It's often a very confusing conversation, and there's also a lot of misinformation and outdated information about interchange. When it comes to interchange rates, our north star is always what the credit card processors communicate on their own websites. Visa, MasterCard and American Express maintain up-to-date information, so we always encourage operators to visit their sites to get the direct scoop.
What is the Difference Between Interchange-Plus & Blended Rate Processing?
First, let’s start with the simpler of the two concepts: blended rate processing. A blended rate is just a simplified way of balancing the costs. It’s an average rate and the net effect is that sometimes your vendor will lose money and sometimes they will make money using with it.
Many merchants automatically assume that interchange (IC) plus pricing is always cheaper than blended rate processing. We find that’s not always the case. First, IC plus or cost-plus pricing means that the processor has no incentive to use the most cost-effective method for processing a card because they do not bear those costs - you do. How a processor executes transactions matters a lot and can increase the interchange cost to you by 50% or more if done badly.
When the processor executes the transaction sub-optimally, those are called “downgrades” because the banks treat them as higher risk and raise the interchange rate. Unfortunately, this happens all the time. Running transactions optimally takes a substantial investment in technology that many processors do not want to make, especially if their customers can’t tell the difference.
Second, interchange is just one part of the cost. It is the portion that is paid to the bank that issued the card to the consumer. This is determined by the type of card, the Merchant Category Code (MCC) of the merchant, and how the transaction is processed. The “plus” portion is composed of yet more fee fractions which get paid to the network (Visa / MC) usually called “Scheme Fees.” If it is an old school processor, there is also a dumping ground which is usually called “Dues & Assessments.”
Finally, in many venues, payments could be aggregated but the tech doesn’t support it (easily). Just think of how many payments you make when you go to a counter service venue. Maybe two: one for the Burger and one for the beer? Worse yet, did you forgo another purchase at the venue (and the venue forgo an extra item sale) due to the additional friction of having to stand in line, order and pay a third time?
This last point isn’t so much about processing rates, as it is pointing out that there are far more significant impacts of a system than saving a half percent of cost.
The Right Priorities for Your Business
Overall, GoTab tries to keep our blended rates aggressively priced. Part of the reason we do this is because we know POS is a very competitive market where large, publicly traded companies will sometimes charge a much lower processing rate, but then make up the difference with long-term contracts and high SAAS fees.
For those who prefer interchange-plus pricing, we expose all the costs as well as the portion that we mark up in the form of a transaction fee. While that is where GoTab makes money, the irony is that our focus from a hospitality technology standpoint is helping our operators increase sales by making it easier for guests to buy things and reducing excess costs for labor and food.
Operators who move food running and re-ordering to the guest consistently tell us the labor saving is the larger prize, but the size of it depends on venue format, service model and how much of the menu moves through a handheld. We would rather model that against your own numbers than quote you an average.
If you want the arithmetic rather than the definitions, we worked a full example — $8M in annual card volume broken down by card type, with the flat-rate and interchange-plus totals side by side — in restaurant credit card processing at group scale.
Check out our simple and transparent pricing to learn more!
