Is “Interchange++ pricing” always better?

This Interchange plus (“Interchange++/IC++”) post focuses on card payments pricing and is rniche. However, I have wanted to write it for a while, especially after reading some online materials.

On PSP/acquirer websites, I’ve read statements like:

“Interchange++ pricing passes these fees directly to you (merchant), giving you more transparency and lower fees overall”

Here is another quote, referring to merchants having

“more transparency into the fees they pay”

Transparency and lower fees sound good. However, should merchants switch to IC++ pricing? Is it always better? My answer is – it depends on what the “value of transparency” is for your (merchant) business.

I’ll cover three points in this post:

1. IC ++ pricing basics
2. Why IC++ pricing might be a good fit
3. Why IC++ pricing is not always better

1/ IC++ pricing basics

First, here is a quick recap on payment costs:

1. Interchange fees: fees that go to the bank that issued the card.
2. Scheme fees: fees that go to the card networks like Visa, Mastercard.
3. Acquirer + Processor fees: fees that go to the payment service provider (PSP). This is their margin/mark up.

Image is my own.

I’ve written more extensively about it here.

Second, for interchange++ pricing, the acquirer commits to “passing through” the interchange and scheme costs to the merchant, and also showing what their own markup/margin is. For example, if a fee structure is:

IC + scheme + 0.80% = total fees per transaction.

The breakdown could be:

1. Interchange costs: 2% (depends on card type, merchant category code, local vs cross border transaction etc)
2. Scheme fees: 0.1% (higher if a cross border transaction).
3. Acquirer + Processor fees: 0.8% or whatever the negotiated PSP margin is.

With this fee structure, the total fees for that transaction are 2+0.1+0.8% = 2.9%. However, interchange and scheme fees fluctuate (for example, by country), so each transaction has different costs.

2/ When IC++ pricing might be a good fit

1) It is transparent

If your PSP gives a cost breakdown of interchange, scheme and their mark up for each transaction, that is transparent. You have to trust that the numbers are accurate, because you might not be able to verify it (interchange and scheme fees are often not public).

2) It is good for multi region/multi business line merchants looking for cost optimization opportunities

If a merchant is in multiple regions and has multiple entities/bank accounts and local acquiring set ups, a global IC++ pricing structure streamlines pricing across countries and business lines.

IC++ pricing helps if you have a payments team to manage routing decisions, and technical resources to implement cost optimization strategies. It provides visibility into regional costs differences, and opportunities to route payments through lower cost networks.

3/ Why IC++ pricing is not always better

IC++ pricing does NOT always lead to lower total fees. There is no guarantee that “fees are lower” than blended pricing (fixed fee X% + $0.Y per transaction). Ultimately, the acquirer is passing through costs from the banks and networks.

1) Transparency is as good, but only has business value if used

Transparency is good, but doesn’t add business value unless you use the information. For example, imagine switching to IC++ pricing, and the majority of your customers use premium cards (where interchange costs are ~3-4%). You know your interchange + scheme + PSP mark up costs, but your payment costs overall might not decrease. In fact, costs might have increased, if your previous pricing was fixed regardless of card type.

2) Blended pricing is more simple and predictable

Blended pricing could be better for simplicity and predictability. With blended pricing, you know how much every transaction will cost you beforehand. With IC++ pricing, you only know what payment costs are after the customer uses their card. IC++ costs will fluctuate.

3) Blended pricing means the acquirer absorbs the risk of cost increases

In blended pricing, the acquirer absorbs costs increases (they could raise prices, but it’s harder with a contract). In contrast, when interchange/scheme costs increases, increases are passed on to the merchant in IC++ pricing.

Conclusion

For acquirers, it makes sense to advocate for IC++ pricing, to pass through changes in costs (increases) to the merchant.

For merchants, IC++ pricing is not always better. If you have a solid blended pricing deal, it makes less sense to switch unless you are certain that you will pay less fees. Ultimately, consider operations, scale, and the value before leaping into IC++ pricing. It could be a better fit at a later stage.