Why You Should Want Interchange Plus Pricing

September 20, 2008

September 20, 2008

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Interchange plus pricing is the most transparent form of pricing for credit card processing. While tiered and other forms of pricing mean processors can charge arbitrary markups, the processor markup for interchange plus pricing is fixed no matter what kind of transaction occurs.

In fact, we feel so strongly about the fairness of interchange plus, that all of the processors on the FeeFighters marketplace must stick to interchange plus pricing for their bids. Here’s some evidence:We recently found an article at Transaction World, a trade magazine for credit card processors, called Interchange Plus Pricing – click here to read it (it looks like Transaction World removed that article in fall of 2009, so the link goes to the cached version of the article at the internet archive).The article was written by an employee of Global Payments.  Global Payments is one of the largest credit card processors and also provides the backend processing capabilities for many smaller credit card processors (called ISOs).Here are the highlights:More merchants are becoming informed about the fact that interchange plus is a better deal for them:
Until recently, only the largest merchants have been able to obtain “Interchange-Plus” Pricing. Otherwise known as “interchange pass through” pricing, Interchange-Plus is the practice of pricing a merchant with a transaction fee and then passing the exact interchange and assessment costs from the Associations to the merchant…an increasingly competitive acquiring landscape, has significantly increased the percentage of merchants being quoted and paying Interchange-Plus.
Interchange Plus makes it significantly harder to sneak through extra fees to the merchant:
Common practice was for acquirers to mark up and charge significantly more for “downgraded” transactions (those that did not qualify for the best rate applicable). These “downgrades” often comprised the majority of the profit acquirers received on merchants, as business owners focused mainly on the “qualified” or best rate. Interchange-Plus does not allow acquirers to increase profit on “downgraded” transactions.
It also makes it harder for them to raise your fees later:
In addition, the Associations (Visa and Mastercard) have made it a common practice to alter or add interchange rates/levels at least once a year, if not more. Each time changes occur, acquirers hustle to give their merchants notice and then alter merchant pricing accordingly. In many cases, acquirers take this opportunity to actually “pad” the increase and take additional profits. For example, if a blended (accounting for all changes and based upon the transaction history of a portfolio) interchange increase for an acquirer is 2.2 basis points, an acquirer might easily increase most merchants by 3.0 basis points. This “lift in margin” benefits acquirers and sales reps as they make more money per account with no additional sales work.
Conclusion:
Acquirers only take money out of their own hands by accelerating the practice of Interchange-Plus pricing. … Over the long haul, by limiting the use of Interchange- Plus pricing you can simplify the sales and service cycle, increase your profits, and create greater long-term value in your portfolio.
Ok, fair enough, it is better for credit card processors to avoid interchange-plus pricing.  But for all those same reasons, it is better for merchants to *have* interchange plus pricing.Find a credit card processing provider by bidding them off against each other using a FeeFighters credit card processing auction (every deal signed through FeeFighters is interchange plus – because it’s the only transparent and merchant-friendly way).

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