What is Interchange Plus or Cost Plus Pricing?

Today I want to discuss the most complicated but, also, the most transparent cost structure.  When looking at a credit card processing statement, there is an easy way to tell if it’s interchange plus or cost plus pricing.  You should see a huge interchange table on that statement.

What does an interchange table look like?  On the left, there are many incomprehensible abbreviations which you won’t understand.  This a huge list!  Each line will list a dollar amount, number of transactions, a percentage, and the per-item fee.  Depending on the total volume of the statement, there could be ten variations or two hundred.  So, when you see the big interchange table, you know the statement is on interchange plus or cost plus pricing.  

Interchange plus or cost plus pricing happens to be my favorite form of traditional pricing because of its transparency.  That means when looking at this pricing structure, identifying whether you’re actually getting a good deal is easier than other structures.  However, the problem is that interchange plus has the most complex statement!  The big interchange table creates difficulty trying to read the statement.  There are a few different things on the statement that should give a tip-off as to whether or not this statement is on competitive pricing.

The first tip-off is Total Interchange.   You should see that somewhere on the statement.  The interchange there should include the total cost of processing, which means money the credit card processor is not keeping.  The processor is collecting that money and passing it on to the bank that issued this particular card.  If the amount of total interchange was not found on a statement, it is already a little suspicious to me.  Interchange plus pricing by definition should say what the interchange is.

The average interchange in the U.S. market right now (May, 2019) is 1.7%.  There is definitely variation.  For instance, a very small-ticket merchant doing a lot of debit transactions might be at 2.5% or 2.7%.  These would include businesses with average ticket size below $10, such as hot dog stands or coffee shops.  Another variation would be large-ticket merchants who take a lot of rewards cards, corporate cards, and business-to-business transactions.  The interchange for them could also be in that 2.2% to 2.8% range.  There are some higher ticket businesses, such as auto repair, who process many debit transactions.  Often their interchange rate could be as low as 1%, even a little bit lower.

Although there is plenty of variation, the vast majority of business owners – most statements you see – should be near that 1.7% range.  When total interchange is 1.6% to 1.8%, that’s probably a good deal.  Just as the effective rate was calculated (in a previous lesson) by dividing the total fees by total volume, divide the total interchange by the total volume to get the effective rate of interchange.  Compare to the 1.7% average.

The easy way to “gut check” a statement is by going to examplemerchantquote.com.  Select the business type.  Put in the total volume, the total fees.  After getting to the quote, scroll down a little bit towards the bottom to find an interchange table built from scratch using statements we have in a database.  Right at the top, it actually says the interchange amount.  Compare that interchange amount to the interchange amount on the statement.  If there’s a drastic difference, that is an indication of something unusual going on with the interchange plus pricing.  It might be what I call interchange plus, plus pricing, meaning the interchange might be marked up.  There might be hidden costs in the interchange table.

Using examplemerchantquote.com is a really great way for you to just gut check statements.  We offer that site to expose people to our marketing platform.  Our platform for the merchant services industry allows business owners to get an instant quote without talking to a sales person.  Merchants can get the information they need right off the bat to see if their pricing is competitive.

Another tip-off is “other fees.”  Once you’ve determined the interchange is within that range where it should be, look at the other fees.  This gets really tricky; there are so many other fees.  But I have a very simple way around this.  Take the total fees minus the interchange to calculate the mark-up.  Now, mark-up isn’t all profit for the processor anymore than a pizza shop who marks up the pizza.  Of course, business owners mark up over cost!  They must pay employees, building lease, electric bill, and many other expenses.  The same goes for the processor.  The processor may be marking up and keeping some of that money to pay for their building rent, their support system, etc.  But by subtracting total interchange from total fees, you can calculate mark-up.  Then divide mark-up by total volume to get a new effective rate.  So again, the interchange should be about 1.7%.

If you are looking at a statement with a total volume of $10,000 a month, that’s fairly small as far as our industry average.  A mark-up of 1% or even 1.5% would not be unusual there.  However, on a volume of 20,000 to 40,000 if you see more than .7% mark-up, most likely that’s not very competitive.  There is probably opportunity to have some savings with that statement.

For a statement at 60,000 and above in volume, somebody might be willing to give a better deal even on a .3% mark-up.  So, getting a quote from examplemerchantquote.com would be a good idea.  You may find room for savings. Don’t miss an opportunity to do something with that statement.

If you have questions, you can even send a statement to us.  Our tool does a full side-by-side analysis.  This is a full statement analysis like traditional statement analysis that you’ve seen in the industry.  But we also have this instant quote functionality, which is an estimate to just get started.  It’s not going to be exact to the penny, but it’s a good starting point.  Then once you get the statement, we can go to the back-end and key in all the details from the statement to get the full side-by-side.  Sales representatives and ISOs in this industry NEED to have this tool.  

Reach out to me if you have any questions:   james@ccsalespro.com.  I’m glad to help in anyway that I can.  I hope you have an awesome day!