Payment Pulse – Ep. 29

Understand interchange, flat rate, tiered, and interchange plus pricing. Learn how payment processing fees work and how to choose the right model.

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Episode Transcript

 

Noelle:  Welcome back to the podcast. Today we’re tackling a topic that almost every business owner deals with, and that’s payment processing fees.

If you’ve ever looked at your merchant statement and wondered what terms like interchange, tiered pricing, or interchange plus actually mean, you’re definitely not alone.

To help break it down, I’m joined by Joe, one of our payment experts here at Xplor Pay. Joe, thanks for joining us today.

Joe: Thanks for having me, Noelle. This is one of those topics that can sound complicated at first. Once you understand the basics, it does start to come together.

Noelle: Awesome. So let’s start with one of the most common terms of merchants here and that’s interchange. What exactly is interchange?

Joe: Yeah. Great place to start. Interchange are the fees set out by Visa, MasterCard, Discover, American Express- the networks, right? Basically you have to pay a fee. Whenever you use the networks, any of these card types, it’s all gonna vary depending on the benefits tied to them.

One thing I often like to talk about or think is interesting, I should say when I first started in this industry, is just how all those benefits for credit cards that we all want, right?

Like, I have a Hilton card and hopefully I get a vacation out of using it every so often. And you wonder, “Where does that money come from?” Well, it comes from interchange. So yeah, it’s very interesting when you kind of peel back the hood and see all the moving pieces.

Noelle: Yeah, for sure. So something that merchants often notice is that rates on their statement aren’t always the same. Does interchange vary from transaction to transaction?

Joe: Yeah, every rate itself, it is gonna be variable. ’cause interchange, it’s not a single rate itself. There are a bunch of different categories depending on those benefits tied to those cards, right? Like that Hilton card I just referenced, that card has a higher interchange rate because I get pretty good benefits on it.

But if you were to pay with a pretty standard credit card or a debit card, for example, you’re gonna have minimal interchange fees. It will just jump all over the place, essentially. Depending on the benefits tied to them, because that’s how the services are provided. You know, money doesn’t just appear, right?

Noelle: Exactly. Yeah. So if interchange is the base cost that’s set by the card networks like Visa and what you mentioned, how do payment processors actually charge merchants, then?

Joe: So we are doing a lot of the heavy lifting behind the scenes. You know, there are possibilities with some of the providers to go direct. Meaning, you’re managing an account directly with them. But what we do is we consolidate it all for you guys. And so when we’re doing that, we’re processing all the moving pieces.

And then essentially there usually is a processor’s fee that’s incorporated, either on top of that interchange plan, or it could be a flat plan, a flat rate, or tiered structure. There’s different types of plans that the processors themselves can provide to customers to meet whatever needs they may have, or their preference.

Some people may like an interchange plan, others may like a flat rate, others may like a tiered, you know, we’re able to be flexible at any point with those different options. But interchange is always factored into any one of those plans.

Noelle: Let’s start with flat pricing because that’s one that many businesses are familiar with.

Joe: Flat is very straight to the point. You could present it as just a very simple “this is what it is”. We’re gonna factor in industry standards for interchange whenever we come up with those plans because those interchange rates just don’t disappear. It’s not like we don’t act like they exist.

Those are a cost to us at that point. So we factor that in. You’ll fix it at whatever we agree to. So on a flat rate plan, whatever it is, let’s just say 3.25%, just to throw a number out there, that’s what it would be in that circumstance. So it will not vary. All card types are gonna be incorporated at that rate, which can be beneficial.

But in other circumstances, depending on your industry type, the actual interchange involved, and average ticket, you may want to consider other plans too. So that’s where we kind of come out looking at our merchant accounts from all different sorts of angles.

Noelle: Awesome. So then another model that merchants sometimes hear about is tiered pricing. How does that one work?

Joe: Tiered is similar to flat in the sense that it’s fixed rates, but depending on the interchange associated with it, it will vary. So, lower cards such as debit cards and standard credit cards, that’s gonna hit what’s called the qualified tier. So you have qualified, mid qualified, non-qualified.

Most often that’s gonna be your tiered structure with us. And so following that thought of qualified, mid, non, depending on the interchange associated with the card being taken, it will fall under those different brackets. So qualified being debit cards, standard credit cards, you know, your lower interchange costs, mid, that’s gonna be mid interchange costs.

And then non qual, you could pretty much bet that your higher tier interchange rates are gonna fall under that one.

Noelle: Awesome, and then that brings us to interchange plus pricing, which I know is often referred to as IC Plus. What does that look like?

Joe: Sure. Yeah. Interchange plus- it’s the most confusing sometimes from a merchant standpoint, but if you really can get a grasp on what it is and how it functions, it may be the most beneficial. Now again, every situation’s gonna be very different. We’re gonna have to walk through what benefits you guys, but just as just a general rule of thumb, so you can have this in your mind.

Interchange Plus: it’s presented as just the fees that are set out from Visa, MasterCard, Discover, American Express, and then our fee on top of that. So it’s truly out of all these different options, it’s truly the most transparent kind of plan. It can also be like I was alluding to, very confusing if you don’t know the industry, but it really is the most transparent kind of plan because you’re seeing: “Here’s my interchange rates, here’s the fee from the processor”, and then when you add it all together, there’s your effective rate.

So, there’s no chance of, say, like a debit card being charged 3.25%, let’s just say if you’re on a flat rate plan.

Noelle: Great, thank you. So another approach we’ve seen becoming more popular lately is our cost savings programs at Xplor Pay. We do offer a variety of those as well. Do you wanna talk through that?

Joe: Yeah, we can certainly really unpack this ’cause there is a lot to unpack on this topic. But just as a high view, depending on state laws, you may qualify for certain programs. You may not qualify for certain programs, but to just give you a big overview of the programs we have compliant, the main ones are gonna be surcharging.

You have dual pricing, you have a true cash discount and service fee. So those are generally gonna be the main channels that we’re gonna look at and that we do offer. And each of those have different little nuances. It can be pretty confusing, but the cost, or lack of costs, I should say, may be worth going through all the compliance steps that are necessary when looking into those programs.

So yeah, those are great options for anyone that is qualified.

Noelle: Awesome. So to wrap things up, for a small business owner who’s trying to evaluate their payment setup, what should they really be paying attention to?

Joe: Bottom line- you know, I’d say when you are looking into your interchange, it would be great if you could get an idea, if you already have one, of what type of plan you’re on, if you’re on an interchange. Plus, you’re gonna know your interchange rates by looking at your statement.

You could even refer to how to read statements from an earlier episode we did. But, if you read your statement, you’d be able to see your interchange rates, if it’s on an interchange plus plan, and then you’ll know your bargaining power from there. So I’d say that that’s a great place to start.

Noelle: Great. Well, thank you, Joe. This has been super informative and helpful. Fees can definitely feel complicated, but breaking down concepts like interchange and pricing models can definitely help make it much easier to understand for everyone.

Joe: Absolutely.

Noelle: So Joe and I will be back soon to talk through those cost savings programs that he referenced, just a few seconds ago. Thanks for listening, and we’ll see you next time.