What is Cost-Plus Pricing?
How Interchange Pass-Through Pricing Works
Cost-plus pricing, also known as interchange pass-through pricing or interchange-plus pricing, is a payment processing pricing model that allows merchants to pay the actual interchange and assessment fees charged by the card networks plus a transparent processor markup. For many growing businesses, cost-plus pricing can provide greater transparency and lower payment processing costs compared to bundled or flat-rate pricing models. In this guide, we’ll explain how interchange pass-through pricing works, how it compares to bundled pricing, and which model may be best for your business.
What Is Cost-Plus Pricing?
Payway uses interchange pass-through pricing for businesses that want to open their own merchant account. This means we pass through the interchange fee rather than bundling it into one flat fee per transaction. An interchange fee is a payment processing fee determined by the card network (Visa, Mastercard, Discover, etc.) and collected by the issuing bank (the financial institution that issued the credit card). The responsibility of the card network is to provide the communication system between the merchant and issuing bank to complete a credit card transaction.
During settlement, the interchange fee (among others) is deducted from the transaction amount before it is deposited into the merchant’s bank. This fee makes up the majority of fees involved in credit card payment processing. This fee is non-negotiable and the responsibility of the merchant. There are ways, however, to save on interchange fees.
Cost-plus pricing is a payment processing pricing model where merchants pay the actual interchange fees, card network assessment fees, and a fixed processor markup. Unlike flat-rate pricing, cost-plus pricing separates each fee component, allowing businesses to see exactly what they are paying for every transaction.
How Flat-Rate Pricing Works
In contrast, flat-rate pricing simplifies payment processing costs by charging the same fee for every transaction, regardless of the card type or the actual interchange rate associated with the payment. This pricing model is commonly used by payment service providers (PSPs) because it offers predictability and simple billing. However, the convenience of a flat rate often comes at a cost. Since all transactions are charged the same percentage, businesses may end up paying significantly more for lower-cost payment methods, such as debit cards, even though the underlying interchange fees for those transactions are much lower. As a result, merchants with consistent transaction volume may find that cost-plus pricing provides greater transparency and lower overall processing costs.
Example: How Flat-Rate Pricing Can Increase Debit Card Processing Costs
Let’s assume a customer makes a $100 purchase using a regulated debit card.
With cost-plus pricing, the actual fees might look like:
- Interchange Fee: $0.21 + 0.05% = $0.26
- Assessment Fee: $0.02
- Processor Markup: $0.15
Total Cost: $0.43
With flat-rate pricing, many payment service providers charge something similar to:
2.9% + $0.30
For the same $100 transaction:
- Flat-rate fee = $3.20
Total Cost: $3.20
In this example, the merchant pays more than 7 times as much under a flat-rate pricing model, even though the underlying debit card transaction is relatively inexpensive to process.
Benefits of Cost-Plus Pricing
- Greater pricing transparency
- Easier fee auditing
- Lower costs for growing businesses
- Visibility into interchange expenses
- Reduced likelihood of hidden fees
- Better cost forecasting
| Feature | Cost-Plus Pricing | Flat-Rate Pricing |
|---|---|---|
| Pricing Transparency | High | Low |
| Interchange Visibility | Yes | No |
| Processor Markup Visibility | Yes | No |
| Best for Growing Businesses | Yes | Sometimes |
| Easy to Understand | Moderate | High |
| Cost Savings Potential | High | Moderate |
Payment Service Providers and Bundled Pricing
If you choose to work with a payment service provider (PSP) to get a merchant account vs. applying for a merchant account on your own, you probably are paying one flat rate per transaction. A PSP, on the other hand, combines a variety of different merchants under a single umbrella account. So, instead of getting a specific merchant ID number through a processing bank with a merchant account, you get a license to process payments through the PSP merchant account. You become what’s known as a “sub-merchant.” PSPs are convenient, but they can also come with per-transaction fees that can be pretty expensive.
Many PSPs such as Stripe, Square and PayPal charge use this pricing model. Bundling pricing ensures that you pay the same amount for every transaction, no matter what the card type might be. There’s no monthly fee to worry about, and other costs beyond transaction costs or usually non-existent too. This is pricing model is better for businesses with a lower-than-average volume of payment transactions or that are trying to avoid the complexities of applications and underwriting that come with merchant account provider services.
In summary, smaller or start-ups might benefit from paying one bundled fee per transaction as it’s easier and convenient to work with a PSP using this pricing model. However, once your business has reached a certain level of steady revenue, you’ll likely discover that having a merchant account with interchange-plus pricing provides you with more flexibility and offers up new opportunities for expansion.
Final Thoughts
Reducing payment processing costs is not simply about finding the lowest rate. It requires understanding how fees are structured, evaluating pricing models, optimizing payment methods, and identifying opportunities to improve transaction qualification. While interchange and assessment fees are largely non-negotiable, businesses can often lower their total payment acceptance costs by adopting a transparent cost-plus pricing model, increasing ACH payment adoption, optimizing commercial card transactions, and regularly reviewing their processing statements.
The most successful organizations take a holistic approach, looking beyond transaction fees to evaluate overall payment performance, operational efficiency, and long-term scalability. By understanding the factors that influence payment processing costs and partnering with a provider that prioritizes transparency and optimization, businesses can reduce expenses, improve profitability, and create a stronger foundation for growth.
If you’re curious how much your business could save, try Payway’s Savings Calculator to compare your current payment processing costs and identify potential savings opportunities. A quick analysis can help you determine whether your existing pricing structure is supporting your business goals or costing you more than necessary.
Frequently Asked Questions
What is cost-plus pricing?
Cost-plus pricing is a payment processing model where merchants pay the actual interchange fee, card network assessment fee, and a clearly disclosed processor markup.
Is interchange pass-through pricing the same as cost-plus pricing?
Yes. Interchange pass-through pricing and cost-plus pricing are often used interchangeably. Both describe a pricing model that passes actual interchange costs directly to merchants and adds a transparent processor markup.
Is cost-plus pricing cheaper than flat-rate pricing?
For many businesses with moderate to high transaction volume, cost-plus pricing may reduce payment processing costs because fees are based on actual interchange rates rather than a bundled flat rate.
What are the disadvantages of cost-plus pricing?
Cost-plus pricing statements can be more detailed and complex than flat-rate pricing, making them slightly more difficult to understand without industry knowledge.
Who should use cost-plus pricing?
Cost-plus pricing is often a good fit for subscription businesses, membership organizations, utilities, publishers, healthcare providers, and businesses with consistent transaction volume.
Related Resources
Exploring Beyond Stripe: Why it Might be Time to Say Goodbye and Discover New Stripe Alternative
Understanding Cost-Plus Pricing vs. Bundled Pricing