Credit Card Processing: ‘Interchange-Plus’ Pricing Not Necessarily Fair, Part 2

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 that offer interchange-plus contracts. He explains his views in the article below.

As I stated in my article last month, I am a strong advocate of interchange-plus pricing. To date, I have allowed only merchant account providers that offer interchange-plus pricing to bid for my clients’ business. However, I am also concerned about how some providers and salespeople appear to be pitching interchange-plus pricing as a panacea for ensuring merchants are being priced fairly. Therefore, I decided to turn last month’s article into a 3-part series on interchange-plus pricing — so merchants can see that while interchange-plus pricing can be important, it does not automatically guarantee fair pricing. This article is the second installment of that series.

Interchange Plus: 2 Things to Understand as a Merchant

First, card processing is a very perplexing and convoluted industry. You can have, say, 30 different customers use their debit or credit cards to buy the same product at the same price on your website, and you theoretically could be charged 30 different processing rates. This is one of the reasons why a clever salesperson can offer what appears to be a good processing rate — and ends up being anything but that.

Second, don’t expect a salesperson to offer you the best possible price. If you are currently overpaying for processing by $20,000 per year and the salesperson thinks he can entice you into changing providers for $5,000 in savings, he may offer you a rate that saves you $5,000. There is nothing wrong with this type of sales approach. Merchants — like credit card salespeople — want to make as high a profit as possible. However, this perplexing and convoluted industry puts merchants at a disadvantage in the negotiations, which is the reason for my articles here each month.

An Actual Interchange-Plus Example

I have worked with several merchants recently that were offered interchange-plus contracts. Fortunately, they understand that interchange-plus pricing was not necessarily fair. As a result, each eventually received — after negotiations — far better pricing and terms and conditions than originally offered. Here is an example of one such merchant.

This merchant was with one of the largest merchant account providers. The merchant was on a tiered pricing schedule — I explained tiered pricing in a previous article — and was grossly overpaying for the service. Its provider offered interchange-plus pricing at 0.31 percent plus $0.05 plus normal fees, all of which would save more than $100,000 over three years. As impressive as this may sound, in fact there were three problems with this offer.

First, the merchant was overpaying by more than $175,000 during that timeframe. The provider thought it could wow this merchant into thinking that the savings it offered would keep this merchant. However, after negotiating, the merchant ended up getting pricing at 0.07 percent (versus .31 percent) plus $0.08 plus normal fees, which saved the merchant the additional $75,000 over three years. Both rates were interchange plus, but only the latter pricing was fair.

Second, the provider included a “liquidated damages” clause for early termination. I encourage my clients to never sign a contract with a liquidated damages clause. Depending on the specific verbiage, it could cost thousands of dollars to terminate the contract early. In fact, I know of an ecommerce merchant who was forced to continue processing with his provider — or pay several hundred thousand dollars to terminate early. It should never cost more than $400 to terminate your contract early.

Third, the provider was charging its processing percentage on returns. The provider charged the merchant 3 percent to process a $1,000 sale with a specific card type; the merchant paid $30 in processing for the sale. If the customer returned the goods, the provider would charge an additional 3 percent to reverse the credit card charges. Therefore, the provider received $60 and the merchant had a net sale of zero. There is no reason why a merchant should pay a processing percentage for refunds — other than it’s another way a provider can make money without the merchant understanding he or she overpaid. I know of one ecommerce merchant that was paying $6,000 per year in refund-processing fees.

An Important Interchange-Plus Question to Ask

I now see merchant account providers increase their fees or add new fees, while at the same time claiming to be passing through all of the Durbin Amendment debit-card interchange reductions. This does not seem right to me. Yes, they may be passing on the lower debit interchange rate. However, if at the same time they are taking more money out of the merchants’ pockets with new or increased fees, are they really passing through all of the Durbin Amendment reductions? Are they really any different than the provider that is not passing through all the Durbin Amendment reductions?

So, one of the questions I ask the salesperson during the negotiations is simply “Has your company increased any fees or added any new fees over the last year? If yes, explain why.” This is a question of provider integrity that each merchant should ask. I am not saying that the provider isn’t justified in increasing or adding new fees. However, all merchants should ask this question during the pricing negotiations.


In summary, remember these seven points when you negotiate an interchange-plus contract.

  1. Interchange-plus pricing is not a panacea.
  2. The card processing industry is perplexing and convoluted.
  3. Do not expect the salesperson to offer you the lowest rate. You need to work to get it.
  4. Do not be wowed by a large savings amount, as there may even more savings left on the table.
  5. Do not focus on just the rate. Understand, also, the fees, funding, and terms and conditions in the contract.
  6. Avoid liquidated damage clauses.
  7. Ask the tough questions during negotiations.
Phil Hinke
Phil Hinke
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