In the credit card processing world, the term Interchange is quite common, it is also very often misunderstood.

A simple way to understand Interchange is to think of it as the wholesale rate the card brands (Visa, MasterCard, Discover and American Express) charge all of the processing companies. All processors, no matter how big or small, have the same interchange cost.

The interchange rate is made up of two components; the discount rate which is a percentage of the transaction amount, and a per transaction fee. The discount rate varies widely from .05% up to over 3%; the transaction fee component ranges from $0.05 to $0.22.

There are over 300 different card types and each one has its own interchange rate.

Ethix Pricing – Interchange Plus
Interchange plus pricing is the most aggressive pricing model for merchants, it is also the most transparent as you know exactly what the interchange rate is for each card type and exactly how much your credit card processor is making on your transactions.

Interchange plus pricing means the merchant pays the interchange rate (the exact wholesale rate is passed through) plus a fee to their credit card processor. That fee is usually measured in basis points. Each basis point is 1/100th of a percent.

For example, at Ethix we charge 25 basis points for a fee of 0.25%. If you ran a card-present transaction of $50 with an exempt Visa check card, the interchange fee would be 0.30% + $0.15. That gives you an interchange rate of $0.15 + $0.15 for a grand total of $0.30 for the transaction.

Interchange pricing is a bit complex, but it is important to understand what you are paying to minimize the cost of your payments system.

We’ve received quite a few questions recently regarding how Ethix is different than processors like PayPal (who also owns Braintree) and Stripe, so we thought it would be a timely topic for a blog post. The biggest difference comes down to what merchants are really most concerned about: cost.

Pricing

Both Stripe and PayPal/Braintree charge flat rate pricing, an increasingly popular cost structure for processors. And it’s easy to see why – simplicity is attractive. Flat rate pricing is easy to understand and it saves merchants from the annoyance of sifting through complex credit card processing statements. There’s no risk of missing some fine print and — at least on the surface – it appears to be totally transparent.

The flat rate pricing illusion

Flat rate pricing is simple. Credit card processing is not. In fact, flat rate pricing isn’t designed to be competitive at all–the attraction comes from the ease in which merchants can understand the structure. It’s a marketing tactic. With all the intricacies involved in credit card processing, it’s all but impossible for processors to charge a flat rate that is competitive while still remaining profitable as a company. Here’s why.

Whether they’re aware of it or not, every transaction a merchant processes incurs three fees:

1. A fee to the issuing bank, e.g., Chase, B of A, etc. (interchange)
2. A fee to the card brand, e.g., Mastercard or Visa (assessment)
3. A fee to the credit card processor

While assessments are fixed costs, the interchange rate is not. This rate can vary from as low as 0.05% to over 3%. Processors that charge a flat rate need to account for every possible interchange rate. The good thing about flat rate pricing is that there’s no guesswork and it’s easy for a merchant to figure out how much it’s going to cost them to process their payments. Unfortunately this convenience comes at a cost of spending about 20% more than they have to on processing costs.

Stripe and PayPal/Braintree use a fixed percentage of volume pricing structure of 2.9% + $0.30 per transaction. This is on the higher end in comparison to interchange rates, and for merchants with low ticket transactions that extra $0.30 can be a real burden.

 “Interchange Plus” pricing optimizes costs

Quite simply, “interchange plus” pricing means the merchant pays the interchange rate plus a fee to their credit card processor. That fee is usually measured in basis points. Each basis point is 1/100th of a percent.

For example, at Ethix we charge 25 basis points for a fee of 0.25%. If you ran a card-present transaction of $50 with an exempt Visa check card, the interchange fee would be 0.30% + $0.15. That gives you an interchange rate of $0.15 + $0.15 for a grand total of $0.30 for the transaction. That same transaction through Stripe or PayPal would cost $1.75!

Funding

Another cost of processing with many flat rate processors is the funding timeline. Since companies like Stripe are technically payment aggregators, it’s not cost-effective for them to maintain the reserve required to fund their clients in a timely manner.

Through PayPal/Braintree, it takes 48 hours to receive your money. With Stripe, it takes a week. That’s seven days between purchase and funding, which can become a huge burden for many merchants, and can complicate accounting long-term.

And as for APIs…

Stripe and PayPal/Braintree are lauded for their developer-friendly APIs, and it’s no wonder. They’ve put together a collection of quality SOAP and REST APIs that allow businesses to have control over the customer-facing piece of their payment process. In fact, their APIs are so well-marketed that companies will often overlook the higher prices of processing. What these merchants don’t realize is that they don’t have to make that sort of sacrifice for simple, high-quality developer tools.

Payment processors like like our partner CardConnect provide SOAP and REST APIs and developer tools that rival the best in the industry. Plus, if you process with Ethix/CardConnect, you know your customer’s card data is protected with our patented tokenization process.

In summary

With a little education on pricing, business owners don’t have to settle for a flat-rate structure. Even smaller, low-volume businesses and startups should expect transparency, access to their money when they need it, and a full suite of developer tools. Expect more from your processor – you deserve it.