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A Simple Explanation of Interchange Plus Pricing

If you are an active agent, you know that the pricing structure I recommend is “Interchange Plus Pricing.” I find that many agents do not have a clear understanding of how Interchange Plus Pricing works. Therefore, they are not able to make a clear presentation to the customer. This is my attempt to create an […]

If you are an active agent, you know that the pricing structure I recommend is “Interchange Plus Pricing.” I find that many agents do not have a clear understanding of how Interchange Plus Pricing works. Therefore, they are not able to make a clear presentation to the customer. This is my attempt to create an easy to understand explanation of Interchange Plus Pricing and how it compares to Tiered pricing. In this blog article, I am going to reference several documents. You may want to download these first so you can pull them up to reference them. I am going to walk you through how I present Interchange Plus Pricing to a merchant.

The Sample Interchange Fee Table provides a random look at the different interchange fees that Visa charges when one of their cards is swiped or keyed in. Each line on this spreadsheet represents a separate card type and/or a separate method of entry (keyed in or swiped, retail or restaurant, etc.) There are over 400 different interchange charges for Visa and Mastercard on this form. I have chosen fifty Visa interchange rates to show a broad sample; I would like you to notice several things about this form.

1. Notice the range of percentage fees that fits into each “bucket” or “tier” on standard tier pricing. At the top we see a random sampling of interchange rates for transactions which would be considered “Qualified” or “Qual” transactions. These include the new debit fees from the Durbin Amendment at the top (0.05%) all the way to a standard retail swipe purchase (1.54%.) On three tier pricing (the most common pricing in the industry) the merchant would pay one flat rate for all of these transactions, usually around 1.79%.

2. Notice the column labeled “Average Tier Rate.” This is the average rate the merchant would pay on a tier pricing platform. For Qualified or “Qual” transactions (also called Tier 1) I used an average rate of 1.79%. For Mid-Qualified transactions I used the rate of 2.9%. And for Non-Qualified transactions I used the rate of 4.1%. These are broad industry averages and vary by business type and volume. ***Just to make sure you understand this fully, look at number 1246 under “Global Chg.” This particular card type labeled “International Airline…” (probably a United Airlines Visa Card) has an interchange rate of 1.00%. Every time this card is used at a business Visa charges the processor 1.00% for that transaction. The processor then puts this under the heading of “qualified transaction” on the processing statement and charges a flat fee of around 1.79% for all qualified transactions. In other words, they mark up this transaction 0.79%. If the merchant was on interchange plus pricing, the processor would pass through the 1.00% to the merchant plus a set percentage of mark up.

3. Notice the “Average Mark Up.” This is the average tier pricing rate minus the actual interchange cost. In other words, this is the percentage of profit the processor is making on each type of transaction. Again, notice the range: some transactions are very profitable for the processor and others are less profitable. This is because they are charging the merchant a flat fee for all transactions in that tier, but the processor must pay many different interchange fees to Visa, Mastercard, etc.

4. Notice the “Per Item Fee” column. Many agents do not fully understand this. The per item interchange fee works exactly the same as the percentages. When you look at a statement that has a transaction fee of say $0.27 you might think, “Well, we only charge $0.08!” But that would be comparing apples to oranges. On interchange plus pricing, using an $0.08 transaction means we mark up each interchange per item fee $0.08. Notice that some card types have $0.00 per item fee. In this case, if they were on tier pricing, they would still pay the full transaction fee (I used $0.27 as an example rate.) So the processor would profit $0.27 on that transaction. However, notice that the new debit interchange fees at the top include a per item fee of $0.22. In this case, the processor would only profit $0.05 if they were charging $0.27. On interchange plus pricing, we pass through the per item interchange fees just like the interchange percentage fees. In the case of the transaction fee, we mark up each transaction a set amount (I use $0.08.) So if you were marking up each transaction $0.08, the merchant would actually be paying $0.30 for a debit transaction but only $0.08 for those card types that have $0.00 per item fee.

5. Notice the “Per Item Mark Up” column. This column shows the mark up per transaction for a tier priced merchant paying a $0.27 transaction fee. As you can see, there are a few transactions where the mark up is less than $0.08. But the large majority of the transactions are marked up much higher than $0.08. Again, this is one more reason why interchange plus pricing is usually the most cost effective structure for a merchant.

6. At the bottom of this form, I show the average mark up percentage just based on all the fees listed on this form. The average came out to 1.13% as opposed to 0.25% on our interchange plus model. The average transaction fee mark up came to $0.19 as opposed to $0.08 on interchange plus pricing. Now let’s take a look at the Interchange Plus Worksheet. I provided it above in PDF or WORD if you would like to edit it. I would highly recommend taking this little form with you to businesses. If you do not want to fill it out, you can at least bring the bottom “Example” portion to explain to merchants why interchange plus is better. Here are the instructions if you want to fill it out in front of the merchant:

Step 1: Show the merchant the “Sample Interchange Rates” form. Explain that although there are many different rates Visa and Mastercard charge, the current processor combines all these into three rates called: “Qualified,” “Mid-Qualified,” and “Non-Qualified.” Take a look at a few rates on this form and show the average tier rate compared to the actual interchange rate. Explain how much transactions are marked up. Do the same for the per item fees and show how those are marked up as well.

Step 2: Look at the merchant’s statement, and identify the Qualified, Mid-Qualified and Non-Qualified rates. Now show the merchant these rates on the statement.

Step 3: Enter the qualified rate in all four blanks at the top of the worksheet. You can get a good idea of how to fill this out by looking at the example merchant at the bottom of the worksheet.

Step 4: Subtract the “Example Interchange Rate” from the “Qualified Rate.” Enter the result in the “Current Mark Up” space for each of the four example rates. Explain to the merchant as you do this, “As I showed you earlier on the Interchange Table, there are many different interchange rates. Here are four example interchange rates. Let’s see what your current mark up is on these four transaction types.”

Step 5: Show the merchant the text below the current mark up which states how our interchange plus mark up is a flat 0.25%. Have him or her compare that mark up to what is currently being paid.

Step 6: Enter the transaction fee in all four of the spaces next to “Current Transaction Fee.” Then subtract the “Example Interchange Rate” (ranges from $0.22 to $0.05) from the “Current Transaction Rate.” Write the resulting number in the “Current Mark Up” spaces underneath each of the four example interchange rates. While you do this say, “In the same way that the percentage fees vary, so do the per item or transaction fees from Visa and Mastercard. Here are four examples of different per item fees. You can see some are very high and some are low. In fact some card types have no per item fees at all. But on your current plan you always pay X transaction fee no matter what the true cost per item is.”

Step 7: Read the text below that section stating that on interchange plus pricing, we mark up each transaction $0.08. Then compare that to the mark up the merchant is paying now. ***Odds are our total per item fees will be higher on the debit transaction fee. Show the merchant that while our total debit per item fees may be higher, our percentage mark up is drastically lower. (The interchange rate is now 0.05% + 0.25% mark up, compared to 1.79% that most merchants pay for these transactions on tier pricing.) I really hope these forms help you gain a better understanding of how Interchange Plus pricing works and to present these benefits to the merchant. Completing these forms is a perfect way to close on the spot by saying, “Although I cannot give you an exact dollar amount we will save you on the spot, we will clearly be saving you a good deal of money, won’t we?” Or use these forms to get the statement by saying, “Obviously, I would need to take a copy of this statement back to my office to work up a full price comparison if you would like to know the exact dollar amount you could save. Would Thursday be a good day for me to come back in and show you these savings?”

Have a great day!
James Shepherd james@ccsalespro.com

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