The role of card payments—and the card payment processing fees that accompany these payments—is only growing. In 2023, Visa alone facilitated more than 276 billion transactions globally. For any business that accepts card payments, understanding the costs involved is key to making sound financial decisions and safeguarding its bottom line.
As card payments continue to grow, it’s even more important for business owners to understand the two primary pricing models in card payment processing: interchange plus and flat-rate pricing. Each has different benefits, and understanding these differences can lead to substantial cost savings, increased transparency, and clearer financial forecasting. Below, we’ll provide a straightforward comparison of these two models to help you choose the best one for your business’s payment processing needs.
What’s in this article?
- What are interchange fees?
- What is interchange plus?
- Interchange plus vs. flat-rate pricing
- How to choose an interchange fee pricing model for your business
What are interchange fees?
Interchange fees are the fees that a business’s bank (known as the acquiring bank, or acquirer) pays to a cardholder’s bank (the issuing bank, or issuer) when businesses accept card-based transactions. They are one part of the total transaction amount and are used to cover the issuing bank’s costs related to card issuance, transaction risk, and handling.
Interchange fees pay for the convenience—and cover the risk—of using card-based payment methods. In the European Union, consumer card interchange fees are capped at 0.2% for debit and 0.3% for credit cards. Here’s how interchange fees break down for Visa and Mastercard in a few regions.
Visa
Visa’s interchange fees depend on the type of card and transaction method, among other factors.
Mastercard
Mastercard’s interchange fees also vary based on multiple factors.
What is interchange plus?
Interchange plus—also known as interchange plus pricing or cost plus pricing—is a pricing model used by credit card processors, merchant service providers, and payment processors to determine how much businesses pay to accept credit and debit card transactions.
In this model, the costs are broken down into two parts:
Interchange fee: These are the fees that the card-issuing banks charge for each transaction. They vary based on factors such as card type, transaction size, and the business’s industry.
Plus (markup): This is the payment processor’s markup. It includes a small, fixed percentage of the transaction plus a per-transaction fee. This is how the payment processor makes money.
In the interchange plus model, the business pays the interchange fee set by the card networks, plus a separate fee that the payment processor or acquiring bank charges. The interchange fee is the same fee that the card networks charge for the transaction, and it varies depending on factors such as the type of card, the transaction type, and the industry.
With interchange plus, the separate fee that the payment processor or acquiring bank charges is usually a fixed markup or a percentage of the transaction value. This fee covers the processor’s services, including managing the transaction, providing customer support, and other associated costs.
Here’s an example of how interchange plus works:
Imagine that a customer makes a $100 purchase with a credit card, and the interchange fee for that particular transaction is 2% of the transaction amount, or $2. In addition, the payment processor charges a markup of 0.5% on top of the interchange fee.
In this case, the business would pay $2 for the interchange fee (2% of $100) and an additional 50¢ for the processor’s markup (0.5% of $100). The total cost to the business for that transaction would be $2.50.
Interchange plus pricing is often considered more fair and cost-effective for businesses compared to other pricing models, such as tiered or flat-rate pricing. This is especially true for businesses with a high volume of transactions. While it may seem more complex initially, interchange plus pricing can often result in lower overall costs because of its transparency and potentially lower markup rates. But each pricing model has its pros and cons, and each business will need to take into account its own needs when choosing which model to use.
Interchange plus vs. flat-rate pricing
Typically, businesses encounter two main pricing models for credit card processing fees: interchange plus and flat rate. Each has its own advantages and disadvantages.
Interchange plus pricing
The interchange plus model breaks down costs into two parts: the interchange fee—which is set by the issuing banks and card networks—and the markup fee, which is set by the payment processor. This model is highly transparent, as it allows businesses to see exactly how much they’re paying for each part of the service.
Interchange plus pricing tends to be more cost-effective for businesses with higher transaction volumes or businesses where transactions vary greatly in size. The variable nature of the interchange fees means that businesses can take advantage of lower fees for certain types of cards or transactions.
However, interchange plus pricing can be difficult to understand because of the variability in interchange fees, and the pricing structure can be unpredictable—as interchange fees can change twice a year.
Flat-rate pricing
Flat-rate pricing simplifies everything into one set rate for all transactions, regardless of the type of card used or how the transaction is processed. For example, a payment processor might charge a flat rate of 2.75% per transaction.
The main advantage of this model is its simplicity. It’s easy to understand, and businesses can predict their costs for every transaction. This can be particularly beneficial for small businesses, startups, or businesses with lower transaction volumes—for which the benefit of simplicity might outweigh the potential cost savings of the interchange plus model.
The downside of flat-rate pricing is that this simplicity often comes at a cost. Flat-rate pricing can be more expensive than interchange plus pricing, as payment processors set their rates to cover the highest possible interchange fee they might incur, and then keep the difference as profit. Additionally, there’s a lack of transparency, because businesses don’t see the breakdown of costs between interchange fees and the processor’s markup.
Between the two models, neither choice is objectively “better.” It depends on your specific business needs. If your business processes high volumes of transactions, or you value transparency and potentially lower costs, interchange plus might be the better choice. If simplicity and predictable costs are more important to you, flat-rate pricing might be more suitable.
How to choose an interchange fee pricing model for your business
Choosing the right pricing model for your business hinges on a variety of factors, including your sales volume, average transaction size, the nature of your business, and your preference for simplicity versus cost optimization. Here are a few key aspects to consider when evaluating your options:
Sales volume and average transaction size
If your business has a high volume of transactions or deals with high-value transactions, the interchange plus model could be more cost-effective. This model can take advantage of lower interchange fees for certain types of cards or transactions. But if your business is new, small, or deals with lower-value transactions, the predictability and simplicity of flat-rate pricing might be more beneficial.Nature of your business
The nature of your business can help determine which model will work best for you. If your business operates in person, and customers pay by swiping or inserting their cards into your point-of-sale (POS) system, the interchange fees will generally be lower because of lower risk compared to online transactions. In this case, interchange plus could save you money. But if you operate primarily online, the higher interchange fees might make flat-rate pricing a more sensible option.Simplicity vs. cost optimization
Consider your personal preference and comfort level with financial complexity. If you prefer a straightforward, easy-to-understand pricing model, flat-rate pricing might be the better choice—despite potentially being more expensive. However, if you’re comfortable with a little more involvement and want to optimize for cost, interchange plus pricing could be the more economical choice.Expert opinion
Consider working with a trusted financial advisor or a merchant services consultant before committing to a model. An advisor can help analyze your business’s specific situation, guide you through the difficulties of each model, and help you make an informed decision.
Whatever choice you make doesn’t have to be a permanent one. As your business evolves, your needs may change. You can always re-evaluate your choice and switch models. It can also help to work with a payment processing provider, such as Stripe, that’s built to work with businesses as they change and grow.
Learn more about how Stripe’s transparent fee model helps businesses facilitate efficient payments at scale.