What is interchange ++ (IC++) and how does it work?

What is IC++?

IC++ or interchange plus is a pricing model that credit card processors use to calculate transaction fees for businesses. Compared to flat or blended pricing, IC++ offers an added layer of transparency. It can also be more cost-effective for businesses looking to have greater control over their finances.

As a business owner, it's essential to understand the ins and outs of IC++ pricing.

How interchange ++ pricing determines credit card transaction fees

IC++ is calculated by combining three separate processing fees:

• Interchange fee: Charged by the bank that issues the credit card (e.g., Chase).
• Card network fee: Charged by the credit card network (e.g., Visa).
• Markup fee: Charged by the credit card processor (e.g., PayPal).

If you use the interchange ++ pricing model, these fees come out of each sale you make. For example, say a buyer pays $100 for your product. Here's what those IC++ fees may look like:

• Interchange fee: Chase bank earns 2% or $2.
• Card network fees: Visa earns 0.5% or $0.5.
• Markup fee: PayPal earns 1% or $1.

As the merchant, you pay a total of $3.50 in IC++ fees for this sale. In the end, you receive $100 - 2 - 0.5 - 1 = $96.50.

It’s important to note that IC++ pricing is different from IC+ pricing. The latter only breaks down costs into two fees: the interchange fee and payment processing fee. So IC+ can be less transparent than IC++ pricing.

What's the difference between IC++ and blended pricing?

Blended pricing, also known as flat pricing, is a common alternative to IC++ pricing.

With blended pricing, the payment processor charges an overall rate, such as 3.5%, for each transaction — regardless of the card type, issuing bank, and other various factors. So instead of the merchant paying 2% to the bank, 0.5% to the credit card network, and 1% to the payment processor, they pay the total 3.5% to the payment processor.

The payment processor then pays the bank and credit card network their percentages and keeps the rest as their margin.

So back to our example, if a buyer pays $100 for your product, here’s how you would calculate merchant fees with blended pricing:

Payment processor earns 3.5% or $3.50.

As the merchant, you receive $100 - 3.5 = $96.50.

In these examples, the net result is the same for each pricing model. However, in reality, the pricing model you choose can often impact how much you receive based on variables like the buyer's card type and processor's margin.

When it comes to comparing these two options, blended pricing is simpler to calculate and keep track of, but IC++ is more transparent and potentially more cost-effective.

What are the pros and cons of IC++?

IC++ pricing has its own unique benefits and drawbacks.

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• Transparency. As a merchant, you can clearly see each individual fee issued to different parties for each transaction.
• Cost-effectiveness. With a transparent view of each fee, you can better control your finances.

Meanwhile, the potential downsides of IC++ include:

• Slow settlements. It can take two to three days for the payment processor to receive the fee information from credit card networks and issuing banks before settling the transaction accurately.
• Complexity. Settlements can be complicated, since more fees and transaction details are displayed on each report.

What is the difference between gross settlement and net settlement?

Once you choose a pricing model and calculate your potential fees, how do you go about paying those fees for each transaction? There are two common methods that businesses can use:

• Gross settlement: Receive the full payment from each transaction up front and pay all processing fees by the end of the next month. Example: You receive $100 and pay $3.50 by the end of the next month.
• Net settlement: Receive only your portion of each transaction, paying processing fees right away. Example: You receive $96.50.

Now that you understand the difference between gross settlement and net settlement, how do you choose which to use? In general, gross settlement is a good option for merchants who want to maximize immediate cash flow and delay fee payments. It allows you to make one collective payment by the end of the next month instead of many small payments daily. On the other hand, net settlement ensures that your fees are paid quickly and up front, so you only pocket the sum total that you earn. Also, remember that your payment processor may have a preferred or required payment method. That’s why it’s important to consider these options when you choose a payment processing company.

Discover more payment processing terms that business owners should know.

Does IC++ make sense for your business?

IC++ pricing is transparent and could potentially be a cheaper solution compared to other common pricing models like blended pricing. That’s because, with IC++ pricing, businesses have an opportunity to separately optimize and negotiate various costs, including interchange fees, card network fees, and markup fees.

It’s important to understand the nuances of how online payment processing works and how you can access lower fees. For example, some credit cards are eligible for Level 2 and Level 3 credit card processing, which can result in lower interchange rates. Merchants just have to provide more information about each transaction to their credit card issuer. This helps the issuer minimize risk and, in return, reduce their fees.