Interchange ++ vs. Blended Pricing: Understanding the Best Payment Processing Strategy

Accepting card payments is crucial for businesses in today's digital economy. However, understanding the payment processing fees and the Merchant Discount Rate (MDR) can be challenging. One of the most critical decisions merchants face is choosing the right pricing model for payment processing: Interchange ++ or Blended Pricing. This article will delve into the nuances of each model, helping you determine which option best suits your business needs.

What is Interchange ++ Pricing?

Interchange ++ is a transparent and detailed pricing model that breaks down the fees associated with card transactions into three distinct components:

Interchange Fees

These fees are set by card networks (e.g., Visa, Mastercard) paid by the acquiring bank to the issuing bank for each transaction. Their purpose is to compensate the issuing bank for the risk and costs associated with handling the transaction, including fraud prevention and processing.

Interchange fees vary based on:

• Card Type: Debit, credit, commercial, and rewards cards have different rates. Usually, interchange fees are higher for commercial cards than those issued to individuals, as well as for credit cards compared to debit cards.
• Transaction Type: Card-present (CP) transactions generally have lower fees compared to card-not-present (CNP) transactions due to lower fraud risk.
• Merchant Category Code (MCC): Different industries have different interchange rates based on perceived risk and average transaction size.
• Region: Domestic transactions usually incur lower fees compared to cross-border transactions.

How much are interchange fees?

In Europe, interchange fees typically range from 0.3-0.4% of the transaction amount, while in the US, they are around 2%. These fees are determined by card schemes and are non-negotiable. Visa and Mastercard adjust their interchange rates twice a year and provide the most current information on their websites. Interchange rates for Visa and Mastercard in different regions are listed below:

• Visa interchange rates: EU, US, SG, AU, IN
• Mastercard interchange rates: EU, US, AU

AMEX and Discover, among many, which have different policies, do not publish their rates online.

Card Scheme Fees

Card Scheme fees are other types of fees charged by card networks (Visa, Mastercard) for the use of their payment systems. These fees are paid by merchants, payment processors, and acquiring banks that participate in the card payment system. They support the card network's infrastructure, security, and operational capabilities.

The components of the card scheme fees are:

• Assessment Fees: A percentage of the transaction amount covering the network's operational costs. Generally ranges from 0.11% to 0.14% of the transaction amount.
• Authorization Fees: A fee for each transaction authorization request. Usually a fixed fee per transaction, ranging from $0.01 to $0.10.
• Network Access Fees: Charges for accessing the payment network, which may be per transaction or a flat monthly fee. Can vary widely, but often include fees such as $0.005 to $0.10 per transaction or a flat fee of $5 to $15 per month.

Acquirer Markup Fee

Acquirer markup fees are charged by the acquiring bank or payment processor for facilitating the transaction. These fees cover various services and costs associated with processing payments and maintaining the merchant's account. Below are the key components of the acquirer markup fee:

• Processing Costs: Fees for transaction authorization and settlement.
• Risk and Fraud Management: Costs related to fraud detection and prevention.
• Customer Support: Costs for handling disputes, inquiries, and complaints.
• Compliance: Costs for adhering to industry regulations and standards.
• Profit Margin: The acquiring bank's profit for providing payment services.
• Negotiability: Unlike interchange and card scheme fees, the acquirer markup fee is negotiable and can vary based on the merchant's transaction volume and risk profile.

Payment Service Providers (PSPs) and Independent Sales Organizations (ISOs) and their associated fees

Merchants do not always work directly with acquirers; instead, they often utilize the services of Payment Service Providers (PSPs) or Independent Sales Organizations (ISOs). This approach can be beneficial for several reasons, including simplified integration, enhanced customer support, and access to additional services.

Why PSPs and ISOs are Needed

1. Simplified Integration: PSPs and ISOs streamline the process of setting up merchant accounts and integrating payment gateways, making it easier for businesses to start accepting payments quickly.
2. Enhanced Customer Support: These providers offer dedicated customer support, assisting with technical issues, transaction disputes, and regulatory compliance.
3. Access to Additional Services: PSPs and ISOs often provide value-added services such as advanced fraud prevention tools, recurring billing options, and multi-currency support, which can enhance the merchant's payment processing capabilities.

ISO Model and How They Charge

ISOs are third-party entities that partner with acquiring banks to resell their payment processing services to merchants. They play a crucial role in expanding the reach of acquiring banks by providing sales and customer support to merchants. Here's how ISOs typically charge for their services:

1. Residual Income: A share of the transaction fees collected by the acquiring bank from the merchants they onboard. ISOs earn a portion of the transaction fees as long-term residual income, incentivizing them to sign up and support more merchants.
2. Markup Fees: Additional fees added to the acquiring bank's rates. ISOs negotiate their own markup fees with merchants based on the services provided, which can vary widely depending on the level of service and support offered.
3. Service Fees: Fees for extra services such as terminal rentals, technical support, and additional security measures. ISOs may charge merchants for additional services, offering tailored solutions to meet specific business needs.

