The interchange-plus pricing model works by adding the processing fee of the bank directly to the interchange fee as set out in the merchant agreement.
Interchange in the payment industry is a charge that a processing bank charges for a transaction with a MasterCard or Visa payment for a card issuance of a card. Interchange is a composite fee, consisting of a percentage and a fixed amount of components, e.g. 1.80 per cent + $0.10 (in this case the interchange fee for a $100 transaction would be [1.80 per cent x $100] + $0.10 = $1.90).
Interchange fees are set by Visa and MasterCard and are published on the websites of both Credit Card Associations. Each association uses dozens of different exchange rates, based on two key criteria: the type of card used. Regular consumer types of cards have a lower exchange rate than special cards, such as rewards, business-to-business, commercial, etc. In addition, debit cards have a lower exchange rate than credit. Setting the transaction. Payments processed in a face-to-face environment are less interchangeable than non-face-to-face payments.
The interchange plus pricing model works by adding the processing fee of the bank directly to the interchange fee as set out in the merchant agreement. Typically, the processor mark-up is also a composite fee, consisting of a percentage and fixed components.
Thus, if the processor charges 0.25% of the transaction value + $0.15 for its services, this fee would be added to whatever the exchange rate each transaction of the trader receives. As there are dozens of different exchange rates, the merchant will pay dozens of different fees for his transactions.
Many traders feel uncomfortable with the interchange plus pricing model, precisely because it lacks predictability. They have become accustomed to two or three-tiered pricing structures, where they know that transactions can only be processed at two or three different rates, respectively. Is it really necessary to make things more complicated than this?
Yes, it is, if you're going to save money. To understand why, look at the two-and three-tiered models as an attempt to simplify the interchange tables. Let me explain how a tiered pricing structure is designed to illustrate this.
Suppose there are 50 different MasterCard interchange fees. The two-tiered model breaks them down into two groups, one containing the 25 lowest rates and the other containing the remainder. The processor sets one rate, called "qualified" for the lowest rate group, and another, called "non-qualified" for the other group.
The crucial point to be understood is that both the qualified and the non-qualified rates must be higher than the highest interchange rate in their respective groups. Thus, if the lowest rate in the qualified group is 1.04 per cent + $0.10 and the highest is 1.80 per cent + $0.10, the qualified rate must be higher than 1.80 per cent + $0.10. The same rule applies to the second group.
Now you can see that the rate of your processor charging you can vary in a fairly wide range in a tiered model. This does not make sense, because the payment is processed in exactly the same way, irrespective of the interchange in force. As far as the processor is concerned, all transactions are identical. So why should it be paid a lot more for one transaction than another?
More importantly, why would you pay for certain transactions even more than others for your processor? See, there's nothing you can do about the interchange. It's beyond your control. However, it is within your powers to select a pricing model and negotiate what your processor charges. As unpredictable as it may seem, the interchange plus credit card pricing model is the one that lets you get the most out of your negotiating position.