processors to profit on every transaction within a bucket regardless of the interchange rate for a particular card.
This pricing structure can be expensive because it makes it hard for merchants to know exactly how much each transaction is costing them. As an alternative to both flat-rate pricing and bucket pricing, the interchange plus pricing model offers merchants of all sizes a much better way to save on fees.
Interchange Plus Pricing
With the interchange plus pricing model, you pay the interchange fee plus a fixed processing fee on the transaction volume—no buckets, no rate calculations, no complicated definitions buried in the fine print of your merchant services agreement. And unlike flat-rate or bucket pricing, the interchange-plus pricing model offers greater transparency by providing you with a more detailed breakdown of your costs.
Here are some more reasons why the interchange plus model is the best option for most businesses.
- Since the rates are displayed on your statement, you could calculate how much you’re paying for every transaction, which gives you better insight into costs.
- Lower interchange fees result in reduced costs for card acceptance and increases your profit.
- Interchange plus pricing is the better option for large businesses and merchants who process high-dollar volumes per month.
- The Interchange plus pricing model is generally more affordable for small, lower-volume businesses.
In short, the interchange plus pricing model is the easiest and most transparent way to manage the cost of your credit card transactions.
Choose a Merchant Services Provider That Offers You a Choice
The interchange plus pricing model is the simplest way to price your credit card transactions, but not all payment processors offer this option. In fact, many don’t have the technology in place to offer interchange plus pricing, and some only offer this option to large companies that process $10,000,000 or more annually. Stripe, Square, PayPal, and Bambora/Worldline do not offer this model.
Cartis Payments has the technology and the business “know how” to support interchange plus pricing for businesses of all sizes. When you partner with us as your merchant services provider, you can be confident knowing that you can always give your customers the best prices without sacrificing profit.
Say “No!” to expensive card processing fees, and put the money you save toward growing your business instead. Call us today to learn how!