Tiered rate credit card pricing is one of the worst and most unfair credit card processing options for businesses offered by merchant service providers.
Tiered credit card pricing or bundled pricing is a structure used primarily to mask the amount of money that processors make from businesses. Supposedly, it is meant to simplify monthly statements and pricing. This is not the case. Much like flat-rate credit card processing, it only creates a continual shroud around what you are actually being charged and what it actually costs to process each transaction.
How Tiered Pricing Works
Tiered credit card pricing is a structure that allows credit card processors to bundle interchange fees into pricing tiers of their choice. The most common tiers or categories used by processors who offer this model are “qualified”, “mid-qualified”, and “non-qualified”. To understand how tiered credit card pricing works, you need a basic understanding of how interchange fees work.
Interchange fees are transaction fees that a business must pay whenever a customer uses a credit/debit card to make a purchase. The first set of these fees are paid to the card-issuing bank to cover handling costs, fraud, bad debt costs, and the risk involved in approving the payment. The second set is paid to one of the major card brands (VISA, Mastercard, American Express, Discover, JCB, etc). Both are fixed costs established by the card brands and issuing banks that every business has to pay. These fees and the level of risk pre-determined for each card type are what comprise interchange categories and their rates.
See VISA and Mastercard’s interchange guidelines and fee structures here:
VISA Interchange Fees
Mastercard Interchange Fees
This is how it works out practically:
Credit card processing fees paid by businesses within a tiered pricing structure do not directly cover interchange fees. In this case, credit card processors will receive payment from a business and then cover the interchange fees required to process a transaction. This is how processors create tiers within their own rate structure: They bundle interchange categories into either a qualified, mid-qualified, or non-qualified pricing tiers. Each “tier” is then assigned a discount rate. Each tier and the corresponding discount rate is often based on qualifications or rate buckets predetermined by the credit card processing company.
A simple example of a discount rate for each tier is as follows: For whatever criteria a processor uses for the “qualified” rate bucket, a business could pay 1.5% per transaction. If a transaction falls under a “mid-qualified” rate bucket, then the fee could be 2.5% per transaction. The biggest problem is that the businesses rarely receive these “discount” rates. More often than not, transactions will “downgrade” to a lower qualification which charges a much higher rate. There are a plethora of reasons a transaction would downgrade to a lower qualification (higher rate). One is the type of card it is (credit, debit, corporate, rewards, gift, etc). Another is the brand of card (VISA, MasterCard, American Express, etc). Sadly, it can get drastically more complicated (if the card is present at the time of the transaction, what type of industry your business is in, is a cash-back option available, etc, etc, etc). The processor using the tiered pricing model is the one in charge of setting each of the qualifications. The hardest part is that business owners have zero control over what card type their customers will use at checkout. At first, this pricing structure sounds simple, but as you look into it, things get dark and very confusing.
Tiered Pricing: An Illusion At Best
Tiered pricing is truly an illusion at best. This model allows credit card processors the ability to set rate buckets, based on spending trends and data models, to ensure they consistently get downgraded transactions (higher rates per transaction) from businesses. This most often means that you are guaranteed to get downgraded as often as possible so the processor’s profit per transaction will produce optimal yield. In addition, processors who use this pricing structure ensure that it is so hard to prove the reason for the downgrade that most business owners in this situation feel hapless. If the reasoning so hard to explain or determine, these devious companies basically ensure maximized profit, all at the cost of you being able to take card payments.
Here’s the Solution: Interchange Plus
If you’re currently in a tiered credit card pricing structure, you need to cut and run. There is a far better rate model that ensures that you, the business owner, maximize YOUR profit, and no one else. The model is interchange plus. Think of it this way: What if you only had to pay a small, fixed percentage for every transaction? This is the case with interchange plus. In this model, processors like us at Rev19, pass the interchange costs directly through to you, the business, while adding the same percentage of margin to each of those costs.
Here’s how it’s different: There aren’t rate buckets with interchange plus.
Nothing changes. Your rate charged by companies like ours never fluctuates based on card type, risk, swipe location, etc. We simply at our wholesale, pass-through rate on top of whatever the interchange fee is to get the transaction processed by the card brands and the card issuer’s bank. For example, if you were priced at an interchange plus rate of 0.25% plus $0.10 per transaction, that cost would be added to the interchange cost for every transaction. We’ve used this example on one of our other blogs covering flat-rate credit card processing and we’ll use it here again to note the cost savings every business can receive. Let’s say a customer makes a $100 purchase with a regulated debit card again and pays for it at your card terminal (card present). With a standard assigned interchange rate of 0.05% + $0.21 per transaction, the interchange fees would only be $0.26 or 0.26%. According to the previously mentioned interchange plus rate, you would only be charged $0.40 on this $100 transaction. If you ran the same transaction through a tiered pricing structure and get downgraded, the rate could jump to 3.5% + $0.30 per transaction. Using the same $100 payment, it would cost you $3.80! In this example, the difference between tiered pricing and an interchange plus transaction could easily save you $3.54 per transaction.
Make the Switch. Increase Your Cash Flow Today.
If you’re a business owner stuck with a tiered pricing processor, find a processor that offers interchange plus pricing. There are several credit card processing companies that offer much lower, more transparent pricing. Whether large or small, making the switch to the interchange plus pricing structure can saving you thousands of dollars each year.
If you’re looking for an opportunity to get a free savings analysis to determine how much the interchange plus pricing model could help your cash flow, fill out the form below and we’ll reach out to you so you can start saving today.