Selecting the right credit card pricing structure can be a daunting task, especially when faced with terms like "interchange" and "surcharging" that can add complexity to fee comprehension. This article aims to simplify these concepts, providing you with a clear understanding to make an informed decision that best suits your business needs. There are three primary pricing structures for credit card fees: Flat-Rate, Interchange Plus, and Merchant Surcharging. Let's delve into each of them!
Flat-Rate:
How it works: In a flat-rate pricing structure, the merchant pays a fixed percentage and sometimes a fixed transaction fee for every credit card transaction processed. This pricing model is simple and easy to understand, making it popular among small businesses and startups.
Key Point: Although flat-rate pricing is simple to understand, merchants with a flat rate pricing structure will typically pay more in credit card fees
Interchange Plus:
- How it works: Interchange Plus pricing breaks down the cost of a credit card transaction into two parts: the interchange fee set by the card networks (Visa, Mastercard, etc.) and the processor's markup (a percentage of the transaction amount and sometimes a per-transaction fee). Merchants pay the actual interchange fee plus the processor's markup.
Key Point: Interchange-plus pricing can be a little more difficult to understand, but merchants using this pricing structure generally pay lower fees overall
Merchant Surcharging:
- How it works: Merchant surcharging involves passing the credit card processing fees (interchange fees and the processor's markup) directly onto the customer by adding a surcharge to the transaction. This means that the customer pays an additional fee for using a credit card.
Lets take a look at some of the advantages and disadvantages of Merchant Surcharging
- Advantages:
- Merchants don't have to think about credit card fees as much when designing their product offerings
- Fees are passed directly to the customer and are never handled by the merchant
- Disadvantages:
- Legal and Regulatory Considerations: Surcharging is subject to legal and regulatory restrictions in many jurisdictions. Some regions or card networks may prohibit or limit surcharging.
- Since not every card can be surcharged, the merchant will have to pay some fees. This includes all debit cards
- Each point of sale must have posted disclosures that the customers card will be surcharged
- Many customers do not like seeing the fees on a seperate charge on their credit card statement
Key point: Most fees for credit cards are passed directly to the customer, but the rapidly changing legal landscape and the requirements can also be a lot to keep up with