Tiered pricing simplified the costs of accepting credit cards, but it’s an opportunity for processors to charge merchants more than they would pay with other pricing models.
Credit card processing companies have come up with a variety of ways to charge for processing your credit card transactions. Because your processor has to pay interchange fees (sometimes also called interchange reimbursement fees) to the issuing banks and credit card associations, they’re always going to set your rates high enough to cover these costs, and still ensure a reasonable profit for themselves.
The most common processing rate plan in use today is called tiered pricing.
In this article, we’ll discuss what tiered pricing is, how it works, and how to tell if your merchant account uses it. We’ll also explain how providers use deceptive marketing practices to fool you into thinking that tiered pricing is a better deal than it actually is, and why this type of pricing plan will usually cost you much more money than the other types of plans. Finally, we’ll compare tiered pricing against your other options, and explain which type of processing rate plan will be the best (and most affordable) choice for your business.
What Is Tiered Pricing?
Tiered pricing grew out of merchants’ frustration and confusion in trying to decipher the interchange fees assessed by the major credit card associations.
Over the years, these fees have gradually been broken down further and further to make finer distinctions between transactions based on factors such as card-present vs. card-not-present, transaction size, type of card being used, nature of the goods or services being sold, and more.
On top of that, each major credit card brand (i.e., Visa, Mastercard, Discover, American Express, etc.) publishes its own interchange fee schedule. As a result, there are literally hundreds of rates – only one of which will apply to a given transaction.
Tiered pricing offers simplicity by condensing your actual processing rates down to a more manageable number by combining similar transactions into tiers.
Instead of having to deal with hundreds of possible interchange rates, you would only have a small number of general rate categories that your transactions could fall into, making the entire rate structure easier for merchants to understand (and for sales agents to explain).
The problem with this approach is that your processor has to ensure that they don’t lose money when processing any of your transactions. Thus, if they combine several dozen interchange rates into a single processing rate, they’ll have to base the rate for that tier on the highest of those interchange rates. The end result of this policy is that, while you’ll pay a fair rate for some of your transactions, you’ll be overpaying – sometimes by quite a lot – for almost all of the other ones.
How Does Tiered Pricing Work?
Tiered pricing rates are usually categorized as either qualified, mid-qualified, or non-qualified.
In addition to setting their own rate schedules, each provider is free to set their own rules regarding whether a transaction will fall under the qualified, mid-qualified, or non-qualified category. As you might expect, qualified transactions have the lowest processing rates, while non-qualified transactions have the highest.
What you might not expect is how much of a difference this determination makes in your actual cost. In general, non-qualified rates can be as much as two to three times higher than qualified rates from the same provider.
To make matters worse, it’s increasingly likely that the majority of your transactions will be non-qualified. Why? Because most providers lump rewards cards that give out frequent flyer miles or cash back rewards for their use into the non-qualified category. These types of rewards cards have become increasingly popular with the general public in recent years, resulting in a tremendous increase in non-qualified transactions.
To be fair, however, rewards cards have significantly higher interchange fees, so even if you’re on an interchange-plus pricing plan, you’ll still be paying for your customers’ credit card perks.
Tiered pricing also makes it nearly impossible to determine how much of a markup your provider is charging you for any given transaction. Unless you’re willing to track down the underlying interchange fee that was charged for a transaction, you won’t know whether your provider is taking a fair and reasonable markup, or ripping you off. This situation is in stark contrast to interchange-plus pricing, where your provider’s markup is a distinct part of the rate itself and doesn’t vary from one transaction to the next.
With so many obvious drawbacks, you would expect that tiered pricing plans would be very unpopular with merchants, and that they’d see little use in the business community. Unfortunately, that’s not the case. Tiered pricing is the most commonly used pricing plan today among merchants, with over half of all merchants in the United States currently being on a tiered plan.
How can this be? There are two main reasons.
For one thing, tiered pricing is very lucrative for merchant account providers, who aggressively push these types of plans when setting up new accounts. Most providers offer a combination of both tiered and interchange-plus plans, but don’t always disclose that you might have a choice between the two. Instead, your sales agent will offer you a tiered plan, but make no mention of interchange-plus pricing unless you specifically ask for it.
