Payment Processing 101: Interchange Plus Rates vs. Flat Rates vs. Tiered Pricing

Understanding credit card processing fees is one of the more difficult parts of being a business owner. Trying to grasp the difference between interchange plus rates, flat rates and tiered pricing can be confusing.

If that sounds familiar (or, more importantly if it doesn’t), then read on. We’ll explain the ins and outs of these two pricing models in simple, straightforward terms and along the way, we’ll help you understand which approach is right for your business.

• Credit card processing overview
• Credit card processing fees
• Flat rate pricing
• Interchange plus pricing
• Tiered pricing
• Deciding which structure is right for your business

Credit card processing overview

Before comparing interchange plus, flat rate processing and tiered pricing, let’s dive into a basic overview of how credit card processing works.

There are several parties involved in a typical credit card transaction:

• Issuing Bank. This is the organisation that issues a credit card to a customer. Common examples include Westpac, Commonwealth and ANZ.
• Credit Card Networks. These entities work with issuing banks to distribute their credit cards, usually Visa or Mastercard.
• The Acquirer. Colloquially referred to as a processor, this is the middle man that communicates with the issuing bank to approve or decline a credit card transaction. These are also called merchant service providers (MSPs) or Independent Sales Organisations (ISOs)

Behind every seemingly simple swipe is a complex chain of communication between these three entities. When a customer taps, swipes or inserts their card, the transaction is sent to the issuing bank via the acquiring bank. The issuing bank then approves or declines the transaction and then funds are deposited into the merchant’s bank account.

Credit card processing fees

Now let’s learn about the fees you’ll need to pay to the processor. These fees inform the pricing model used by the credit card processing companies, and are a precursor to the processing rate you’ll pay to both interchange-plus and flat rate processors.

Australia also has laws to protect consumers from excessive fees applied by merchants. These laws, set by the ACCC, limit the amount a merchant can surcharge a customer to cover their fees to no more than the fees cost the merchant.

For example, if a merchant is charged the equivalent of 5c for a credit card transaction, the maximum surcharge they can apply to this would be 5c, whether that’s a flat monetary amount or a percentage.

Wholesale rate

This percentage fee (usually a per transaction percentage) is set by both the issuing banks and the credit card companies like Visa and Mastercard. Because of this, it’s not possible to negotiate this rate. It’s the same for all merchants.

However, this rate will differ depending on the type of transaction. For example, a keyed-in transaction will always have a higher fee than a swiped one. Wholesale rates are commonly called interchange rates or an interchange fee.

Miscellaneous fees

If you work with a good processor, you shouldn’t have to deal with many more fees than the above, but there are a few you might need to pay. For example, credit card terminal rental fees, PCI compliance fees, payment gateway fees, instant deposit fees, a subscription price that’s a flat fee per month and more. 

Flat rate pricing

Flat rate pricing is exactly what it sounds like. When you use a flat rate processor, all of your transactions fall under one flat rate. This rate includes both the interchange or wholesale rate plus the processor’s markup.

Most payment providers will offer slightly different rates for card-present (in-present) transactions vs. card-not-present (online) transactions. ​​

Pros of flat rate credit card processing

• It’s easy to understand. Credit card processing fees and pricing can be pretty complicated. It’s made worse when processors go out of their way to be as non-transparent as possible. With flat rate processing, you pay the same amount for every transaction, which can be refreshingly simple.
• It’s predictable. As a small business owner, life likely keeps you guessing, but some measure of predictability is the key to staying sane. With a single rate it’s easier to predict your processing expenses month to month, which can help you budget effectively.
• It allows you to accept elite cards without extra cost. Certain cards (we’re looking at you, American Express) charge higher rates. Those rates often exceed the low, flat processing rates available today from processors.

Cons of flat rate processing

• A lack of transparency. The simplicity and predictability of flat rate pricing can come at a cost. The processor hides both the interchange rate and their markup from you. This makes it impossible to understand why you’re paying what you are. Since you don’t know the details of what you’re paying, it makes it more difficult to shop around to find the best price.
• Some transactions are more expensive. As we mentioned earlier, there are many different types of transactions, and each has a different interchange rate. Some are more expensive and some are less. When all transactions cost you the same amount, you lose out on any cost savings you might get based on the transaction type.

Should you choose a flat-rate payment processor?

