What is interchange-plus pricing?

What interchange-plus pricing is

Interchange-plus is a pricing model that passes the card networks’ interchange through at cost and adds a separate, disclosed markup for the processor. Two numbers, printed apart: what the transaction cost, and what your provider kept.

The alternatives fuse those two numbers into one. A flat rate quotes a single percentage and a single per-transaction amount for every card that walks in the door. Tiered pricing quotes two or three percentages and decides on your behalf which one each transaction falls into. Neither is dishonest on its face, but in both the network’s share and the provider’s share arrive combined, so nothing on the statement tells you which of the two moved when your cost went up.

The practical difference is auditability. On interchange-plus you can take a line on the statement and check it against a schedule the network publishes. On a bundled rate you can check this month’s total against last month’s total, and that is the whole of what you can check.

Who sets interchange, and why your processor cannot change it

The card networks set interchange, and the bank that issued your customer’s card collects it. Visa and Mastercard publish their Canadian interchange rate schedules; your processor does not set those rates, cannot discount them, and pays exactly what every other processor pays to move your transaction.

That single fact explains most of what follows. If the interchange component is identical no matter whose logo is on the statement, then the only parts of a card price a provider genuinely controls are its own markup and its own fixed fees. A sales conversation that refuses to separate the two is a conversation about a number nobody can verify.

Interchange is not static either. The networks revise their Canadian schedules on their own timetable — adding categories, retiring others, moving rates within them — and a provider that passes interchange through hands you those revisions in both directions. A provider quoting a bundled rate has no mechanical reason to move its quoted number when interchange falls, which is exactly why Canada’s Code of Conduct treats a network cost reduction that is not passed on to you as a trigger for your right to cancel without penalty.

Interac, Canada’s domestic debit network, does not price the same way at all. In-person Interac debit reaches the merchant as a flat amount per transaction rather than a percentage of the sale, so two businesses with identical monthly volume can have very different bills purely because one of them is debit-heavy and the other is not.

The three components of every card price

Every card transaction you are billed for is made of three things: interchange, network assessments, and processor markup. That is true whether or not your statement shows them separately — bundled pricing changes what you are shown, not what you are charged.

Interchange is the largest of the three on a credit sale. It is set by the network, collected by the issuing bank, and varies by card product, by how the transaction was presented and by the merchant category your account was assigned when it was underwritten.

Network assessments are the networks’ own charges on your volume, separate from interchange: small percentages, sometimes with a per-authorization component, that fund the network rather than the issuer. They are pass-through in the same sense interchange is. No processor sets them and every processor pays them.

Processor markup is the only piece priced by the company you actually signed with. On an interchange-plus agreement it is usually expressed as a percentage plus a per-transaction amount, applied on top of the two pass-through components. Everything else on the statement — monthly account fees, gateway charges, PCI fees, terminal rental, batch fees — is also the processor’s to set, which is why the markup on its own is a poor summary of what you pay.

How it differs from flat-rate and from tiered pricing

Interchange-plus shows both components, flat-rate shows neither, and tiered pricing shows a component that does not correspond to anything the networks actually charge.

Flat-rate pricing charges one percentage and one per-transaction amount regardless of card. It is genuinely simple and genuinely predictable, and it is indifferent to your card mix — you pay the same on a basic consumer card as on a commercial card, which means the inexpensive transactions in your mix are carrying the expensive ones. Where the mix is unpredictable and the volume is small, that trade can be worth making.

Tiered pricing sorts every transaction into a small number of buckets, conventionally named qualified, mid-qualified and non-qualified, each with its own rate. The rate you were quoted is the qualified one. The rate you pay depends on how many of your transactions the processor decides do not qualify.

None of the three models is inherently cheaper. What separates them is how much of the bill you can see, and what happens to your cost when the network changes a rate or your customers change their cards. The comparison that settles a decision is total monthly cost at your own volume and your own mix, not the headline percentage on the proposal.

Why a qualified and non-qualified tier structure hides margin

Tiered pricing hides margin because the tiers are the processor’s invention rather than the networks’. There is no non-qualified interchange category. There are hundreds of interchange categories, and the processor decides privately which of its own two or three buckets each of them lands in.

