Interchange Plus vs. Flat Rate Restaurant Credit Card Processing: What’s the Difference?
Interchange Plus restaurant credit card processing explained, in comparison to Flat Rate payment processing.
Restaurant payment processing can be a tricky area to navigate, particularly when it comes to pricing. In this article, we’ll clear up any confusion by providing you with an overview of the differences between the two main payment processing pricing structures: Interchange Plus and Flat Rate.
The Interchange Plus model involves paying the Interchange and network costs of each card that your restaurant accepts, along with a fixed markup that your processor takes in as net revenue. Although interchange and network costs vary with each specific card your guests use, the separation of these fees from your processor's markup provides increased transparency into what you’re actually paying for.
The Flat Rate model involves charging one simple Flat Rate for each transaction your restaurant processes, no matter what type of card is used. This means that, as long as your sales and average ticket don’t fluctuate significantly month-to-month, your costs will remain relatively constant and predictable.
Let’s delve deeper into each payment processing structure, with an example at the end to help illustrate the key differences.
The Basics of Interchange Plus
Let’s start with Interchange Plus. Interchange Plus (“IC+”) is a cost-plus pricing model that starts with a base of interchange fees and network fees; together, these fees are sometimes referred to as the “inherent cost” of card processing because your payment processor must pay these fees regardless of which pricing structure you choose. Your payment processor then adds its markup for providing its services (the “plus”) on top of these fees. Here’s a brief description of each of these components:
- Interchange fees make up the bulk of processing fees. They’re set by card networks, such as Visa and Mastercard, and are paid to the bank that issued the card that is used for each transaction.
- Network fees are set by card networks and are paid to the card network. These fees differ based on card brand, card type, and other factors, similar to the variances seen with interchange fees.
- The processor’s markup is layered on top of the Interchange fees and typically includes a volume fee (a percentage) and a per-transaction fee.
Each card brand and card type is associated with different interchange fees and network fees; in fact, there are hundreds and hundreds of card-specific fees that further depend on a variety of characteristics, such as whether the card is debit or credit, regulated or unregulated, rewards or traditional, and more. Interchange and network fees can change twice a year, and they’re publicly available — you can see Visa’s rates detailed here.
Let’s take a look at an example where your restaurant makes a $40 sale with an Interchange Plus pricing structure. Below, we’ll break down the inherent cost and the processor’s markup separately using illustrative rates, where:
1. The card your guest paid with carries an interchange rate of 2.00% + $0.10 per transaction
- (2.00% x $40 ticket) + ($0.10 x one transaction) = $0.90 in interchange fees
2. The card your guest paid with carries a network fee of 0.14% + $0.03 per transaction
- (0.14% x $40 ticket) + ($0.03 x one transaction) = $0.086 in network fees
3. The processor’s “plus,” or markup over interchange fees, is 0.30% + $0.10 per transaction
- (0.30% x $40 ticket) + ($0.10 x one transaction) = $0.22 in processor markup fees
4. The total fee for this transaction would be (A) interchange fees plus (B) network fees plus (C) “plus” fees
- Interchange fees ($0.90) plus the network fees ($0.086) plus the markup ($0.22) = $1.206
Take a look at the graphic below, which shows the varying Interchange card costs in grey and the markup associated with Interchange Plus in orange. Your restaurant will pay the combined amount of the Interchange fees — which vary from card to card — and the “Plus” fee.
While the Interchange rate may fluctuate depending on card type, the markup, or “Plus” fee (the processor's profit), is a fixed percentage and/or a per-transaction fee for every sale. Though interchange rates differ depending on the variety of cards your guests pay with, an Interchange Plus pricing model provides you with strong transparency into your processing fees by separating interchange fees from the margin it collects for providing its services.
The Basics of Flat Rates
Flat Rate payment processing means your restaurant is charged straightforward flat rates for every card your restaurant comes across, regardless of card type. Generally, the only thing that affects your flat rate is the type of transaction that is being processed. In most cases, there will be one flat rate for card-present transactions (physically swiped, dipped, or tapped), and a separate flat rate for card-not-present transactions (keyed-in or online).
For example, if your card-present Flat Rate is 2.49% + $0.15, and you make a $40 sale in-store, you’ll pay (2.49% x $40 ticket) + ($0.15 x one transaction) = $1.146 in fees (restaurant keeps $38.854). With this model, you don’t need to worry about any Interchange rates or markups, just this one simple flat fee — you’ll know exactly what rate you’re paying from period to period. Meanwhile, your payment processor takes care of paying for the inherent cost associated with processing each card, regardless of whether your flat rate is above or below the fees that your processor pays for on your behalf.
With so many fluctuating variables in your restaurant, it can be comforting to know that you’ll be able to predict your payment processing fees. Check out the graphic below, which depicts how a Flat Rate model works, highlighting its simplicity.
Choose What Works Best for You
Since we’ve taken a look at how Interchange Plus and Flat Rate pricing work separately, let’s put them together to see exactly how their rates can differ.
In the chart above, we can see how the Flat Rate stays steady for each card while the Interchange Plus rate fluctuates depending on what kind of card is used. In certain cases, your overall processing fees on an Interchange Plus structure may be higher, lower, or about the same as the Flat Rate structure.
To summarize, Interchange Plus and Flat Rate are both valid and popular pricing structures, but they both offer their own unique value propositions. A Flat Rate structure offers greater clarity and simpler forecasts since you're paying the same steady rate for each transaction. As for an Interchange Plus structure, you receive greater transparency into your processing costs, which can help you evaluate the cost you’re paying for the services that your processor provides to you.
Some processors manage to find ways to insert hidden fees into their processing fees, regardless of pricing structure; these fees can range from reporting fees, PCI non-compliance fees, fraud prevention fees, and even a fee to get your statement. However, here at Toast, those features and many more are all included in your processing rate at no additional cost. Our goal is to provide a clear and transparent processing rate ー no hidden fees, no bait and switch, no unexplained line items in your statement.
One size does not fit all when it comes to pricing structures — click here to request a demo and speak with one of our restaurant technology specialists to discover which structure is best for your restaurant.