Tiered Merchant Account Pricing: The Epic Fail of a Pricing Model
The infamous tiered merchant account 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.
Tiered merchant account 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. – Transaction World magazine
Rather than go into a detailed explanation of what tiered merchant account pricing is, I’ll give you a brief summary of the key concepts. For a much more detailed explanation, you’ll want to read these articles from Startup Nation, CardFellow.com, and of course, Wikipedia.
Here’s the quick version*:
- The MSP re-organizes those 125 (or more) interchange rate categories into small clusters called “tiers” or “buckets.”
- There can be anywhere from as few as three to as many as twelve different buckets, with the buckets being set at the MSP’s discretion.
- Each bucket has a different rate based on a sliding scale from lowest to highest.
- The MSP has full control in choosing which rate buckets to place each of the 125 (or more) categories into.
- Every MSP arranges their buckets differently.
- The MSP will frequently quote you the price of their lowest rate bucket, called the “Qualified Discount Rate.”
- The other buckets (i.e., Mid-Qualified, Non-Qualified, etc.) have higher (sometimes much higher) rates, but you probably won’t know that and the MSP is unlikely to divulge it.
- You begin processing credit cards, but your transactions start qualifying (i.e., downgrading) to the more expensive buckets because of the way your MSP has arranged them. You end up paying higher rates, which you probably weren’t informed 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 and easier to read is a valid idea. In practice, however, it actually reduces transparency and often results in a bad deal for the business owner for several reasons:
- A qualified transaction at one processor could be mid-qualified (or even non-qualified) at another processor. This makes it very difficult to compare rate quotes from multiple processors.
- 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.
- Since there is so little transparency in the rates, it often results in misunderstandings between the processor and merchant. These misunderstandings can sometimes be manipulated by the processor to generate additional profit – at the expense of the merchant.
Because each merchant service provider can set which rate bucket the various interchange categories will qualify to, it’s impossible to accurately compare rates and fees from different providers unless you know in advance how each provider sets its various interchange categories. Thus, it’s quite possible (and often actually happens) that a business receives multiple merchant account quotes with nearly identical rates and fees – and one of those account quotes will actually cost the merchant hundreds of dollars less than the others on a monthly basis.
Sadly, the tiered merchant account pricing model never really accomplished its original purpose. What was intended as a way to simplify rates for understandably confused merchants has instead become a devious way to exploit that confusion and reap higher profits for merchant account providers. Naturally, it was only a matter of time before merchants saw through the confusion and began to demand a different pricing model. That pricing model, which is rapidly replacing tiered pricing models, is called interchange plus. When it was first introduced, it was only offered to larger businesses with high sales volumes, but it has rapidly gained popularity and is now frequently available to smaller merchants as well. Prospective customers need to beware, however, as interchange-plus pricing isn’t always advertised by merchant account service providers. Be sure to ask for it when negotiating with a sales agent to set up your merchant account.