A transaction downgrades when it fails a condition the processor set for the cheapest bucket: a rewards card instead of a basic one, a keyed entry instead of a tap, a missing address verification response, a batch settled after the cut-off, an authorization captured days late. The interchange behind that transaction may indeed have risen. The gap between the tier it left and the tier it landed in is set by your provider, and the difference between the two is margin.

What makes this difficult to challenge is that the statement is internally consistent. The tier rates are printed, the transaction counts are printed, and the arithmetic adds up. The missing element is the mapping — which interchange categories were assigned to which tier, and what each of those categories actually cost.

You can test it without switching providers. Ask for the same month restated with interchange shown separately, or ask for the interchange detail behind each tier. A provider that will not produce the interchange detail behind its own tiers has told you something useful about the statement.

How to compute your effective rate, and what it does not tell you

Your effective rate is total processing fees divided by total card volume for the same period, expressed as a percentage. Take every fee the statement charged — per-transaction, percentage, monthly, incidental — divide by the gross card sales that produced them, and multiply by one hundred.

It is the only figure that compares two providers, two pricing models or two months honestly, because it is indifferent to how the fees were labelled. A low markup wrapped in monthly minimums, a gateway charge and a terminal rental can produce a higher effective rate than a higher markup with nothing attached, and the effective rate is where that shows up.

It is also a blunt instrument, and it is worth being precise about its limits. An effective rate tells you what you paid, never why. A month with more commercial cards, more keyed sales or more refunds will show a higher effective rate on completely unchanged pricing. Two businesses can pay the same effective rate with entirely different room to negotiate: one is paying high interchange on an expensive card mix with a thin markup, the other is paying low interchange with a thick one.

So compute it more than one way. Compute it overall, then by card brand, then by channel where the statement separates in-person from online and keyed. And compute it on a month that actually represents you, because a peak season or a month with an unusual refund pattern will mislead in both directions.

Which cards cost more, and why

Interchange rises with the issuer’s cost and risk, and four things move it: what kind of card it is, where it was issued, how the transaction was presented, and what kind of business you are.

Card type is the most visible. Basic consumer credit sits at the bottom of the schedule. Premium and rewards cards sit above it, because the interchange is what funds the points, the cash back and the travel benefits your customer is collecting. Commercial, corporate, purchasing and fleet cards sit higher again, since they carry expense controls and enhanced reporting for the business that issued them. You cannot refuse a premium card once you accept the network’s credit category, so this part of the mix is your customers’ decision rather than yours.

Geography moves it next. A card issued outside Canada carries cross-border interchange rather than domestic, and a sale settled in a currency other than the one the card was issued in may also carry a currency conversion charge — a separate line, not interchange, and worth confirming which of the two you are looking at.

Acceptance method matters as much as the card. A card-present sale, dipped or tapped at a terminal with the cardholder standing there, is the cheapest way to present a transaction. Card-not-present — an online checkout, a payment link, a keyed sale in a virtual terminal, a phone order — carries higher interchange because the issuer is absorbing more fraud risk. Data quality inside card-not-present matters too: address verification, the card security code and 3-D Secure authentication are conditions on the better rates as well as fraud controls.

Finally there is your merchant category code, assigned when your account was boarded. Some categories — grocery, fuel, charities and others — have interchange programs of their own. If what your business does has changed materially since you were underwritten, an out-of-date category code is worth raising with your provider.

What you can negotiate and what you cannot

You can negotiate the markup, the fixed monthly charges and the contract terms. You cannot negotiate interchange or network assessments, because your provider never receives them.

That leaves a longer list than most merchants use. The percentage markup and the per-transaction amount are the obvious two. Beyond them sit the monthly account or statement fee, the PCI programme fee, the monthly minimum, gateway charges, terminal rental, batch or settlement fees, chargeback and retrieval fees, the length of the term, whether it renews automatically, and whether any early-termination charge exists at all.

Leverage comes from three places and only three: a clean processing history, volume that is stable or growing, and a competing quote priced the same way as your current one. A flat-rate proposal set against an interchange-plus statement compares nothing, which is why the first move is usually getting both onto the same basis.

Ask for the outcome in writing rather than on a call. The markup expressed as a percentage plus a per-transaction amount, every recurring charge listed with its frequency, confirmation that interchange and assessments pass through at cost, and the term and cancellation provisions. A rate is a promise about one line on the statement. A fee schedule is a promise about the bill.