Interchange Fees and the Hype behind Interchange-Plus Pricing

There's a pretty steep learning curve when it comes to credit card processing. Much of the confusion comes from elaborate merchant account pricing models built to maximize profits and increase merchant retention through fees that are more expensive than they seem. All of these pricing models are based on interchange - understand interchange, and you're well on your way to saving a lot on credit card processing fees.

The easiest way to interpret interchange is as the wholesale rate and fee that a business pays to accept credit cards. Interchange fees are set by stakeholders of Visa and MasterCard and they're updated twice a year in April and October.

Interchange fee schedules are readily available from Visa and MasterCard's respective websites – but before you go checking them out, know that there are a couple hundred interchange categories between the card associations.

The sheer number of fees is intimidating, but it doesn't have to be. In fact, many interchange fees are for specific business types or businesses with a specific processing profile. Typical merchants don't have to worry about these categories.

You don't need to memorize the interchange fee schedules, just understand that interchange fees are the basis for all merchant account pricing models. It doesn't matter if your merchant account has a tiered pricing model, interchange plus or enhanced recover reduced (ERR). They all use the same interchange fees as a basis for charges.

How the different pricing models act upon the underlying interchange fee is what makes them more or less expensive and also more or less transparent to the merchant. Let's take a look at tiered pricing for example. A tiered pricing model functions by reducing all of the interchange fees down to just a few categories. The lowest rate on a tiered merchant account referred to as the qualified rate is what's known as a lost leader in the industry.

Through sales tactics and conditioning, merchants have been trained to concentrate on getting the lowest qualified rate when in fact most of their transactions are going to be charged at the higher mid and non-qualified rate categories. ERR is similar to tiered pricing in the way that is has hidden consequences, only the actual charges on an ERR pricing model can be even harder to determine.

That's where interchange plus pricing enters the picture. The interchange plus pricing model functions just as the name implies. Instead of packing interchange fees into a few categories, interchange plus adds a pre-determined percentage to every transaction.

Interchange is a complex topic, but you don't need to be an expert to understand basically how it directly affects the money that your business pays in processing expenses. Click on over to MerchantCouncil to find a wealth on in-depth information on interchange and the different merchant account pricing models that are available to your business.