Fixed vs Interchange++ Pricing Explained—Cut Card Fees
Written by Lee Hart
Small merchants face a critical decision when choosing between fixed and interchange++ (Interchange Plus Plus) pricing models for card processing. Both options have distinct advantages and drawbacks that directly impact monthly merchant service fees and business operations. Understanding these differences can save thousands of pounds annually whilst providing better control over payment processing costs.
For most small merchants, interchange++ pricing typically offers lower overall costs and greater transparency, whilst fixed pricing provides simplicity and predictable monthly expenses. The choice depends largely on transaction volume, average ticket size, and the merchant's preference for cost transparency versus operational simplicity.
Fixed pricing bundles all processing costs into one rate, making it easier to understand but potentially more expensive. Meanwhile, interchange++ pricing separates wholesale costs from processor markups, offering transparency but requiring more analysis to understand monthly statements. Small merchants must weigh these factors against their specific business needs and processing patterns.
Key Takeaways
- Interchange++ pricing usually costs less for small merchants but requires more complex statement analysis
- Fixed pricing offers predictable monthly costs but often results in a higher overall payment processor fee
- The best choice depends on transaction volume, average sale amount, and preference for transparency versus simplicity
Understanding Card Processing Fees
Card processing fees involve multiple parties and fee structures that directly impact a merchant's bottom line. These costs include interchange fees, scheme fees, and processor markups that vary based on card type and transaction details.
Key Players in Card Transactions
Four main parties handle every card transaction. Each plays a specific role in moving money from customer to merchant.
The issuing bank provides the payment card to customers. This bank pays the merchant's bank initially, then collects from the cardholder later.
The acquiring bank (acquirer) works directly with merchants. It receives payments from issuing banks and deposits funds into business accounts.
Card networks like Visa and Mastercard connect all parties. They set the rules and fees for processing transactions across their systems.
The payment processor handles the technical side. It routes transaction data between banks and card networks whilst managing the merchant's payment gateway.
The Components of Card Processing Fees
Card processing fees consist of three distinct parts that merchants must pay.
Interchange fees represent the largest portion. The issuing bank receives these fees from the acquiring bank for each transaction.
Card networks charge scheme fees (also called assessment fees). These cover network maintenance and transaction routing costs.
Processing fees go to the payment processor. This covers technical services, customer support, and the processor's profit margin.
Fee Type/Who Receives It/Typical Range
- Interchange/Issuing Bank/0.2% - 2.0%
- Scheme Fees/Card Networks/0.05% - 0.15%
- Processing/Payment Processor/0.1% - 0.5%
How Fees Affect Small Merchants
Small merchants face unique challenges with card processing costs. These expenses can quickly accumulate and impact profitability if not properly managed.
Lower transaction volumes mean less negotiating power. Small businesses typically pay higher processing rates than large corporations with significant monthly volumes.
Credit card fees are generally higher than debit card fees. Premium cards with rewards programmes carry the highest interchange rates, sometimes exceeding 2.5%.
Fee structures vary significantly between processors. Some charge monthly fees, others include gateway costs, and many add extra charges for specific services.
Cash flow timing matters for small businesses. Most processors hold funds for 24-48 hours, but some delay payments for several days, affecting working capital.
What Is Fixed (Blended) Pricing?
Fixed pricing, also known as blended pricing or flat rate pricing, combines all payment processing fees into one simple rate that merchants pay for every transaction. This model offers predictable costs but may not always provide the most transparent fee breakdown for small businesses.
How Blended Pricing Works
Blended pricing offers a simplified fee structure where payment service providers charge a single, fixed rate for all types of transactions. A typical example might be 2.9% plus £0.30 per transaction.
This model groups all processing fees together, including interchange fees, card association fees, and processor charges. Merchants receive one consolidated fee without seeing the individual cost breakdown.
Unlike tiered pricing models that charge different rates based on card types or transaction methods, flat rate pricing treats all transactions equally. Whether a customer uses a basic debit card or a premium rewards credit card, the merchant pays the same percentage.
The payment service provider absorbs the varying costs of different card types and transaction methods. They calculate an average rate that covers their expenses whilst maintaining profit margins.
Pros and Cons of Blended Pricing
Advantages of blended pricing:
- Simplicity: Easy to understand and calculate monthly fees
- Predictability: Fixed rates make budgeting straightforward
- Quick setup: Faster onboarding compared to more complex pricing models
- No surprises: Consistent rates regardless of card mix
Disadvantages include:
- Less transparency: Merchants cannot see individual fee components
- Potentially higher costs: May pay more than necessary for basic transactions
- Limited optimisation: Cannot adjust processing methods to reduce fees
Businesses that regularly accept cross-border transactions may find blended pricing more cost-effective than other models. International transactions typically cost more to process, so fixed rates can provide better value.
