Interchange pass-through

By Onkore

Interchange pass-through pricing is a transparent pricing model used in credit card processing. In this model, merchants are charged the actual interchange fees set by the card networks (Visa, MasterCard, etc.), and payment processors add a separate, fixed markup for their services. This approach aims to provide merchants with a clear understanding of the costs associated with accepting credit cards.

Here's an explanation along with a few examples of transactions using interchange pass-through pricing:

1. Interchange Fee:

   • The interchange fee is the amount that the cardholder's bank (issuing bank) charges the merchant's bank (acquiring bank) for processing a credit card transaction. This fee is set by the card networks and can vary based on factors such as card type, transaction method, and industry.

2. Payment Processor Markup:

   • In an interchange pass-through pricing model, the payment processor charges a fixed markup on top of the interchange fees. This markup covers the processor's services, such as transaction processing, customer support, and other features.

Example Transaction:

Let's say a merchant processes a credit card transaction for $100 with the following interchange fee and payment processor markup:

• Interchange Fee for the Transaction: $1.50 (hypothetical value)

• Payment Processor Markup: $0.20 per transaction

Calculation:

1. Interchange Cost: $1.50

2. Processor Markup: $0.20

3. Total Cost to Merchant: $1.50 (Interchange) + $0.20 (Markup) = $1.70

In this example, the merchant pays a total of $1.70 for processing a $100 transaction. The interchange pass-through pricing model ensures that the merchant sees the actual interchange cost separate from the processor's markup.

It's important to note that interchange fees can vary, and there may be different rates for different types of cards (e.g., rewards cards, corporate cards). The processor's markup, on the other hand, is typically a fixed amount per transaction or a percentage of the transaction value.

This pricing model provides transparency and allows merchants to better understand the costs associated with credit card processing. It also incentivizes payment processors to compete on their markup, as merchants can easily compare and choose providers based on the disclosed fees.customized models.