Card Payments: Your Comprehensive Guide to Blended Pricing

Understanding the difference between Blending Pricing and Interchange Plus Pricing models  

As a business owner accepting card payments, understanding the fee structures involved is crucial for managing your expenses. There are several pricing models that payment processors offer, with Blended Pricing andInterchange Plus (IC+) Pricing being two of the most common. Each of these models approaches fees differently, and understanding them can help you make an informed decision on what’s best for your business.

In this guide, we’ll dive deeply into these pricing models, explain how they work, and explore their pros and cons. By the end, you’ll have a clear understanding of which model might be right for your business.

The Three Key Elements of Card Payment Fees

Every time a customer pays with a card, a variety of fees are involved. These fees make up the Merchant Service Charge (MSC), which is what you’ll ultimately pay for processing card payments. These fees fall into three main categories:

1. Acquirer Markup: This is a fee charged by your payment processor or acquirer. It covers their costs and provides them with a profit margin. The acquirer markup is a negotiable part of your payment processing fees, meaning you can potentially secure a better rate through negotiation. 
   
   
2. Interchange Fee: The interchange fee is paid to the bank that issued your customer’s card. This fee is non-negotiable and makes up the largest portion of the total card processing cost. The rate can vary depending on factors such as the type of card used, the location of the transaction, and whether it’s a domestic or international payment.
   
   
3. Card Scheme Fees: These fees are paid to the card schemes (such as Visa, Mastercard, or Amex) for the use of their payment networks. The card scheme fees are also non-negotiable and cover things like network dues, assessment fees, cross-border fees, clearing, and settlement services. These fees vary depending on the type of card and transaction but are published by the card schemes to maintain transparency.

By understanding these three components, you can better navigate the pricing structures offered by payment processors.

What is Blended Pricing?

Blended pricing is the most common pricing model offered to businesses, especially smaller merchants in the UK. In fact, around 95% of merchants use this model, and it’s particularly popular among those with an annual card turnover of under £10 million.

With blended pricing, all the fees associated with processing a card payment—interchange fees, card scheme fees, and acquirer markup—are bundled together into one fee. This combined fee is presented to you as a single percentage of the transaction value.

For example, let’s say the total blended fee is 2%. Every time a customer makes a £100 purchase, you’ll pay £2 in fees, regardless of how the total breaks down between the interchange fee, card scheme fees, and acquirer markup.

Pros of Blended Pricing

• Simplicity: Since all fees are bundled together, blended pricing is easy to understand. You know upfront how much you’ll pay on each transaction, which simplifies budgeting.
• Predictable Costs: With a fixed percentage fee, you can easily forecast your monthly costs based on your expected transaction volume.

Cons of Blended Pricing

• Lack of Transparency: Since all fees are combined, you don’t know how much of your payment is going toward the acquirer’s markup or the interchange and scheme fees. This can sometimes lead to overpaying, especially if your processor is padding the fees.
• Potentially Higher Fees: While blended pricing is convenient, it can sometimes work out more expensive, especially for merchants with higher transaction volumes or those accepting a variety of card types. This is because the processor sets a single percentage that might be higher than the actual fees for certain transactions.

What is Interchange Plus Pricing (IC+)?

In contrast to blended pricing, Interchange Plus (IC+) Pricing offers a more transparent approach to payment processing fees. Instead of bundling all the costs together, IC+ breaks them down into two main components:

1. Interchange Fee: This is passed on to you at cost. The rate can vary depending on the card used and the type of transaction, but with IC+, you’re charged exactly what the card issuer charges—no markup.
2. Markup Fee: This is the acquirer’s profit margin, which includes their costs for processing the transaction. This fee is negotiable and can be lowered with the right provider.

The benefit of IC+ is that it allows you to see exactly how much you’re paying for each transaction element. For example, you might be charged 1.2% for the interchange fee and 0.5% for the acquirer markup, giving you a clearer picture of where your money is going.

Pros of Interchange Plus Pricing

• Greater Transparency: Since all the costs are broken down, you can see exactly what you’re being charged for each transaction. This allows you to understand the true cost of processing card payments.
• Potentially Lower Fees: Because you’re only paying the actual interchange fee, which can vary depending on the transaction, IC+ can result in lower overall fees. For example, a domestic debit card payment might incur a lower interchange fee than an international credit card payment.
• Negotiable Markup: Since the interchange fee is fixed, the acquirer’s markup is where you can negotiate a better deal.

Cons of Interchange Plus Pricing

• Less Predictability: Since the interchange fees can fluctuate based on transaction types and other factors, it can be harder to predict your monthly costs. For businesses with high volumes of varied transactions, this can make budgeting more challenging.
• More Complex: IC+ pricing requires a bit more understanding of how fees work. While the transparency is beneficial, it may feel overwhelming for smaller or newer businesses.

Other Pricing Models: Interchange Plus Plus (IC++) and Fixed Pricing

For larger businesses, particularly those with significant card turnover, Interchange Plus Plus (IC++) offers even more detailed transparency. IC++ breaks down not just the interchange fee and markup but also the card scheme fees. This means you’ll see every individual cost involved in processing each transaction.

This model is typically only offered to businesses with an annual card turnover of more than £50 million, as it’s generally not needed for smaller merchants.

On the other hand, fixed pricing is a simpler model offered by payment facilitators like Square, Sumup, and Zettle. This model presents your fees as a fixed percentage of each transaction, regardless of the type of card or transaction. While easy to understand, fixed pricing can be more expensive, especially for merchants processing higher volumes of transactions.

Pros and Cons of IC++ Pricing

Blended Pricing vs. Fixed Pricing

Fixed pricing presents rates as a flat percentage of each transaction, similar to blended pricing, but with one key difference: fixed pricing doesn’t allow for negotiation based on the transaction type. This can sometimes lead to higher costs, as you might be paying a flat fee that’s higher than the actual cost of processing certain transactions.

How to Choose the Best Pricing Model for Your Business

Now that you understand the basics of the different pricing models, how do you choose the one that’s right for your business? Here are a few considerations:

1. Business Size and Transaction Volume: If you’re a smaller business with a relatively low volume of card transactions, blended pricing might be your best option for simplicity and predictability. For larger businesses with more varied transaction types, IC+ or IC++ can offer potential savings through greater transparency.
2. Type of Transactions: If you frequently process international transactions or deal with different types of cards (e.g. credit cards, debit cards, commercial cards), IC+ or IC++ pricing could be more cost-effective, as it allows for the actual interchange fee to be passed on at cost.
3. Need for Predictability: For businesses that need clear, predictable monthly costs to manage cash flow, blended or fixed pricing might be the better option. However, if you’re willing to take on some complexity in exchange for potential savings, IC+ or IC++ could be worth considering.

Which Pricing Model is Best for You?

Each model has its benefits and drawbacks. Here’s a quick comparison: