Practical Ecommerce

Merchants Using Interchange-Plus Pricing Continue to Overpay

Editor’s Note: Contributor Phil Hinke is a veteran of the credit card processing industry. He now consults with merchants to help lower their processing costs, believing the credit card industry is often unfair to them. His latest article, below, addresses misconceptions with interchange plus pricing that continue to cost money for merchants.

If you have been reading my articles over the last two years, you know that I am a huge proponent of interchange plus pricing for credit card processing. However, you also know from my articles that interchange plus pricing does not automatically mean your business has been priced correctly and competitively.

What Is Interchange Plus Pricing?

Interchange plus pricing means that the provider charges a set fee — say 0.10 percent + $0.05 — over the interchange rate (the fees that go to the bank that issued the card used to purchase the goods and services) and the pass-through fees (the fees charged by the card companies).

Why Do Merchants Overpay for Interchange Plus Processing?

When merchants on interchange plus pricing contact me, they usually say something like, “We are on interchange plus pricing [some say 'cost plus'], so I’m sure our pricing is fine. However, we just want you to audit our statement.”

So far this month, every interchange plus merchant who sought my help has been overpaying for card processing. In general, most of the interchange plus merchants who contact me, regardless of the month, are overpaying. And they are not just slightly overpaying. One ecommerce company I helped this month processes $2.7 million per year; it was overpaying by more than $42,000 per year. I have seen smaller merchants overpay by larger percentages.

One of the major reasons so many interchange plus merchants overpay is because providers have done a good job of convincing merchants that interchange plus pricing somehow means fair pricing. Some providers claim that through interchange plus pricing they are “giving back” Durbin Amendment — capping certain debt card transactions — money to merchants. Nobody is giving anything back. They are simply passing through what rightfully belongs to the merchant.

Other providers claim to be the merchant’s friend — even an advocate — for the merchant. I just audited a statement that a small merchant sent me from one of those “merchant friends.” This merchant is currently overpaying by $15,000 per year. I’ll give the provider credit: there were no hidden fees. It was simply doing some old-fashioned gouging.

I also believe that card processing salespeople do a good job of raising the emotion level of merchants who are on tiered pricing, which has a set number of tiered rates — 3-tiered pricing is the most common — and all card transactions fall into these set pricing tiers. It can be easy for a salesperson to convince a merchant on tiered pricing that an interchange plus pricing plan is fair and will save the merchant money. What the salesperson may not clearly state is that his or her interchange plus plan also comes with misleading fees.

In “Credit Card Processing: Interchange Plus Pricing not Necessarily Fair,” a 3-part series I wrote previously, I address some of the misleading rates and fees. I invite you to read that series if you are currently on interchange plus pricing or considering renegotiating your current pricing. You may be surprised at the misleading tactics some providers use.

Again, I am a proponent of interchange plus pricing over tiered and flat-fee pricing plans. However, merchants must negotiate a fair price and watch for covert fees and other tactics.

Renegotiating Rates or Changing Providers

Merchants should follow the procedures I outlined in “How to Lower Credit Card Processing Costs and Obtain Better Terms,” my 5-part series, when renegotiating rates and fees or negotiating with a new provider. You cannot simply compare one interchange plus pricing offer to another just as you cannot compare one tiered pricing offer to another.

There are no standards that define how interchange plus pricing is implemented and what additional fees or practices are used. The examples below illustrate how misleading some of the fees can be.

Example 1: Misleading ‘Foreign Handling Fee’

Just because “Visa” is stated on the statement doesn’t mean it is a Visa fee.

For example, I recently reviewed a statement that contained a “Visa Foreign Handling Fee” that was, in fact, simply a provider surcharge.

Visa and MasterCard do charge fees for transactions where an international card is used. Visa charges an “International Service Access fee” of 0.40 percent and an “International Acquirer fee” of 0.45 percent. In the statement I reviewed, the provider is passing through these Visa fees — as it should. However, it was also adding its own 0.20 percent “Visa Foreign Handling Fee.”

If you were to call someone in the provider’s customer service department, he or she would probably tell you it is a Visa fee. I am not saying that the person in customer service would lie. Just understand that the average customer service person doesn’t understand interchange rates. The person would simply view this as a Visa fee since it read “Visa” on the statement.

But it’s not a Visa fee. It’s a provider surcharge. This merchant thought he had a great interchange plus rate and didn’t realize he was paying an additional 0.20 percent provider fee for his international card business, which represented a significant portion of his customers.

Example 2: Refunds

Another example from a recent interchange plus statement I reviewed involved refunds. When a merchant refunds a customer, a major portion of the Visa and MasterCard interchange rate is refunded back to the provider. But that doesn’t mean the provider will pass it back to the merchant. In the statement I reviewed, the merchant should have received roughly $125 in credit from refunds. But he did not.

Some providers properly return the refunded interchange rate back to the merchant. Some keep it. And some actually keep it, and charge the merchant full processing fees on the refund transaction.

Summary

  1. Many interchange plus merchants are overpaying despite what they have heard about interchange plus pricing.
  2. There are no standards for how interchange plus pricing plans are implemented.
  3. Follow the negotiation procedures in “How to Lower Credit Card Processing Costs and Obtain Better Terms,” to ensure you are being priced correctly.

Phil Hinke
Phil Hinke
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Comments ( 4 )

  1. Ben Dwyer April 12, 2013 Reply

    Actually, there are standards to how interchange plus pricing must be implemented. The key is to involve a third-party with the power and a system in place to enforce such standards.

    For example, CardFellow requires a signed, legal agreement from each provider in its marketplace that requires interchange vouchers to be passed to merchants, and our free statement auditing and monitoring service ensures this is the case. Our agreement also requires interchange and assessments to be passed at true cost. This clause eliminates processors’ ability to markup assessments thereby charging hidden costs.

  2. depalmal April 18, 2013 Reply

    I guess when I hear ‘interchange plus’ I think back on my days as Director of Emerging Products at Paymentech, where the merchant was truly receiving interchange (and was fully responsible for interchange compliance rules). When I hear of processors that don’t pass through true costs, then I would just immediately think they’re not on one of the big CNP platforms like Litle, Vantiv, Paymentech, etc.

  3. MerchantFeeSavers April 19, 2013 Reply

    Ben,

    There are no standards. Some in the industry have been trying to create standards, guidelines, or at least consistency. However, there is no real force behind their efforts. So far, all they have created are words which is why the issues on which I educate merchants still exist.

    I’m glad to see you want your merchant clients to have full disclosure like MerchantFeeSavers does for its merchant clients.

    Phil Hinke

  4. MerchantFeeSavers April 19, 2013 Reply

    depalmal,

    You did a nice job with Emerging Markets. Unfortunately, I continually see merchants processing on even some of the bigger CNP platforms that have inflated fees or pass through fees that are not really Visa/MasterCard fees.

    Phil Hinke

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