INTERCHANGE++ Payments Fees and Calculation | Complete Guide for Payment Processing 2024
Payments processing fees and how they are calculated
Quick Answer
Interchange++ is a transparent pricing model that breaks down payment processing fees into three clear components: Interchange fees (set by card networks), Scheme fees (charged by Visa/Mastercard), and Acquirer markup (processor's margin). This model provides complete transparency compared to traditional blended pricing, helping merchants understand exactly what they're paying for each transaction.
INTERCHANGE++ Payments Fees and Calculation
In the world of acquiring payments, there are two different models of pricing. One model is called Interchange++, another model is called Blended pricing.
Blended pricing mainly refers to a buy rate and sell rate model, where the acquirer or the payment service provider calculates a fixed buy rate, and then adds its own margin on top of that and refers to that as their sell rate or selling price. This is typically calculated based on the merchant category code. The payment service provider offers the merchant that pricing for its services. For example, an acquirer may calculate that its buy rate for any certain MCC is 1.6% and then it decides to add 0.4% on top of that so it sells the acquired services on that MCC at 2%. And in many cases, this has allowed the payments service provider to charge a substantial amount of fees on top of their fees and making it a bit murky for the end Merchant to know what exactly is the fees that they should be paying and what MCC they are transacting on.
Interchange++ is a unique model as it divides the pricing into three different components:
- Interchange fee: Set by card networks and paid to the card-issuing bank
- Scheme fee (first +): The fee charged by the scheme (Visa/Mastercard/AMEX etc.)
- Acquirer markup (second +): The fee charged by the acquirer (payment service provider)
"Interchange++ pricing provides merchants with complete transparency, allowing them to see exactly what they're paying for each component of their payment processing fees." - Payment Industry Expert
Over the past few years, Interchange++ has been adopted by regulations in different countries and regions with the goal that it has provided the much needed clarity in terms of how pricing for each payment is calculated. Especially by dividing the price into three different components that allows it to be more transparent for the end Merchant.
How is Interchange fee calculated?
Interchange fees are set by the card networks (Visa, MasterCard, etc.) and are paid to the card-issuing bank. Interchange fees vary based on several factors, including:
- Card Type: Different rates apply to credit cards, debit cards, commercial cards, etc.
- Transaction Type: Rates differ for in-store, online, and card-not-present transactions.
- Merchant Category Code (MCC): Different business types have different interchange rates.
- Transaction Volume and Size: Higher volume or larger transactions may attract different rates.
Each component is typically expressed as a percentage of the transaction amount plus a fixed fee.
Interchange Fee (IC):
- Set by the card networks (e.g., Mastercard/VISA)
- Varies based on card type, transaction type, and merchant category code (MCC)
- Format: x% + $y (percentage + fixed amount)
Scheme Fee (SF):
- Charged by the card network
- Includes various sub-fees (e.g., assessment fees, cross-border fees)
- Format: x% + $y (percentage + fixed amount)
Acquirer Markup (AM):
- Set by the payment processor
- Covers their costs and profit margin
- Format: x% + $y (percentage + fixed amount)
Interchange++ Fee Breakdown Example
Let's consider a $100 purchase made with a Mastercard World Elite (premium) credit card at a retail store (MCC 5411 - Grocery Stores/Supermarkets).
Note: The exact fees can vary, so these are illustrative figures based on common rates.
| Fee Component | Rate | Calculation | Amount | % of Total |
|---|---|---|---|---|
| Interchange Fee | 2.10% + $0.10 | (2.10% × $100) + $0.10 | $2.20 | 81.94% |
| Scheme Fee | 0.14% + $0.04 | (0.14% × $100) + $0.04 | $0.18 | 6.72% |
| Acquirer Markup | 0.20% + $0.10 | (0.20% × $100) + $0.10 | $0.30 | 11.34% |
| Total Interchange++ Fee | 2.44% + $0.24 | $2.20 + $0.18 + $0.30 | $2.68 | 100% |
Source: InterchangeFeesEU Analysis 2024
Therefore, for this $100 transaction, the total fee would be $2.68, or 2.68% of the transaction value. The Interchange++ model provides complete transparency, showing exactly how each component contributes to the total cost.
Challenges
While Interchange++ offers clear benefits, it's not without its complexities. The detailed breakdown of fees can be more challenging to interpret than traditional flat-rate models, potentially requiring additional resources for analysis and reconciliation.
Additionally, the variability of fees based on card types can introduce an element of unpredictability into financial forecasting and budgeting processes.
Adoption
The adoption of Interchange++ has been particularly grown in the European Union, where regulations have imposed caps on interchange fees. This model has increased competition among payment processors and enhanced transparency across the payments ecosystem.
Looking to the future, Interchange++ is poised for global expansion beyond its current stronghold in Europe. It's likely to spread to other regions with developed electronic payment infrastructures as demand for fee transparency grows worldwide. The model's alignment with open banking initiatives may lead to deeper integration, enabling real-time fee calculations and more dynamic pricing models. This could accelerate the adoption of alternative payment methods, potentially diversifying the payment ecosystem.
Frequently Asked Questions
Q: What's the difference between Interchange++ and blended pricing?
A: Interchange++ breaks down fees into three transparent components (interchange + scheme + acquirer markup), while blended pricing combines all fees into a single rate. Interchange++ provides complete transparency, while blended pricing can hide the true cost structure.
Q: Why is Interchange++ becoming more popular?
A: Regulatory pressure for transparency, merchant demand for cost clarity, and the need for better financial forecasting are driving adoption. The EU's interchange fee caps have particularly accelerated this trend.
Q: How can merchants benefit from Interchange++ pricing?
A: Merchants gain complete visibility into their payment costs, can optimize their payment mix, negotiate better rates with processors, and make more informed decisions about payment acceptance strategies.
Q: What are the main challenges with Interchange++ implementation?
A: The main challenges include increased complexity in fee interpretation, need for better financial analysis tools, potential unpredictability in costs due to varying interchange rates, and requirement for more sophisticated reconciliation processes.
Conclusion: Embracing Transparent Payment Processing
Interchange++ represents a significant shift toward transparency in payment processing. By breaking down fees into clear components, this model empowers merchants to make informed decisions about their payment strategies while ensuring compliance with evolving regulatory requirements.
As the payment industry continues to evolve, businesses that embrace Interchange++ pricing will be better positioned to optimize their costs, improve their financial forecasting, and build stronger relationships with their payment partners through complete transparency.