The most common form of credit card processing pricing is the tiered option. Depending on the nature of the transaction, the applicable fee can vary greatly — making cost forecasts exceptionally difficult.
But there’s another option for merchants, and it makes projecting the cost of credit card fees a lot easier. It’s called “interchange” or “cost plus” pricing, and it’s growing in popularity around the world.
What Is Interchange or Cost Plus Pricing?
Interchange is an infinitely complex subject, one that is confusing to many small retailers. The short explanation is that interchange is a fee that major credit card associations establish as payment for their services. The interchange charge applies to all card transactions, and is a pre-arranged percentage of the total transaction amount. This charge must be paid by the organization processing the charge, so it’s passed on to you. In most cases, the charge consists of a percentage and a fixed markup price.
There is also a charge levied by the processor (the organization providing your merchant services). This is usually a smaller percentage of the total transaction value, plus a flat markup fee.
A Simple Example of Interchange Pricing in Action
Imagine a customer pays for a $100 dress with their credit card. The interchange cost applied to transactions is 1.5% plus $0.08. That’s $1.50 plus $0.08 — or a total of $1.58 to process the entire £100 transaction.
But the merchant also requires payment for the credit card services they provide. Let’s say the markup fees are 0.5% along with a flat $0.04 per transaction — and additional $0.54.
So, the cost of selling that dress for $100 is $1.58 (interchange fee) plus $0.54 (merchant fee). This cost of $2.12 can be passed onto the customer or absorbed by your business. The fact that you can forecast it with a degree of accuracy makes financial planning, price-setting and margin control just a little easier.
How Interchange Pricing Can Save Your Business Money
Tiered pricing models round these charges into a few tiers to simplify things, but the result is often a higher overall figure at the end of the year. As interchange and merchant markup costs are transparent and shown separately, it’s easier for business owners to see exactly where there money is going. In most cases, switching to the Interchange pricing model will result in a significant cost saving over the course of a year.
Talk with an expert in POS services about the benefits of switching to the interchange model of credit card processing charges. With a clearer understanding of what you’re paying for credit card terminals and the services they deliver, you might be able to save your business a significant amount of money.
If you are interested in the topic of interchange, here is another blog that is available to you on the subject https://insight.getvms.com/understanding-interchange or about types of credit card processors to avoid https://insight.getvms.com/four-types-of-credit-card-processors-to-avoid