What is an Interchange Plus Merchant Account?
What is an Interchange Plus Merchant Account?
Recently I’ve been approached by a few merchants that were quite confused about the interchange plus merchant account model and how it works. So, I’ve decided to write this short post explaining how it works, why it is better and why you should consider changing your merchant account to an interchange plus account.
First of all, in order to understand the structure of an interchange plus merchant account we have to understand the other plans as well if we want to know the benefits of this account. In the credit card processing industry there are three types of accounts, flat rate, tiered rate and interchange pass through rate. The most simple one to understand is the flat rate, let’s say 2.70% for all swiped transactions and 3.49% + $0.19 for keyed transactions, the reason why keyed transactions are usually higher is due to the higher rate that Visa, MasterCard, Discover and American Express are charging us to process these cards. These accounts are usually good for small and starting businesses and typically the rate on a flat rate account is higher than other accounts.
Then, we got the invention of most credit card processors, the tiered rates, you might recognize it by the famous “Qualified, Mid-Qualified and Non-Qualified rate” terminology, Non-Qualified usually been the highest rate. As a matter of fact, the credit card networks are not familiar with these rates at all and this terminology is created solely by credit card processors as a great way to make more money and keep it simple for the merchants. How it works? The merchant services company sets three (3) rates for your merchant account (Qual, Mid-Qual and Non-Qual), usually the qualified rate is for debit cards and usually that ends up been the lowest rate, then there is the Mid-Qual with slightly higher rate and the Non-Qual, which is the highest rate (I’ve seen as high as 4.25% + $0.30). Non-Qual cards are usually reward credit cards (like the ones you probably have and use all the time since you get cash back from your credit card company), these cards are very popular today and a large amount of transactions come from them. For the merchant services company it cost more to process these cards than processing debit cards and that is why the merchant services company charges more for it. The problem comes when in fact, the person to decide what cards are called “Qual” and what cards are called “Non-Qual” is the same company that sets these rates. There is no book / manual that states what cards are related to each category, so each credit card processor can have different cards in each category.
So how do we save money, accept credit cards and not over paying our merchant services provider? Very easily, that’s where Interchange Plus Merchant Accounts come very handy!
The structure of an interchange plus, also called interchange pass through, account is very simple. The credit card networks charge their interchange (click here for Visa interchange schedule)and the credit card processor charges its interchange. Let me clarify, let’s say that you have a merchant account in which you are set up with an interchange plus 70 basis points (0.70%), plus $0.09 per transaction. A client steps in to your store and uses a Visa credit card for the transaction. That visa credit card has its own rate issued by Visa, and that rate (for demonstration only) is 1.10% + $0.10 per transaction. The sale is for $100, so you, the merchant will be charged 1.80% + $0.19 by your credit card processor, which will come up to $1.99 for the entire transaction. Compared with Non-Qualified rate which you may be over paying by over 2.26% and $0.10 at some cases. Debit card transactions have an even better rate from Visa (some as low as 0.05% + $0.22, so for that same transaction you might be paying 0.75% + $0.31 which will total $1.06 for the entire transaction if it was a Visa debit card for example. That is compared to 1.69% + $0.10 (which will total $1.79 for this transaction) at most credit card processors for Qualified cards.
In conclusion, whether you accept credit cards on iPhone, Android or iPad, online on your website or at your retail location, for most merchants who have an average ticket of $50 or more, an interchange plus account will result in money savings for them. It is an easier approach for the merchant and the merchant services provider to track what each makes and know that you are not over paying your merchant services company every month.
For more information about interchange plus merchant accounts please contact us here.