Until recently, only the largest merchants have been able to obtain “Interchange-Plus” Pricing. Otherwise known as “interchange pass through” pricing, Interchange-Plus is the practice of pricing a merchant with a transaction fee and then passing the exact interchange and assessment costs from the Associations to the merchant. For example, interchange plus $0.10 means the merchant will pay $0.10 in addition to the applicable Associations’
interchange cost per transaction, regardless of the qualification level of a given transaction. The exposure bestowed upon the Payment Associations and their interchange pricing structure on the heels of well publicized industry legal actions, congressional review and the like, has lead to an increase in well- informed merchants. This coupled with an increasingly competitive acquiring landscape, has significantly increased the percentage of merchants being quoted and paying Interchange-Plus.
Traditionally, smaller merchants had pricing blended into three or four categories. This practice made explaining the payment network and pricing structure much easier. Instead of having to educate merchants (and salespeople) on the various levels of interchange qualification (now more than 100 if we count all MasterCard and Visa card and charge types), acquirers explained the three or four
different prices a merchant could receive for various transactions.
This simplified the entire process. In addition, common practice was for acquirers to mark up and charge significantly more for “downgraded” transactions (those that did not qualify for the best rate applicable). These “downgrades” often comprised the majority of the profit acquirers received on merchants, as business owners focused mainly on the “qualified” or best rate. Interchange-Plus does not allow acquirers to increase profit on “downgraded”
transactions.
In addition, the Associations have made it a common practice to alter
or add interchange rates/levels at least once a year, if not more.
Each time changes occur, acquirers hustle to give their merchants notice and then alter merchant pricing accordingly. In many cases, acquirers take this opportunity to actually “pad” the increase and take additional profits. For example, if a blended (accounting for all changes and based upon the transaction history of a portfolio) interchange increase for an acquirer is 2.2 basis points, an acquirer might easily increase most merchants by 3.0 basis points. This “lift in margin”
benefits acquirers and sales reps as they make more money per account with no additional sales work. This is a true bottom-line win for acquirers, and for larger acquirers, the win can be tremendous. A portfolio of Interchange-Plus merchants gets no lift as the interchange alteration is merely passed through to the merchant.
There has been a great deal of debate about whether Interchange-Plus is a purer form of pricing. Interchange-Plus puts the merchant in a situation where they will always pay their acquirer the same and be directly responsible for the costs from the Associations, with no mark-ups. However, this pricing methodology can create merchant confusion as understanding statements with numerous qualification levels is complex and tedious. Furthermore, I would argue that acquirers only take money out of their own hands by accelerating the practice of Interchange-Plus pricing. After all, making a profit is not a bad thing and market forces will let an acquirer know if they have been too greedy with increased attrition or lower merchant additions. Over the long haul, by limiting the use of Interchange- Plus pricing you can simplify the sales and service cycle, increase your profits, and create greater long-term value in your portfolio.
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