Compare interchange plus vs flat rate pricing models

Every business has its share of costs and overheads, and minimising these can be just as important to success as boosting sales. Interchange fees – charged by financial institutions every time you process a credit or debit card transaction, are part of the bundle of merchant service costs that sellers pay every time they receive an electronic payment. 

It’s not always easy to understand the pricing structures of interchange fees and other merchant service costs, but choosing the right one for your business can help you save money that stacks up over time. This article will guide you through the options, so you can ensure that you’re not incurring unnecessary costs with every payment you collect.

Understanding merchant service fees

Merchant service fees, also known as card processing fees, are paid by merchants to the financial institutions and payment processors they use to handle credit and debit card transactions.

Fees are usually charged as a percentage of the transaction amount + a fixed fee, and the rate depends on several factors, including the type of card used. Transactions made with debit cards are associated with the lowest fees; with credit cards the charges are higher; and transactions made with commercial credit cards are higher still.

These are some of the charges that are typically included in merchant service fees:

Interchange fee

An amalgamation of charges from the card issuer, the card network and the merchant’s acquirer to cover the costs involved in processing the transaction. Interchange fees are debited from the merchant’s account by the acquirer and passed on to the other financial institutions involved whenever a customer pays with a credit or debit card.

The interchange rate is set by the card network (such as Visa, Mastercard or American Express), and therefore varies depending on the type of card used, and on other factors such as the merchant’s industry and whether the card was used online or in a store. Factors that increase the risk of fraud or non-payment of debts – such as payments made online, with credit cards, or to businesses in high-risk industries – are associated with a higher interchange rate.

Payment gateway fee

This may come in the form of a fixed monthly fee or a small per-transaction fee, or both. It covers any costs involved in providing a payment gateway to enable payment processing.

Network assessment fee

These are set by the card networks and paid by the merchant’s acquirer to the card network. However, they are separate from the interchange fee. They contribute to the operating costs and profitability of the card networks, rather than being directly related to the transfer of funds between the acquiring and issuing banks.

Payment processor fee

The payment processor can add additional merchant account provider fees to cover services such as transaction authorisation, settlement and customer support. 

Hidden FX costs

Don’t forget that payments in foreign currencies can come with extra hidden charges if your acquirer only allows you to settle in your domestic currency. It’s standard for acquirers to add their own markup to the foreign exchange (FX) rate, on top of the standard interbank FX rate. Merchants can save money on cross-border payments by choosing an acquirer that supports multi-currency settlement. Airwallex allows merchants to settle ‘like-for-like’ in several currencies. Merchants can those funds in their account, and use them to pay overseas suppliers with Airwallex cards and transfers, all whilst avoiding costly foreign currency conversions.    

There are two main pricing models for merchant services: Interchange Plus and flat rate pricing. We’ll explore these in more detail below. 

What is the Interchange Plus pricing model?

If you choose the Interchange Plus pricing model for merchant services, your per-transaction cost will be more variable because you'll always be charged the real interchange rate. For example, you’ll pay a higher rate for transactions in which customers are using a credit card, and lower when they use a basic debit card. You'll also receive a breakdown of the interchange fees you've been charged in your bill.

It’s a more transparent form of pricing, because you can see why you are paying the precise fee charged for each transaction. However, it’s also less predictable, so businesses that need a high degree of control over their overheads may not wish to choose this option.

Medium- to large-sized businesses with high-value transactions may prefer this pricing model, as they may be able to tolerate more variability in their rates. Businesses in industries associated with lower interchange rates, such as healthcare and education, may also prefer this model. 

What is the flat rate method of pricing?

Flat rate pricing, sometimes referred to as 'blended pricing', is predictable and easy to understand. The interchange or wholesale rate, plus the other processing fees, are rolled into a simple figure, usually a percentage of the transaction plus a small per-transaction fee. There is a small amount of variability, for example, the fee will differ depending on whether the card is international or domestic. 

It’s easier to predict monthly fees at a flat rate, which can help with budgeting and financial strategy. On the other hand, there’s less transparency. It has been suggested that businesses with a low average transaction size may be good candidates for flat-rate pricing methods. Businesses that prioritise simplicity and cost predictability may also prefer this method.

How to make the right choice for your business

Here are some questions to ask yourself when deciding whether Interchange Plus or flat-rate pricing is better for your business, when it comes to merchant service fees.

• Do you want predictability when it comes to payment processing fees? 

• Do you lack the resources to analyse your transaction data?

• Do the items you sell generally have low prices?

If you answered yes to most of these questions, flat-rate pricing may be a better fit for your business.

• Do you want full transparency when it comes to payment processing fees?

• Do you have the time and resources to go through your transaction records and assess strategies for reducing your interchange rate?

• Is your business in a low-risk industry, such as government or the charity sector?

• Have you assessed your transactions and found that the cards used by customers are overwhelmingly those that come with low interchange rates, for example debit cards?

If you answered yes to most of these, Interchange Plus could be a better pricing model for you.

Analyse your business for further insights

If you are still unsure of which pricing model is best for your business’s bottom line, you may want to invest in a period of research and evaluation. Consider a trial period with each pricing model to evaluate the actual costs based on your company’s unique transaction patterns. It’s also possible to consult with payment processing experts to get personalised advice based on your business's specific needs.

Finding a reliable and cost-effective payment processor is essential, no matter which pricing model you go for, and processors themselves will have teams who can offer you tailor-made advice for your business. 

Talk to Airwallex for customised advice

Airwallex is an acquirer and payment processor that offers both Interchange++ and Blended (fixed-rate) pricing models. We designed our payment gateway to make it easier and more cost-effective for businesses to collect customer payments globally.

Talk to our team to find out more about how to choose the best option for your business today – just click here.