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ONBOARDING BLOG SERIES 2 - Understanding Interchange Optimization and Processing Fees

The ability to accept credit and debit cards is crucial for businesses in today’s competitive landscape, but when it comes to transaction and processing fees, things can get expensive – and confusing - quickly. While there are a variety of pricing structures offered through different payment processing partners, it can be difficult to decide which structure is best for your business. Often times, merchants fail to realize they have a choice when it comes to these fees, and their goal should be to obtain the best rate possible for their specific business type. To help lessen the confusion, we’ve put together a cohesive look at each standard pricing structure and what they will ultimately mean for your business’ bottom-line.  


To start, ‘interchange’ is defined as the cost imposed on businesses to accept credit cards. These fees are typically non-negotiable, and cover the costs and risks associated with payment processing, like fraud.  Interchange fees are normally paid in full to the card-issuing bank, which means payment processors do not profit off of them. In each pricing option, interchange is included, but the markups and pricing structures vary.


Most processors offer two pricing options: flat rate and interchange-plus pricing.


Flat rate pricing is usually considered the most simple pricing structure, and for that reason, it is an attractive option for many merchants. Although the flat rate is the easiest to understand, it may not be the best way to save or make money for your business. In flat rate pricing, the processor charges its clients based on a fixed percentage of volume (or a flat rate). Common current flat rates are from 2.75%-2.9% for swiped transactions. Flat rate pricing is simple because there’s only one rate and price to understand, but markups on interchange rates are higher than other pricing options. So if you have a high volume of transactions, those interchange rates can add up and be costly. Flat rate pricing may be more suitable for a small business with low transaction volume.


Interchange-plus pricing is considered the most transparent, as merchants only pay an interchange rate, as well as a fixed additional cost. The interchange charge is a percent of the transaction that the issuing bank and credit card association charge. In this case, the processor will pass that interchange rate to the merchant, as well as an additional ‘plus’ cost for processing and completing the transaction.


The benefit of interchange plus pricing is that the merchant can see the specific cost of each credit/debit transaction. Without transactions being tiered or bundled, merchants can save money because each line item is priced separately. The ‘plus’ or markup on the interchange rate will remain the same no matter the transaction type, unlike tier pricing. Plus, if a merchant is processing transactions on a gateway that supports Level ll/Level lll processing, they can save money with interchange optimization.


So what is interchange optimization? It’s the process in which a business collects specific credit card data in order to qualify for the least costly interchange rate possible. In order for this to happen, a payment processor must be able to process Level ll and Level lll data.


With Level ll and Level lll processing, extra data is collected to help gather information on the transaction. Items like customer codes, tax IDs and PO numbers can help merchants realize better rates on their transactions. With Level l data, basic billing information is included, which is not enough to to garner the benefits of interchange optimization.


No matter the pricing structure your business chooses, it is crucial to understand the fees you’re being charged, and why you’re being charged them. Overall, it is important to partner with a payments provider that offers transparency in all facets of their business – including processing fees. And if you partner with a provider who passes Level II/Level III data, you’ll not only benefit from optimized rates, you’ll also reduce fraudulent activity, thanks to the additional data that is passed with each transaction.