How Interchange ++ Pricing Works

Interchange ++ pricing provides a detailed breakdown of each fee component for every transaction, enabling merchants to see the exact cost structure. Here's how it works in practice:

1. Transaction Initiation: A customer makes a purchase using a credit or debit card.
2. Authorization Request: The merchant sends an authorization request to the acquiring bank.
3. Interchange Fee Payment: The acquiring bank pays the interchange fee to the issuing bank.
4. Acquirer Markup Fee: The acquiring bank adds its markup fee to the transaction.
5. Merchant Billing: The merchant receives a billing statement showing the interchange fee, card scheme fees, and acquirer markup fee as separate line items.

Interchange ++ vs Interchange +

The primary distinction between Interchange++ (IC++) and Interchange+ (IC+) lies in the handling of card scheme costs. With IC+, the card scheme cost is included in the processing fee, making it difficult to determine the exact markup being charged for the service.

What is Blended Pricing?

Blended Pricing, often referred to as flat-rate pricing, is a billing strategy that combines all fees into a singular, consistent rate. This unified rate remains unchanged regardless of the card type used or the transaction amount processed, offering a straightforward and predictable billing experience. The simplicity of Blended Pricing makes it particularly attractive for businesses looking to streamline their accounting processes and avoid the complexity of deciphering various interchange fees and markups. However, this convenience comes at a potential cost. For high-volume businesses, the flat-rate model might not be the most economical choice, as it could result in higher overall expenses compared to other pricing structures that offer more granularity and potential savings for different transaction types and volumes.

Comparing Interchange ++ and Blended Pricing

When deciding between Interchange ++ and Blended Pricing, consider the following factors:

1. Transparency and Understanding of Fees

• Interchange ++: Offers complete transparency. Merchants can see and understand each fee component, enabling better cost management.
• Blended Pricing: Simplifies the fee structure but lacks detailed visibility, which might obscure the actual costs involved.

2. Cost Efficiency

• Interchange ++: Can be more cost-effective for businesses processing a high volume of transactions or those that often handle high-value transactions. It allows for negotiation of the acquirer markup fee.
• Blended Pricing: Offers predictability and simplicity, which can be advantageous for small businesses with low transaction volumes.

3. Business Type and Transaction Volume

• Interchange ++: Suitable for businesses with high transaction volumes or those dealing with a mix of different card types (e.g., corporate, rewards cards). Potential cost savings can be significant.
• Blended Pricing: Better suited for small to medium-sized businesses that prefer straightforward billing and have a lower volume of transactions.

4. Cost Predictability

• Interchange ++: Variable costs depending on transaction types and volumes. Merchants need to analyze their billing statements regularly.
• Blended Pricing: Provides a stable, predictable fee structure, making it easier for businesses to forecast expenses.

Factors to Consider When Choosing a Pricing Model

1. Types of Cards Accepted: High-cost cards (like corporate or rewards cards) can increase processing fees. Interchange ++ allows merchants to see and manage these costs better.
2. Transaction Volume: High-volume businesses may benefit from the detailed cost breakdown of Interchange ++. Low-volume businesses might prefer the simplicity of Blended Pricing.
3. Average Transaction Amount: Businesses with high average transaction values might find Interchange ++ more advantageous due to potentially lower overall fees.
4. Cost Predictability: Blended Pricing offers easier financial forecasting, which can be beneficial for smaller businesses.

How Payment Processors Influence Fees

Payment processors play a significant role in determining the overall cost of payment processing. They can impact fees by:

• Offering tiered pricing based on transaction volume.
• Providing fraud prevention tools to reduce chargebacks and associated costs.
• Streamlining payment processing to minimize errors and delays.

Choosing the Right Payment Strategy

To determine the best payment processing strategy for your business, consider your transaction volume, types of cards accepted, and need for cost transparency. For businesses with high transaction volumes and a mix of card types, Interchange ++ can provide significant cost savings and better visibility into fees. For smaller businesses prioritizing simplicity and predictability, Blended Pricing may be more suitable.

Conclusion

Understanding the differences between Interchange ++ and Blended Pricing is crucial for making informed decisions about your payment processing strategy. By evaluating your business needs and transaction patterns, you can choose the model that offers the best balance of transparency, cost-efficiency, and predictability.

For a more comprehensive understanding of payment processing fees, including interchange rates and Merchant Discount Rate (MDR), refer to our detailed guide: Payment Processing Fees: Understanding Merchant Discount Rate (MDR) and Interchange Fees.

Contact us at Catalystpay for personalized support and to learn more about optimizing your payment processing strategy.

FAQs 

What are the main differences between Interchange ++ and Blended Pricing?

Interchange ++ offers transparency by breaking down transaction fees into interchange, card scheme, and acquirer markup fees. Blended Pricing combines all fees into a single rate, simplifying billing but potentially obscuring actual costs.

Which pricing model is more cost-effective for high-volume businesses?

Interchange ++ is often more cost-effective for high-volume businesses due to the ability to negotiate the acquirer markup fee and manage costs associated with different card types.

Why might a small business prefer Blended Pricing?

Blended Pricing offers simplicity and predictability, making it easier for small businesses to forecast expenses and manage their finances without delving into complex fee structures.

How do interchange fees vary by card type and transaction type?

Interchange fees differ based on whether the card is debit, credit, commercial, or rewards. Card-present transactions generally have lower fees than card-not-present transactions due to reduced fraud risk.

Can merchants negotiate interchange fees?

No, interchange fees are set by card networks and are non-negotiable. However, merchants can negotiate the acquirer markup fee with their payment processors.