Cost plus v. tiered pricing is commonly misunderstood by merchants. If you’ve ever scouted for better credit card processing rates, you’ve probably been asked by competing merchant account services to present your previous months’ statements for them to analyze.
When you get back quotes from them, you could see a difference in cost from just a few tenths of a percentage point, to hundreds of dollars a month in potential savings. However, if the rate you’re being quoted is the same as the one you have now, how is it that there is such a huge discrepancy in the numbers?
Welcome to one of the most misunderstood and potentially confusing parts of the payment gateway industry: merchant account pricing and its wide variety of different payment structures. The most common being Interchange/Cost Plus Pricing versus Tiered Pricing.
But, before we go into the pros and cons of each, you should first understand that one of the reasons behind why there could be such a huge difference in cost from one account provider to the next is how they have your company set up to process credit cards. There are a lot of different factors that can influence the rate you’re given by your merchant account provider:
- Type of card used(a no-frills basic Visa card versus a Visa Reward Card will process at different rate “buckets” or “tiers;” the interchange on a rewards card will be higher)
- The way a transaction is processed (swipe in-person, over the phone orders, keying in card number in person, accepting payments online)
- The type of business accepting the card (are you selling high-risk, high ticket items? Is your business type historically prone to troublesome chargebacks?)
For example, if your business started out as an online store and now you’ve opened a brick and mortar store front processing card present transactions, you’ll save an incredible amount of money if you simply inform your merchant account provider of this change. Basically, each transaction will cost you less because you’re processing a card face to face, which is much more secure than a card not present transaction (processing a credit card through an estore or over the phone order). So before you even begin shopping for rates, make sure your business is set up to process card orders the right way.
Let’s first look at how tiered pricing works. The word “tiered” means that the merchant account provider splits all card transactions into separate “tiers” or “buckets.” The most common tiered pricing structure includes three tiers: Qualified, Mid-Qualified, and Non-Qualified. Another tiered system that you might see is a six-tier which includes special pricing for PIN-entered and PIN-not-entered debit card transactions. Three tier pricing is much more common, so we’ll mainly focus on that system in this article. The major credit card networks post something called a Qualification Matrix which dictates what interchange category a transaction will post to based on:
- How the transaction is entered (swiped, keyed in, etc.) and
- What type of card is used (reward, non-reward, corporate)
Once the card is swiped or keyed in, the credit card terminal talks to the cardholder’s bank to identify the card type and then places the transaction into one of the three “tiers” we talked about earlier. To better understand this system here’s an example of how it works:
- Qualified Rate: 1.85% (regular card, swiped in a card present transaction)
- Mid-Qualified Rate: 2.25% (rewards card swiped, keyed in)
- Non-Qualified Rate: 2.55% (corporate card, ZIP code verification incorrect)
Example 1: A rewards card is swiped at your terminal. You pay Mid Qualified 2.25% plus any surcharges that the MSP charges for this tier of transaction.
Example 2: A corporate card is swiped at your terminal. You pay Non-Qualified 2.55% and any surcharges that the MSP charges for this tier of transaction.
When speaking to an account rep and they quote you “their rate” of X% and if you know they’re based off of a tiered system, be aware that “their rate” of X% is the QUALIFIED RATE only. Trust me when I say you’re bound to process cards that fall under the mid and non-qualified tiers, so make sure you ask what their additional rates are when researching merchant accounts.
Cost/Interchange Plus Pricing
The second and just as common pricing structure offered by merchant account providers is interchange plus otherwise known as cost plus pricing. This structure is a little easier to understand. When a card is processed, it doesn’t fall into a “tier.” Rather, each card has its own interchange rate attached to it, and then your merchant services provider adds on its own interchange markup fee (a percentage) plus a flat-rate transaction fee (usually only 10 to 20 cents per transaction). For example, lets say you run a basic Visa card via a swiped transaction. That specific card is looked up on a standardized rate table that breaks card types into 400 or more categories and assigns each card a percentage based off of that table. Your merchant account provider then adds their own fixed percentage PLUS 10-20 cents. That total of percentages and cents is your processing cost for that transaction. Let’s break this example down further:
Your merchant account provider charges you .77% + $0.15 per transaction. You accept a basic, no-frills Visa with an interchange of 1.60%. Your cost for that transaction is 1.60% plus .77% plus $0.15 or 2.37% and $0.15.
After reviewing this information between Cost/Interchange Plus vs. tiered pricing, you’re probably wondering which pricing model is best for your company. The answer is: it depends on your business type, your processing volume, and which types of cards you encounter most frequently. I would recommend gathering at least three previous months of processing statements or, if you’re opening a new business, make some educated guesses about the aforementioned questions and send them to several different merchant account providers. Most will analyze your statements (or the information you’ve provided them) and be able to quote you how much they would charge you based on your transaction history. Some will be able to come in much lower than others based on either their flat cost plus fee or the way that they’ve set up their “tiers.” It pays to look at several offers from competing service providers while trying to get the best rate and price structure possible for your company.