Credit card processing costs businesses money. There’s no doubt about that.
To begin with, processing providers charge a recurring fee, typically monthly, to maintain a merchant account to process cards. All businesses and merchants need them, large or small.
Where things get a little stickier is the individual credit card processing fees processors charge for each transaction, which cut into a business’s profits. These work according to four different pricing models for varying reasons.
However, two primary pricing models typically appear in merchant accounts: tiered pricing and interchange-plus pricing.
Tiered pricing is what most businesses use in their merchant accounts. In spite of that, tiered pricing has downsides that make it a less-than-optimal choice compared to interchange-plus.
It comes down to convenience versus bill transparency, and transparency saves businesses money.
Pricing Model Types
There are four:
- Tiered pricing
- Interchange-plus pricing
- Blended pricing
- Subscription/membership pricing
Let’s talk about blended and subscription/membership pricing first because they are less common. Depending on the type or size of the business, they might prove to be better options.
Flat/Blended Pricing
This pricing model is more like tiered pricing, which has three tiers. Blended puts all three tiers into one flat processing rate for every transaction. It’s priced higher than a tiered plan but has no monthly fee, which might make blended more economical for small, low-volume businesses.
Subscription/Membership Pricing
This system is more like interchange-plus pricing.
Instead of a calculated markup per transaction, though, it takes a flat fee for every transaction along with a monthly fee for membership.
The problem is that few processing providers offer this option.
Tiered Pricing
Tiered pricing could almost be mistaken for an industry standard. It’s what most processing services use. However, it comes with hidden costs.
It works like this:
Each transaction includes an interchange rate set and charged by the issuing credit card or bank. Processing companies also charge an additional markup.
All processing rates are grouped into three tiers: qualified, mid-qualified and non-qualified. Qualified transactions have the lowest markups, non-qualified the highest.
There are several hundred processing rates. Which tier they fall into, however, is up to the processing providers. They set the selection criteria.
For example, transactions with non-rewards cards or signature swiped cards typically fall into the qualified tier.
Card-not-present transactions, rewards cards and business cards most often fall into mid or non-qualified, which have higher markups.
The presumed benefit of tiered pricing is readability. Three tiers make it easy to tell where these hundreds of rates occur in monthly statements.
However, they also don’t show what the markups are or the selection criteria. That’s hidden.
As well, processors often advertise a qualified or low-markup rate, but most rates end up in the non-qualified or mid-qualified tiers with high-markups. A transaction could be qualified for one processor but non-qualified for another. They choose.
Businesses end up with consistently higher rates without knowing why. They lose money unnecessarily and never change providers.
Interchange-Plus Pricing
The difference here – and the advantage for businesses – compared to tiered-pricing, is inverse. Rather than complex rate-selection and easy to read statements, interchange-pricing has a more detailed statement but a simple rate plan.
That’s where the transparency is. Businesses can see in detail what’s going on and make choices.
Interchange-plus – also known as cost-plus or true pricing – is just that: interchange and plus. The statement breaks down all charges made to the credit card company. Each item shows the interchange fee plus the markup amount providers charge to run it. The markup can consist of a flat fee per transaction or a percentage or both combined. These are typically lower markups than tiered-pricing.
Interchange fees are set by the issuing credit card companies. Though they can get complicated and involve such criteria as card-present or card-not-present transactions, interchange fees are the same for large corporations and small corner stores alike.
An example would start with a $100 purchase, tax included. The interchange rate – set by the card company – is a 1.2 percentage and a $0.05 flat fee. The business pays $1.25. On top of that, the merchant account processor charges a markup, which is 0.15 percent and a flat $0.10 fee, totaling $0.25. All told, the business pays $1.50.
This shows up on the statement.
With tiered-pricing, these details are hidden. As well, each tier has a highest rate, so whatever falls into that tier can even be rounded up to that rate. The monthly statement shows a lump sum listed for that tier but doesn’t disclose these higher rates, and businesses are none the wiser.
In Summary
With detailed rate-breakdowns in interchange-plus, businesses can see these markups, giving processors a reason to charge more equitable rates. A lot of credit card processors are competing for business. The more competitive the markup rates, the more merchants will sign up. Because of transparency, rates are typically lower than those in tiered pricing. Processors can still charge high markups, but businesses will know it and know to look around.
Interchange-plus pricing has normally only been available to large companies or retail chains. But that’s not necessarily the case anymore. Some processors offer interchange-plus exclusively. Others still don’t even offer it. Some providers offer both but might try to sell the tiered-pricing version first. Getting good rates takes asking and making comparisons with other providers.
Again, depending on the type of business, monthly or annual fees might be the biggest concern. But interchange-pricing presents advantages for businesses and merchants over tiered pricing and can save a lot of money.
It’s worth looking at the business’s numbers and then looking for the best credit card processing providers for the best rates.
