Interchange Plus Pricing vs. Flat Credit Card Rates

By: Will Rus

3 Minute Read

Feb 12, 2018

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RatesUnderstanding how Interchange Plus pricing works can be confusing on its own, let alone when you try to compare it to flat credit card processing rates. Ultimately, both types of rates can result in higher, lower, or the same fees for a business. Here's how to think about these two options.

There are two typical types of credit card processing rates:

  1. Interchange Plus
  2. Flat Rate

(There is also a third type, tiered pricing, which tends to be the least advantageous option for most businesses.)

What is the Interchange Rate? The Interchange Rate is a processing fee set by the credit card associations (such as Mastercard and Visa) that is paid to banks that issue cards (think your Bank of America Visa card). Fees vary by type of card (Platinum vs. Gold and all of the other options) and are outlined by the credit card associations. In the examples below, the Interchange Rate is the cost to process a credit card transaction.

Here are two examples to illustrate how these two methods work.

Example 1: If I buy a Macbook Air, Apple is charging me a flat rate of $999 for the product. Apple is paying all of the costs of the chips, aluminum casing, processor, labor, software, etc. for me (say, $700) and then picking a markup for profit (say, $299) and charging me the flat rate ($999). If the cost of the pieces Apple uses change -- aluminum costs increase, labor costs increase, what have you -- Apple would eat that cost and still charge me a flat rate of $999 (say the cost is now $750, the profit markup would become $249). This is flat rate processing.

Example 2: If Apple used an Interchange Plus pricing model, they would not say "A Macbook Air costs $999", but instead say "A Macbook Air will cost whatever is our cost to create it, plus $299." When Apple's cost to create the Macbook rises (increase in aluminum costs, labor costs, etc.) from $700 to $750 as in the previous example, in this scenario, Apple would pass the costs to the customer and still charge the fixed markup. So, in this scenario, the customer would pay the cost ($750) plus the fixed markup ($299) - meaning the customer would pay $1049. This is Interchange Plus pricing.

Interchange Plus pricing is quoted as the fixed markup the processor will receive on top of the Interchange fee. The Interchange rate may fluctuate, but the markup - the processor's profit - is constant. In order to calculate the equivalent in a flat rate, you need to know the details of a business's transactions (volume of transactions and typical fees based on the cards used most often in the store). For instructions on how to calculate your effective flat processing rate, check out our post on How Credit Card Processing Works.


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