Interchange++ versus blended pricing

When you apply for a CardCorp merchant account, you can choose between blended and interchange ++ pricing. Each model has advantages and disadvantages, and having all the information is the key to selecting the right model.

In the card payments ecosystem, multiple stakeholders in every transaction charge you fees. Let's break it down:

Merchant Discount Rate (MDR) or "Merchant Rate" is the fee your acquirer charges for their services. MDR is expressed as a percentage of your settled transaction volume.
Authorisation Fee is a fixed fee your acquirer charges on each submitted authorisation request (regardless of outcome) to cover the costs for gateway authorisations, 3D Secure and other fees applied across the network.
Assessment Fees are the fees Visa or Mastercard charge to authorise, clear, and settle each transaction across their networks. Assessment fees vary considerably based on the card type and the cardholder's location (in relation to the merchant). Assessment fees on domestic consumer transactions are low, while fees on corporate, elite, and international transactions can be as much as 10 times higher.
Interchange Fees are the fees charged by the cardholder's issuing bank and are a percentage of settled value. Visa and Mastercard set interchange fees globally, and like assessment fees, they vary considerably based on card type and customer location.

The impact of the highly variable assessment and interchange fees is that the real cost of each transaction is affected considerably by the card type and customer location. Accordingly, charging the merchant the same rate for all transactions is almost impossible.

What are blended and interchange ++ pricing, and how do they account for these fees?

Blended and interchange ++ pricing models include all fees; there's no way around it. The difference is that blended pricing incorporates all fee elements into (generally) two fixed bands of all-inclusive pricing, one for domestic consumer transactions and the other (higher) band for international and corporate transactions, whereas interchange ++ pricing applies the fixed MDR and authorisation fee evenly on all transactions and then passes through the exact assessment fees and interchange on every transaction at face value with no markup.

The obvious advantage of blended pricing is that it makes accounting easier because the merchant can predict exactly what fees will be applied to every transaction. With interchange ++ pricing, the cost of every transaction can only be estimated within a margin of error before receiving the actual settlement figures.

The not-so-obvious downside of blended pricing is that it costs more. Dozens of possible interchange and assessment fee constellations based on any combination of card type and customer location mean the acquirer must charge sufficiently padded rates to cover the highest possible constellation, which renders lower-cost base transactions inefficient and unnecessarily expensive.

Although a disadvantage of Interchange ++ is that it is less predictable, an advantage is that it delivers better value because assessment and interchange fees are passed through at actual cost. That’s why large businesses and industry experts insist on this pricing model and adjust their accounting systems accordingly.

In conclusion, there are arguments for and against both pricing models, but based on your customer types and locations, one model may be the better choice.

Got questions about pricing?