As always, you know what’s right for your business. Flat-rate pricing is a very popular method, so you can’t necessarily go wrong. There are plenty of payment processors out there that offer flat-rate pricing, but the type of business you run matters. 

If you run multiple store locations or are an omnichannel operator, flat-rate pricing is beneficial because of its predictability. If you’re juggling multiple stores and have a high monthly sales volume, knowing you’re paying the same rate for each transaction gives you one less thing to worry about. 

Plus, for medium- and high-volume businesses, being able to accept all types of cards without paying extra is a huge plus—a bigger customer base means you’re more likely to see a variety of credit cards. 

Small businesses can also benefit from a flat rate, so this pricing model offers plenty of flexibility. 

Interchange plus pricing

The alternative to flat rate processing is interchange plus processing. Similarly, the name describes this type of pricing as well. You pay the interchange rate plus the processor’s markup. The biggest difference is that your monthly credit card statement will show you the exact fees that make up each transaction.

Pros of interchange plus pricing

• Transparency. While it has the potential to make your credit card statement more complex than you might like, with interchange plus you’ll always see the fees you’re paying for each transaction. This helps you know if you’re paying a fair price.
• Some transactions are more affordable. For example, debit card transactions are typically less expensive than credit.

Cons of interchange plus pricing

• It’s more complex. Because each transaction has a different price associated with it, and you can’t predict the exact number and type of transactions you’ll get each month, your costs become harder to predict.
• Some payments are more expensive. Certain charges, like those from elite cards, have high interchange rates associated with them. When processor fees are added to those high rates, the resulting fee might be more expensive than a flat rate pricing model.

The interchange fees of some card networks

Here are some of the interchange costs of various card networks: 

• Visa: For credit card payments, Visa’s interchange fees range from 0.231%-0.88% (GST inc.).
• Mastercard: Mastercard’s credit card interchange rates vary from 0.198%-0.88% (GST inc.), depending on the card type. 

Debit card interchange fees are usually lower than credit card fees. Either way, there’s a wide range of fees depending on the card network—something to keep in mind when you’re considering which pricing model to go with.

Should you choose an interchange plus model?

For smaller business operations, interchange plus pricing might be useful because it provides a breakdown of the exact fees per transaction. This can provide valuable insight into where you can cut costs, monthly fee breakdowns and more. Ultimately, if you want eyes on the details of every single transaction, interchange plus could be the way for you.

If your business has a high sales volume or multiple locations, interchange plus pricing could become unnecessarily complicated. You probably already have accounting processes in place to provide detailed overviews of your sales history and transactions. Plus, its unpredictability may lead to you paying higher fees overall, compared to flat-rate pricing, where the fees per transaction are always consistent.

Tiered pricing

Processors that use a tiered pricing model or bundled pricing are hands down the least transparent type of provider and you’ll typically end up paying more than necessary.

But, it’s useful to understand what tiered pricing is so you know which processors to avoid. 

Tiered pricing consists of a transaction fee and processing fee. Transactions are separated into three categories: qualified, mid-qualified or non-qualified. The fixed rate varies based on the tier the transaction falls under.

Processors who use tiered pricing don’t usually disclose how transactions will be categorised. This makes it inherently non-transparent, because you may be misled into thinking that you’re getting a good deal, when really the payment processor just quoted you the cheapest tier. 

After you’re locked in to a contract, you’ll get charged more because the provider will categorise transactions into pricier tiers. 

The deceptive nature of tiered pricing models makes them a bad option for any business owner—we recommend staying far from providers that offer this model, no matter how good they make the terms sound.

Which is right for your business?

As a side note, we encourage you to avoid processors that use a tiered pricing model or bundled pricing at all costs. These are hands down the least transparent type of provider and you’ll almost always end up paying more than necessary.

Choosing between flat rate pricing and interchange plus pricing isn’t always an easy decision. Payment processing is an integral part of most businesses.

Most modern processors today have moved to a flat rate model, because it’s generally simpler for all involved parties.

It’s usually easier to combine your payment provider with your point of sale for one integrated payments solution. The two are closely connected, and if you have questions you can interact with the same support team.

There’s also less chance for human entry error, since the entire payment from beginning to end is managed by the same provider. We at Lightspeed offer a low flat rate and a customised rate for businesses that process more than $250k. Talk to an expert to learn more about Lightspeed Payments.