Practical Ecommerce

Credit Card Processing: ‘Interchange-Plus’ Pricing Not Necessarily Fair

Editor’s Note: Contributor Phil Hinke is a credit-card veteran who now consults with merchants on lowering their processing costs. Hinke believes the credit card processing industry is often unfair to merchants. He believes the Durbin Amendment — which lowers debit card interchange rates — is fostering deceptive pricing practices by some merchant account providers. He explains his views in the article below.

I am not only upset with what I am seeing in the in the card processing industry right now, I am disgusted with how merchants are being taken advantage of.

‘Interchange-Plus Pricing’ Not Necessarily ‘Fair Pricing’

I am a strong proponent of interchange-plus pricing and, to date, I have never recommend tiered pricing for merchants. (I addressed the differences between interchange-plus and tiered pricing at “Notable Views: Credit Card Veteran on ‘Onerous’ Processing Rates,” a previous article.) However, merchants on interchange-plus pricing can still be grossly overpaying for their card processing. In fact, of the hundreds of merchant statements I have analyzed, the majority of merchants that were overpaying were already on interchange plus, which gives merchants only the potential for fair prices — nothing more.

Processing Rate Just One Part of the Price

I recently showed a merchant who was already on interchange plus pricing that he could save money by changing to a provider with a higher processing rate. How could that be? The processing rate is just one of many costs the merchant pays. In this case, the merchant account provider had given the merchant what seemed to be an enticing rate. However, it also hit the merchant with copious monthly and annual fees. Those fees more than offset the rate savings. (I explained the various credit-card-processing fees and charges in my four-part “Understanding Credit Card Fees” series, published earlier this year.)

Do not focus on the processing rate alone. You must understand how all card types are affected by the rate. You must also understand all the fees charged, the account funding process, and the terms and conditions. I require every bidder who works with one of my clients to fill out the same 3-page form. There is only one question regarding the rate, because that is all that’s required. The other questions related to how the rate affects all card types, what all the potential fees are, funding information, and the terms and conditions. This list of questions ensures transparency, so the merchant can make a knowledgeable business decision.

‘Match the Rate’ Offers Mean Nothing

Many merchant account providers will tell their existing merchants that they will “match the rate” should the merchants get better offers. This means nothing — by itself — because of all the other fees merchants need to consider.

I am finding some of these rate-reduction offers to be horrible. This is especially the case with rate reduction offers from financial institutions.

Confirm Savings Analyses from Merchant Account Providers

No merchant should make a decision solely based on the savings analysis done by a merchant account provider, even if it is a well-known provider or financial institution. I am seeing biased and flawed savings analyses presented to merchants. The most common flaw is identifying savings that take the merchant’s existing debit and credit card volume, then showing a projected savings based on the entire volume being at the lower Durbin Amendment regulated debit card rates. Make sure all savings analyses show an accurate breakdown of credit and debit card volume for your business. Also, remember that the Durbin-Amendment-regulated rates will probably only affect 60-70 percent of your debit transactions, since it applies only to financial institutions with more than $10 billion in assets. The remaining transactions will still be at the previous unregulated rate.

Increased Fees Offset Durbin Amendment Savings

Some merchant account providers are telling merchants that all the debit-card savings from the Durbin Amendment are benefiting the merchants.

However, I am also seeing some providers increase their fees or add new ones. I am seeing monthly service or statement fees increase by as much as $10, which mitigates the Durbin Amendment “savings.”

If a merchant account provider tells you it will place your business on interchange-plus pricing to pass through all the Durbin Amendment savings, ask the provider this question: “Has your company increased any fees or added new fees over the last year?” If it answers “no,” get it in writing. If it answers “yes,” then determine if your business is really benefiting from the Durbin Amendment rate reduction.

Get a Third-Party Opinion

No merchant should sign a merchant agreement without having a third party review it and explain the rates, the fees, the funding information, and the terms and conditions. There are good companies that help merchants in this capacity. However, I believe merchants should ask these companies tough questions before using them. This includes asking how the third party makes money, and who is paying that company.


The credit-card-processing tactics that I am seeing in the industry now are alarming. I highly recommend merchants be cautious. I recommend they do not sign with a merchant account provider immediately after a sales presentation or statement analysis, but instead wait at least a couple days to think things through. I also recommend that merchants not make card processing decisions until they review them with a third party — such as a consultant, accountant, attorney, or another merchant, keeping the following points in mind.

  • Interchange plus pricing does not automatically mean fair pricing.
  • Use common sense when your existing processor offers a rate reduction.
  • Never trust a saving analysis done by a merchant account provider without first reviewing it.
  • Always have a third party review any card-processing proposal.
  • Beware of increased fees that offset Durbin Amendment debit card reductions.
  • Ensure all proposals are in writing, not verbal.
Phil Hinke

Phil Hinke

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  1. Ben Dwyer October 13, 2011 Reply

    This is a good outline of some of the problems that plague the processing industry, but the points don’t outline anything new. Whether pricing is based on interchange-plus, tiered, or even ERR pricing, a merchant should be advised to look to the effective rate of an offer as a true and accurate measure of the competitiveness of a processing quote.

    For those unfamiliar with the term effective rate; it refers to a single percentage that shows how much in volume a merchant will pay in fees.

    For example, if a company is charged $100 in processing fees for a month where volume is $5,000, the effective rate is 2.00%. The power of comparing offers based on the effective rate is that all rates and fees are taken into consideration. The effective rate is the only measure that our software uses to rank the quotes that merchants receive.

    Of course, the terms of a merchant processing agreement are always important, but settling for what you’re given is a mistake. In fact, demanding what you want is a better course of action than settling for what you get. For example, if a processor attempts to impose a 3-year term with a $200 cancellation fee, simply refuse to consider their offer unless the term is removed. You will find that processors are very happy to oblige. I know this all too well, because we require processors to sign a legal agreement that forbids cancellation fees and other undesirable tactics. Not a single processor has flinched at our agreement to date.

    Finally, there’s no denying that the Durbin Amendment has created quite a mess — especially for merchants unfortunate enough to still be paying fees on a tiered pricing model.

    Phil’s point regarding the split of regulated versus unregulated debit interchange used when doing a price comparison on a tiered statement is excellent, but I’d like to add one important point.

    A large problem with determining the percentage of regulated versus unregulated debit volume on an individual basis is that there are many variables at work making an accurate comparison virtually impossible. For example, a merchant that is located in a rural area where most debit cards are issued by community banks will have a greater percentage of unregulated volume than a merchant located in an urban area where more volume will be regulated.

    Until actual figures are available based on real usage, I would suggest taking the conservative route and using a 50% / 50% split on regulated versus unregulated. That’s what our software is currently programmed to figure for merchants that use our system, and I expect the numbers will pan out when we do follow up analyses.