The Affect of Interchange Fee Increases at the Merchant Level
Businesses that accept credit cards feel the pinch when Visa and MasterCard raise their interchange fees, but some are affected more than others. Depending on which type of pricing structure your merchant account utilizes, you may be paying a lot more than you think when interchange fees are increased.
There are hundreds of interchange categories that dictate the costs associated with accepting credit cards. When Visa and MasterCard change their interchange fee schedules twice annually in April and October, changes are applied on a per-category basis. That means that some categories may be increased while others are left unchanged.
While Visa and MasterCard may only raise a few interchange categories, the cost increases are amplified by the time the rate hikes trickle down to merchants.
How much you will end up paying to cover increases in interchange depends on which type of pricing structure your merchant account is based on. You're the worst off if your merchant account utilizes a tiered structure, a little better off if it utilizes an interchange plus pricing structure and best off if you've got a flat fee merchant account.
Tiered Merchant Account Pricing
Interchange fees are generalized on a tiered merchant account pricing structure making it the most expensive way to process credit cards.
Aside from being expensive, increases in interchange fees are amplified on a tiered structure. When a single interchange category is increased by Visa and MasterCard, merchant service providers compensate by raising the rate of an entire tier.
The end result is that the merchant pays higher costs on interchange categories that haven't actually been increased by Visa and MasterCard. The across-the-board rate hike also produces larger profits for the merchant service provider.
In the end, the merchant ends up paying more to Visa and MasterCard for the interchange category that actually has been increased and more to their merchant service provider for categories that haven't actually been increased.
Interchange increases are far more transparent on an interchange plus pricing structure than they are on tiered, but it's still second best.
Interchange plus passes actual interchange fees to merchants along with a fixed increase from the merchant service provider. Since merchants are paying actual interchange, they won't pay higher rates on interchange categories that haven't actually increased.
The weakness with interchange plus isn't so much in how increases in interchange fees affect merchant-level pricing, it's that interchange plus is a volume-based pricing structure.
That means that the more a merchant processes, the more they will pay in fees and the more the provider will make in profit. When Visa and MasterCard raise an interchange category, the merchant pay a fixed percentage over interchange to their merchant service provider along with the greater interchange percentage.
Flat fee merchant account pricing
Flat fee merchant account pricing is even more transparent than interchange plus and it's the only form of pricing that isn't volume-based. That means that a merchant pays the same monthly fee to their merchant service provider regardless of how much they process.
On a flat fee pricing structure increases in interchange fees are passed directly to the merchant. There are no additional charges from the provider at all.
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