The tiered pricing model differs from flat fee pricing as it charges different rates based on transaction types. This can create confusion for merchants trying to predict costs.
Who Should Consider Blended Pricing?
Small merchants with predictable transaction patterns benefit most from blended pricing. Businesses processing under £10,000 monthly often find the simplicity outweighs potential cost savings from more complex models.
Ideal candidates include:
- New businesses wanting straightforward pricing
- Merchants with consistent card mix (mostly standard debit/credit cards)
- Companies prioritising ease of accounting over cost optimisation
- Businesses with limited time for fee analysis
Retailers accepting many premium or corporate cards might pay more with flat rate pricing. These card types typically have higher interchange fees that get averaged into the blended rate.
Service-based businesses with smaller transaction amounts often prefer this model. The fixed percentage makes it easy to calculate processing costs when setting prices.
Companies with seasonal sales patterns benefit from predictable rates. They can budget accurately without worrying about fluctuating fee structures during busy periods.
What Is Interchange++ Pricing?
Interchange++ pricing provides transparent fee breakdowns that separate each cost component, whilst processor fees and card scheme charges remain clearly visible to merchants.
How Interchange++ Pricing Works
Interchange++ pricing operates on a cost-plus model where merchants pay the exact interchange rates set by card networks plus clearly defined markups from their payment provider. This model eliminates hidden fees by showing each transaction's true cost breakdown.
The payment provider charges their markup separately from the interchange fee. When a customer makes a purchase, the merchant sees exactly how much goes to the card issuer, the card scheme, and the processor.
This pricing structure offers more transparency than other pricing types because it shows a detailed breakdown of all charges. Merchants can track their processing costs more accurately.
The interchange+ model means costs fluctuate based on actual interchange rates. Different card types carry different interchange fees, so monthly processing costs vary depending on the mix of cards customers use.
Fee Breakdown: Interchange, Scheme, and Processor
Interchange++ pricing comprises three distinct elements: the interchange fee, the acquirer's fee, and the card scheme fees. Each component serves a different purpose in the payment processing chain.
Interchange Fee: This goes directly to the card-issuing bank. Rates vary by card type, transaction method, and merchant category. Debit cards typically have lower interchange rates than credit cards.
Card Scheme Fee: Visa, Mastercard, and other networks charge these fees. They cover the cost of maintaining the payment network infrastructure and fraud prevention systems.
Processor Fee: The acquirer or payment provider charges this markup for their services. The acquirer fee can consist of a percentage fee, a fixed fee or a combination of the two.
Fee Component/Goes To/Typical Range
- Interchange Fee/Card-issuing bank/0.2% - 2.0%
- Scheme Fee/Card networks/0.05%- 0.1%
- Processor Fee/Payment provider/0.1%-0.5%
Pros and Cons of Interchange++ Pricing
Advantages:
Cost transparency stands as the primary benefit of interchange plus pricing. Merchants can see exactly where their money goes on each transaction.
Lower overall costs often result from this model. High-volume merchants typically save money because they only pay actual interchange rates plus a small markup.
Cost optimisation becomes easier when merchants understand their fee structure. They can identify which card types cost more and adjust their pricing accordingly.
Disadvantages:
Unpredictable monthly costs challenge budget planning. Processing fees fluctuate based on the types of cards customers use each month.
Complex reporting requires more time to understand. Merchants must review detailed statements showing multiple fee components rather than simple flat rates.
Smaller merchants might not benefit as much from this pricing model. They often lack the transaction volume needed to make the complexity worthwhile.
Comparing Fixed and Interchange++ Pricing Models
Fixed pricing offers simplicity with one flat rate per transaction, whilst interchange++ pricing provides transparency by separating wholesale costs from processor markups. The choice between these pricing models significantly impacts small merchants' transaction fees and operational complexity.
Transparency and Fee Breakdown
Interchange++ pricing delivers complete transparency by itemising interchange fees, assessment fees, and processor markups separately on monthly statements. Small merchants can see exactly where their money goes for each transaction type.
Fixed pricing bundles all costs into a single rate. Merchants receive straightforward billing without detailed breakdowns. This approach hides the actual interchange costs and processor margins from view.
The transparency difference affects how merchants evaluate payment processors. With interchange++ pricing, merchants can easily compare processor markups. Fixed pricing makes it difficult to assess whether they're receiving competitive rates.
Monthly statements under interchange++ pricing show specific fees for different card types. Debit cards appear at lower rates than premium credit cards. Fixed pricing shows the same rate regardless of card type used.
