Tiered Merchant Account Pricing: The Epic Fail of a Pricing Model

The infamous tiered-pricing model...do you know what it is? If not, I suggest you start learning, because chances are, it's working against you as we speak.

Remember the interchange reimbursement fee? Remember all of those different rate categories (125 or more) that your credit card transactions could qualify to?

Tiered-pricing is your ISO/MSP's attempt at making the whole process a little easier, simply by taking those interchange rate categories and narrowing them down into small clusters called "tiers." That way, only the tiers show up on your statement, and you don't have to dig through all 125+ rate categories to see where your transactions are.

Traditionally, smaller merchants had pricing blended into three or four categories. This practice made explaining the payment network and pricing structure much easier. Instead of having to educate merchants (and salespeople) on the various levels of interchange qualification (now more than 100 if we count all MasterCard and Visa card and charge types), acquirers explained the three or four different prices a merchant could receive for various transactions. This simplified the entire process. - TransactionWorld.net

I'm not gonna get too much into detail about what tiered-pricing is. You can find plenty of resources online that do a great job already...here, here and here.

I'll give you the 80/20 version:

• The MSP re-organizes those 125 (or more) interchange rate categories into small clusters called “tiers” or “buckets.”
• There can be anywhere between 3 to 12 different buckets....MSP's choice.
• Each bucket has a different rate based on a sliding scale from best to worst.
• The MSP has full control of choosing which rate buckets to allocate each of the 125 (or more) categories to.
• Every MSP arranges their buckets differently.
• The MSP quotes you the price of their best rate bucket called the “Qualified Discount Rate.”
• The other buckets (i.e. Mid-Qualified, Non-Qualified, etc...) have higher rates, but chances are you don't know that.
• You begin processing credit cards, but your transactions start qualifying to the crappier buckets because of the way your MSP has arranged them. So, you end up paying the higher rates, of which you knew nothing about in the first place.

*The most important points have been highlighted.

Can you see the problem here?

In theory, grouping transactions into categories to make merchant statements simpler is a valid idea. In practice, however, it reduces transparency and often results in a bad deal for the business owner for a few reasons:

Those reasons being...

1. What is qualified at one processor could be mid-qualified (or even non-qualified) at another processor. This makes rate quotes from one processor very difficult to compare to another.
2. Most processors do not disclose what interchange categories are grouped into each tier. Since sometimes a lower interchange rate can be addressed by an action that the business owner can take, burying the actual categories within tiers can make it harder for a business owner to identify opportunities to lower his/her rates.
3. Since there is so little transparency into the rates, it is often the result of misunderstandings between the processor and merchant and sometimes can be an area where the situation is manipulated by the processor to generate additional profit at expense of the merchant. Here is an article written by a VP at Global Payments, one of the biggest credit card processors, about how tiered pricing can be used to generate additional profit at the expense of the business owner.

The piece above from the TransFS blog pretty much sums it up. If you need more proof that tiered-pricing is less than ideal...

Merchant service providers have the ability to dictate which rate bucket the various interchange categories will qualify to. This makes it impossible to accurately compare rates and fees from different providers unless you know how each provider will be qualifying the various interchange categories. It's often the case that a business gets multiple merchant account quotes with nearly identical rates and fees and one of the accounts costs hundreds of dollars less than the others each month. - MerchantCouncil.org

So the sad truth is, that tiered-pricing never really accomplished what it was meant to. Because of that a new pricing model had to emerge. At first it was only offered to the big dogs, but it has become a bit more mainstream these days.

That pricing model is “interchange-plus,”.