Credit Card Pricing Models
All about Interchange-Plus, Flat-Rate & Tiered Pricing
When your business accepts credit card payments, your overall processing costs will depend partly on the credit card pricing model used by your payment processor or merchant service provider.
This is why credit card pricing models are one of the key things to look for when you’re shopping around for a payment processor.
Most of the credit card processing fees associated with each transaction are set in advance by the credit card networks (and actually get paid to your customers’ card issuing banks and the credit card networks themselves), so payment processors have to get creative if they want to profit from processing credit card payments.
This creativity usually takes the form of one of 3 common payment processing models: flat-rate pricing, tiered pricing, and interchange-plus pricing.
We’ll cover the advantages and disadvantages of each pricing model in the guide below.
Table of Contents
Flat Rate Pricing
Flat-rate plans are the illusionists of the card payment industry. One the one hand, they look simple, cheap, and reliable because the payment processor charges a fixed percentage based on your business’s sales volume (say, 2.75% for card-present transactions). This consistency makes it fairly easy to estimate your credit card processing costs based on your projected sales—a boon for less experienced operators who struggle to understand interchange fees and card network assessments.
On the other hand, payment processors that offer flat-rate pricing still have to pay the same interchange rates and assessments as processors using the interchange-plus model described above, and that often results in much higher processing fees on average. Why? Because the processor needs to make sure its flat-rates cover its costs for transactions with a wide range of potential wholesale fees.
Take the $100 Mastercard Merit III transaction described in the interchange-plus section above. That example combined a 1.58% + $0.10 interchange rate with a 0.20% + $0.10 payment processor markup, totaling $1.98—or 1.98% of the transaction—in the end. By comparison, a processor offering a flat-rate of 2.75% for card-present transactions would take in $2.75 from the same transaction.
Businesses with very low average tickets, however, often benefit from the flat-rate pricing structure. On a $5 sale, for instance, at an interchange rate of 1.58% + $0.10 and a processor markup of 0.20% + $.10 (the same rates described above), a merchant would lose $0.29. Whereas a 2.75% flat-fee would come to $0.14—just under half that amount.
In general, tiered-pricing plans typically categorize credit and debit card transactions into three possible tiers or “buckets”—qualified, mid-qualified, and non-qualified—and apply different markups for each.
Qualified transactions have the cheapest rates, and they apply mainly to card-present debit card and non-rewards credit card transactions.
Mid-qualified transactions are more expensive (though the rate increases depend on the payment processor), and they mainly apply to membership rewards cards, manually-keyed transactions, and card-not-present transactions.
Non-qualified transactions have the highest rates. High-rewards cards, international cards, and corporate cards fall into the category of non-qualified transactions.
Most merchants are caught up in some sort of tiered plan, simply because credit card salespeople tend to use tiered models as a way to look smart and helpful—while ultimately screwing the living crap out of your business.
The Trouble with Tiered Pricing
On the surface, tiered pricing looks simple, and that’s part of its appeal. But, like flat-rate pricing, the apparent simplicity of tiered-pricing models often masks high payment processor markups. Since the tiers group together card transactions that have different interchange rates and card network assessments, the payment processor will often base the tier’s rate on the highest possible interchange fee for the transactions that qualify.
For example, card-present debit cards and non-rewards credit cards share the qualified rate, but the credit card networks set higher interchange rates and assessments for credit cards than for debit cards. The payment processor still has to pay those higher fees, so it might base its qualified rate on the highest credit card interchange rates that qualify for the tier. So, while you might be paying a fairly normal rate for non-rewards credit card transactions, you might also pay egregiously high fees to process card-present debit card transactions.
Additionally, payment processors that offer tiered plans will typically advertise the qualified tier—the tier with the lowest rate—and downplay the more expensive tiers. The trouble, though, is that transactions easily “downgrade” to mid-qualified and non-qualified tiers for all sorts of reasons beyond your control—such as a customer paying with a high-rewards card—and then you’re stuck paying higher rates than you likely anticipated.
Tiered pricing, in other words, lacks the transparency of interchange-plus pricing models, so it can be difficult for anyone—not just novices—to figure out the difference between the interchange fees and assessments charged by the credit card networks and the markups applied by the payment processor.
Interchange Plus Pricing
Interchange-plus pricing models generate their rates by combining interchange fees and card network assessment fees (commonly called wholesale credit card processing fees) with the payment processor’s markup fee (this is the “plus” in “interchange-plus”). The result is a system of rates that go up or down in tandem with the variable interchange rates set by the credit card networks.
On the one hand, this means you’ll pay higher fees overall for transactions with higher interchange rates. But the reverse is also true: when the interchange fee drops, your overall processing fee drops too.
Interchange-plus plans are generally considered more “transparent” than other pricing models because it’s fairly clear why you’re paying the rates you pay—at least if you understand how interchange rates and card network assessments work. This is because if your payment processor uses an interchange-plus pricing model, it will distinguish its markups from the interchange fees on your monthly processing statements.
For example, if your customer pays you $100 with a Mastercard consumer credit card qualifying for an interchange rate of 1.58% + $0.10, your monthly processing statement will typically show two line items for the same transaction: one illustrating the processing fee generated by the interchange rate, and one showing your payment processor’s markup. The markup usually consists of a percentage of the sale and a fixed per-item fee, such as 020% + $0.10.
Here’s a (very simplified) example using the Mastercard Merit III credit interchange rate:
MC Merit III Credit: 1.58%($100) + $0.10 = $1.68
MC Merit III Credit: 0.20%($100) + $0.10 = $0.30
Here, both entries are for the same credit card transaction. The first entry identifies the interchange rate and fee set by the Mastercard network (totaling $1.68), and the second entry identifies the payment processor’s markup on the same transaction (totaling $0.30). For the combined total of $1.98 in fees, in other words, you would pay an overall rate of 1.78% + $0.20–or 1.98% of the sale.
Check out our informational page on Helcim to learn about a payment processor that offers an interchange-plus pricing plan.
Is Interchange Plus Pricing Cheaper?
Not necessarily. One clear perk of interchange-plus pricing is that you’ll typically save on transaction fees when you make more money, which is why interchange-plus plans are usually associated with higher-volume businesses. This is simply because the transaction fees stay the same when the price of the sale goes up.
An $800 sale from a card with the same interchange rate and markup as in the example above, for instance, would still have the same per-item transaction fees totaling $0.20. In that case, the interchange fee would be $12.74 and the markup would come to $1.70, for a total of $14.44. This is 1.81% of the sale (lower, that is, than the 1.98% from the example given above).
So whether a particular payment model is “cheaper” or not really depends on factors like sales volume, the risk-level posed by your type of business, and the overall processing contract you negotiate with your payment processor. Interchange-plus plans still include other fees, after all, including card network assessments and additional service fees. Even a “transparent” interchange-plus pricing plan can stick it to you by adding on high monthly account fees and other weird charges that can eat away at your business’s sales.
Still, the practical advantage of interchange-plus pricing is that it reveals the components of the fees you’ll pay instead of bundling them altogether with no explanation. You’ll probably still get screwed (this is the card payment industry, after all!), but at least you’ll know why. And you’ll also be in a better position to identify overcharges and illegitimate fees on your monthly processing statements with an interchange-plus pricing model vs. the more opaque pricing models described below.
It’s also worth noting that interchange-plus pricing is generally only available when you set up a dedicated merchant account with a traditional merchant account provider.
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