Cost Impact on Small Merchants
Transaction fees under fixed pricing average higher costs for merchants with average transaction values above £15-18. Small merchants processing larger tickets typically pay more with flat rates.
Interchange++ pricing allows merchants to benefit from lower interchange rates on debit cards and basic credit cards. These savings can reduce overall processing costs by 1-2% compared to fixed pricing models.
Fixed pricing works better for merchants with very small transaction amounts. Coffee shops, quick-service restaurants, and retail stores with low average tickets may find flat rates more economical.
Payment processors using interchange++ pricing add their markup to actual wholesale costs. This transparent approach often results in lower fees for small merchants processing diverse transaction types.
Credit card processing costs vary significantly between card types. Premium rewards cards carry higher interchange rates, which interchange++ pricing passes through at cost.
Flexibility and Control
Interchange++ pricing gives merchants control over their processing expenses through detailed cost visibility. Small merchants can identify expensive card types and adjust their acceptance policies accordingly.
Fixed pricing offers predictable monthly expenses but removes merchant control over individual transaction costs. Merchants cannot optimise their payment acceptance based on actual card costs.
Payment processors using interchange++ models typically offer more flexible contract terms. Merchants can negotiate processor markups separately from interchange fees, which remain fixed by card networks.
The pricing models affect how merchants budget for payment processing. Fixed pricing enables simple percentage calculations for forecasting. Interchange++ pricing requires more detailed analysis but offers optimisation opportunities.
Small merchants gain negotiating power with interchange++ pricing transparency. They can compare processor markups directly and switch providers more easily when better rates become available.
Which Pricing Model Suits Small Merchants Best?
Small merchants must consider their transaction volume, average transaction size, and card mix when choosing between fixed and interchange++ pricing models. Payment service providers offer different models that can significantly impact processing costs.
Business Size and Transaction Volume
Small merchants with low transaction volumes often benefit from fixed pricing models. These businesses typically process fewer than 200 transactions monthly. Fixed rates provide predictable costs without minimum volume requirements.
High-volume small merchants may find interchange++ pricing more cost-effective. Businesses processing over 500 transactions monthly can benefit from the transparent fee structure. The interchange fee passes through at cost, whilst the processor adds a fixed markup.
Transaction volume thresholds:
- Low volume: Under 200 transactions monthly - Fixed pricing often better
- Medium volume: 200-500 transactions monthly - Either model viable
- High volume: Over 500 transactions monthly - Interchange++ typically cheaper
Average transaction size also matters significantly. Small transaction amounts under £10 can make fixed pricing expensive due to per-transaction fees. Larger transactions over £50 often work better with interchange++ models.
Transaction Type and Card Mix
The type of cards customers use affects which pricing model works best. Premium credit cards carry higher interchange fees than basic debit cards. Merchants accepting many reward cards see greater cost variations with interchange++ pricing.
Card types and typical fees:
- Basic debit cards: Lowest interchange fees
- Standard credit cards: Medium interchange fees
- Premium/reward cards: Highest interchange fees
Online merchants face higher interchange rates due to increased fraud risk. Card-not-present transactions typically cost more than in-person payments. This makes blended pricing attractive for e-commerce businesses wanting predictable costs.
Retail merchants with mostly chip-and-PIN transactions may prefer interchange++ pricing. These transactions qualify for lower interchange rates. The transparent model allows them to benefit from these cost savings.
Evaluating Payment Service Providers
Small merchants should compare total processing costs, not just headline rates. Some providers offer low interchange++ markups but charge high monthly fees. Others provide competitive blended pricing with no monthly charges.
Key factors to evaluate:
- Monthly fees and minimum charges
- Per-transaction fees
- Setup and equipment costs
- Contract terms and early termination fees
Transparency matters when choosing a payment service provider. Providers offering interchange++ pricing should clearly show all fee components. This includes the actual interchange fee, acquirer margin, and card scheme fees.
Support quality becomes crucial for small merchants with limited resources. Providers with 24/7 UK-based support help resolve payment issues quickly. This prevents lost sales and maintains customer satisfaction.
Other Considerations and Alternative Pricing Models
Beyond fixed and interchange++ pricing, small merchants should understand tiered pricing structures, negotiation strategies with processors, and how banks influence payment costs. Tiered pricing creates qualification categories that can significantly impact merchant expenses.
Tiered Pricing Explained
Tiered pricing groups transactions into three main categories. Qualified transactions typically receive the lowest advertised rates, whilst mid-qualified and non-qualified transactions face progressively higher fees.
Most processors set qualified rates between 1.79% and 1.99%. Mid-qualified transactions often range from 2.19% to 2.99%. Non-qualified transactions can reach 2.89% to 3.49%.
