How Payment Processors Charge Transaction Fees: Interchange-Plus vs. Flat Rate

Introduction

Every transaction comes at a cost. Whether you’re a startup selling $10,000 per month or a high-volume DTC brand processing millions, payment processing fees directly impact profitability.

But not all fee structures are created equal. Payment processors typically use two main pricing models: flat-rate pricing and interchange-plus pricing. Understanding the differences between these models helps merchants make smarter decisions, avoid overpaying, and build scalable payment strategies.

In this article, we’ll explain how processors charge transaction fees, break down the pros and cons of each model, and show you which pricing structure best fits your business.

How Payment Processing Fees Work

When a customer pays with a credit or debit card, multiple parties take a cut:

• Card Networks (Visa, Mastercard, Amex): They set the base interchange rates.

• Issuing Bank: The customer’s bank earns a portion of the interchange.

• Acquiring Bank / Processor: Facilitates the transaction and adds a markup (this is the "plus.")

• Payment Gateway: The technology that routes the transaction, sometimes with its own fees.

  
  

These combined costs are bundled into what merchants see as transaction fees.

Flat-Rate Pricing Explained

Flat-rate pricing charges merchants a single, blended fee per transaction regardless of card type, network, or interchange cost.

Example

• Stripe, PayPal, and Square typically charge 2.9% + 30¢ per transaction for domestic payments.

• International or Amex transactions may be higher (e.g., 3.9% + 30¢).

  
  

Pros of Flat-Rate Pricing

• Simplicity: Easy to understand and predict.

• No Surprises: One consistent rate across all cards.

• Quick Setup: Ideal for new or small merchants processing less than $10,000 a month.

  
  

Cons of Flat-Rate Pricing

• Higher Costs at Scale: Large-volume merchants often overpay compared to true interchange costs.

• Lack of Transparency: No breakdown between interchange and processor margin.

• Limited Negotiation: Rates are fixed by the provider.

  
  

Best Fit: Small or early-stage merchants who prioritize simplicity over cost optimization.

Interchange-Plus Pricing Explained

Interchange-plus pricing passes through the true interchange rates set by card networks and adds a processor markup.

Example

• Visa Rewards Card Interchange: 1.65% + 10¢

• Processor Markup: 1.0% + 10¢

• Total: 2.65% + 20¢ per transaction

  
  

Pros of Interchange-Plus Pricing

• Transparency: Clear visibility into interchange vs processor fees.

• Lower Effective Cost: Especially for high-volume merchants, effective rates can be 1.8–2.5% compared to flat rates ’ ~2.9%.

• Negotiable: Merchants can negotiate processor markups as they grow.

  
  

Cons of Interchange-Plus Pricing

• Complexity: Rates vary depending on card type, transaction method, and region.

• Harder Reconciliation: More detailed statements require accounting oversight.

• Volume Dependent: Benefits are maximized for larger merchants.

  
  

Best Fit: Scaling or high-risk merchants who need control, transparency, and long-term cost savings.

Flat-Rate vs. Interchange-Plus: Side-by-Side

Feature	Flat-Rate Pricing	Interchange-Plus Pricing
Ease of Use	Very simple, one rate	More complex, varies by transaction
Cost at Low Volume	Predictable, good for startups	Slightly higher with fixed markups
Cost at Scale	Expensive, >3% effective	Lower, often 1.8–2.5% effective
Transparency	Blended rate, no breakdown	Full visibility into fee structure
Negotiability	No	Yes, markups can be negotiated
Best For	Small/startup merchants	High-volume or high-risk merchants

Why Pricing Models Matter for High-Risk Merchants

For high-risk industries (nutraceuticals, CBD, coaching, subscription billing, travel, etc.), pricing structures are especially important:

• Flat-Rate Limitations: Stripe and PayPal often restrict high-risk verticals. Even when allowed, their flat rates are expensive and inflexible.

• Interchange-Plus Benefits: ISOs and acquiring banks serving high-risk merchants typically offer interchange-plus pricing with custom terms, reserves, or rolling schedules to manage risk.

  
  

By understanding and negotiating interchange-plus pricing, high-risk merchants can reduce effective fees by hundreds of basis points — a major impact at scale.

The ISO Advantage in Fee Structures

Independent Sales Organizations (ISOs) help merchants cut through the complexity of fee structures:

• Access to Interchange-Plus: ISOs can set merchants up with acquirers offering transparent, negotiable pricing.

• Volume-Based Discounts: As you grow, ISOs renegotiate your markup.

• High-Risk Expertise: ISOs pair merchants with acquirers who understand their vertical and won’t shut them down unexpectedly.

• Chargeback Management: ISOs help reduce disputes, keeping interchange categories optimized.

  
  

Without an ISO, many merchants remain stuck in high flat-rate models, overpaying and risking sudden account shutdowns.

Conclusion

Payment processors don’t all charge the same way. For small businesses, flat-rate pricing offers simplicity and predictability, but it becomes expensive at scale. For growing DTC brands — especially in high-risk industries — interchange-plus pricing provides transparency, negotiability, and significant cost savings.

At Tailored Commerce Group, we specialize in helping merchants transition from flat-rate processors to optimized interchange-plus structures, while also building resilience with multi-MID setups and payment orchestration.

The bottom line? The more you understand your fee structure, the more control you have over your profitability and growth.