Interchange Padding in Cost Plus Pricing: A Trend Merchants Should Not Ignore
Over the last couple of years I have seen a quiet shift in how some processors present cost plus pricing. On paper it looks clean and fair: the true interchange set by the card networks, plus a small processor markup. In practice, a few providers are padding the interchange line itself. The result is simple. You pay more than the networks charge, and the extra margin gets buried in the weeds.
A quick refresher. Cost plus means you pay two parts. First, the actual interchange and card brand fees that go to Visa, Mastercard, and the banks. Second, a clearly stated processor markup, often a few basis points and a per item fee. When done honestly, it is one of the most transparent ways to pay for processing.
How padding happens
Padding shows up in small ways that are easy to miss. A rate that should be 1.65% might post at 1.69%. A per item fee that should be a network pass through shows up a penny higher. Some statements label these items as interchange even though the extra amount is a processor add on. It does not take much. A few extra basis points across housands of transactions add up fast.
Why it is hard to spot
It hides in complexity:
- There are hundreds of interchange categories and the brands adjust them regularly.
- Statements often group fees, which blurs the line between network cost and processor margin.
- Some CRMs and gateways reformat data, which makes side by side comparisons harder.
- Most busy owners do not have time to cross check every code against the published tables.
What you can do about it
- Ask for a clear processor markup in basis points and per item, separate from interchange. Keep it fixed.
- Request a sample month with full interchange detail, including the exact category names and rates.
- Compare a few high volume categories to the current Visa and Mastercard schedules.
- Watch for tiny lifts in common categories and for fees labeled as pass through that do not match brand tables.
- Have an independent review your statements once or twice a year.
- If you switch providers, run a side by side test month and compare the effective rate by card type.
Cost plus can be a great model when it is handled with real transparency. It can also be a place where hidden margin slips in. My promise is simple. I pass interchange through at cost and I put our markup in plain view so you always know what you are paying for. If you want a clean statement review, send one month of data and I will walk you through it line by line.