The challenge lies in transaction classification. Payment processors determine which tier each transaction falls into based on their own criteria. Premium rewards cards almost always fall into higher tiers.
Small merchants often find only 20-30% of transactions qualify for the lowest advertised rate. This creates an effective rate much higher than expected. Corporate cards and rewards cards frequently push transactions into expensive non-qualified tiers.
Negotiating with Payment Processors
Small merchants possess more negotiating power than they realise. Monthly processing volumes above £5,000 typically qualify for better rates. Processors compete heavily for established businesses with consistent transaction patterns.
Key negotiation points include:
- Markup rates on interchange fees
- Monthly statement fees
- Equipment costs and rental fees
- Contract length and early termination clauses
Merchants should request detailed breakdowns of qualification criteria for tiered pricing. They can also negotiate caps on non-qualified transaction percentages. Annual rate reviews help ensure competitive pricing as business volumes grow.
Multiple processor quotes provide leverage during negotiations. Merchants should compare total costs including hardware, software, and monthly fees rather than just processing rates.
Role of Issuing Banks and Acquirers
Issuing banks collect interchange fees when customers use their cards. These banks set the baseline costs that all merchants ultimately pay regardless of their chosen pricing model.
Acquirers facilitate the actual transaction processing and settlement. They work with card networks to move funds from customer accounts to merchant accounts. Acquirers add their own fees on top of interchange costs.
Understanding these fee structures helps merchants evaluate processor offerings more effectively. The relationship between issuing banks and acquirers determines the true cost structure beneath any pricing model.
Large acquirers often secure better interchange rates through volume agreements. This advantage gets passed to merchants through more competitive pricing structures.
Frequently Asked Questions
Small merchants often have questions about interchange fees, scheme fees, and how these costs impact their payment processing expenses. Understanding who sets these rates and how they differ from other processing fees helps business owners make informed decisions about their payment systems.
What determines the amount charged for interchange fees?
Card networks like Visa and Mastercard set interchange fee rates based on several factors. The type of card used affects the rate, with premium credit cards typically charging higher fees than basic debit cards.
Transaction size plays a role in determining costs. The merchant's business category also influences rates, as different industries face varying risk levels.
Processing method impacts fees as well. Card-present transactions usually cost less than card-not-present payments like online purchases.
Could you outline the differences between scheme fees and interchange fees?
Interchange fees go directly to the card-issuing bank that gave the customer their payment card. These fees compensate the bank for taking on the risk of the transaction.
Scheme fees go to the card networks like Visa or Mastercard. These companies charge for maintaining their payment networks and processing systems.
Both fees appear on merchant statements but serve different purposes. Interchange fees are typically higher than scheme fees for most transactions.
What is the process for calculating interchange fees for credit card transactions?
Card networks publish interchange fee schedules that list rates for different transaction types. These rates are either a percentage of the transaction amount or a flat fee, whichever is higher.
The calculation depends on factors like card type, transaction method, and merchant category. For example, a restaurant might pay 1.65% + 10p for a standard credit card transaction.
Payment processors pass these interchange fees to merchants along with their own markup. The final cost depends on the pricing model the merchant chooses.
Who holds the responsibility for setting the rates for interchange fees?
Card networks set interchange fee rates, not individual banks or payment processors. Visa and Mastercard publish these rates twice yearly, typically in April and October.
The Payment Systems Regulator in the UK caps interchange fees for certain transactions. Consumer debit cards are capped at 0.2% whilst consumer credit cards are capped at 0.3%.
Banks and payment processors cannot change these base interchange rates. They can only adjust their own markup fees on top of the interchange costs.
In what ways do interchange fees differ from general processing fees?
Interchange fees are wholesale costs that payment processors must pay to card networks and banks. These fees are set by card networks and cannot be negotiated by processors.
General merchant service charges include the processor's markup, equipment costs, monthly fees, and other service charges. Processors set these fees themselves and can adjust them based on competition and business needs.
Interchange fees make up the largest portion of most processing costs. However, they are separate from the processor's own charges and profit margins.
What aspects should small merchants consider when deciding between fixed pricing and Interchange++ pricing models?
Transaction size affects which pricing model costs less. Merchants with transactions under £18 often benefit from fixed pricing, whilst those with larger transactions typically save money with Interchange++ pricing.
Fixed pricing offers simplicity and predictable costs but may result in higher overall merchant service charges. Interchange++ pricing provides transparency and potential savings but creates more complex monthly statements.
Business type matters when choosing pricing models. Quick-service restaurants and retail shops with small average transactions often prefer fixed pricing for its simplicity and cost-effectiveness.
About The Author
Lee Hart