The other main reason for this situation is that the majority of merchants aren’t aware of the differences in pricing models.
With the expectation that credit card processing is going to be an expensive, but necessary, part of running their business, they’ll accept what they’re offered and sign up without giving the matter a second thought.
What Does Tiered Pricing Look Like?
Like most other credit card processing rate plans, a tiered pricing rate typically consists of two elements: (1) a percentage-based rate, and (2) a fixed, per-transaction fee (also called an authorization fee). A tiered rate schedule will consist of at least three rates: the qualified, mid-qualified, and non-qualified rates. Your processor may also include separate rates for debit card transactions. The following table summarizes what to look for in a tiered rate plan:
|Tiered Rate Type
||· Card-present transactions
· Debit card transactions
· Non-reward credit cards
|1.75% + $0.25/transaction
||· Card-present transactions
· Reward credit cards
· Keyed-in transactions
|2.30% + $0.30/transaction
||· Card-not-present transactions
· High rewards credit cards
· Corporate credit cards
· Online transactions
|3.50% + $0.30/transaction
Why Your Quoted Rate For Tiered Pricing Probably Isn’t Accurate
One of the worst aspects of tiered pricing is the deceptive way in which it is frequently marketed to unsuspecting merchants. If you check out a prospective merchant account provider’s website, you’ll often see a “Rates As Low As…” claim, followed by a number that seems (and is) too good to be true. Is it false advertising? Well, not quite – but it is very deceptive.
In all likelihood, the company really does offer that rate. However, it will only apply to certain types of transactions, and, in most cases, it will only be offered to businesses with very high monthly processing volumes. These limitations aren’t mentioned, of course, because the provider wants to lure you in with the promise of an extremely low rate that you don’t think their competitors can match. What they aren’t telling you is that (1) that rate will only apply to a very small number of your transactions, and (2) it might not be available to you at all because your monthly processing volume isn’t high enough.
If you see a “Rates As Low As…” quote that seems to be even lower than the average interchange rate, the provider is probably quoting a PIN debit rate that won’t apply to your credit card transactions. In fact, it won’t apply to your debit card transactions, either, if you’re having customers verify their identity with a signature rather than entering their PIN.
Even customized quotes obtained directly from a sales representative should be looked at with caution. When a merchant requests a rate quote for their business, the provider often quotes a single rate – the qualified rate. As we’ve mentioned above, a transaction has to meet a strict set of criteria to be considered ‘qualified’ and be processed at the lowest rate. If the transaction doesn’t meet the provider’s criteria for qualified transactions, it’s downgraded to either the mid-qualified or non-qualified tier and will cost much more to process.
Many sales representatives will not disclose this information unless you specifically ask about it. This makes it even more important to read your entire merchant agreement before signing up, as these additional rates will be listed there.
Knowing only your ‘qualified’ rate will not be helpful for estimating your overall monthly costs, as very few of your transactions will be qualified today due to the increasing use of rewards cards. eCommerce-only merchants should be particularly wary, as card-not-present transactions are usually downgraded to the nonqualified tier. In this case, knowing your qualified rate is useless, as none of your transactions will ever be qualified.
How Does Tiered Pricing Compare To Other Pricing Plans?
Tiered pricing is only one of four methods of determining processing costs in use by the payments industry today.
The other three methods are:
- Interchange-plus pricing
- Flat-rate pricing
- Subscription (or membership) pricing.
Let’s examine how it compares to the other pricing methods that you may encounter:
Tiered Pricing VS Flat-Rate Pricing
Tiered pricing and flat-rate pricing both use a blended approach to pricing, where interchange fees and processor markup are blended together to create a simple, predictable processing rate.
While merchants certainly appreciate simplicity, it doesn’t do you any good if it means paying significantly more overall for credit card processing than you would under a more complex rate plan. Tiered pricing also fails to offer the predictability of a flat-rate plan. Merchants using a flat-rate provider (like Square) know exactly how much they’ll pay for a card-present, online, or keyed-in transaction before the payment is accepted. Tiered pricing, on the other hand, uses more obscure (and unpredictable) factors to determine which tier a transaction will fall into.
Submitting a transaction for processing more than 24 hours after approval, for example, will usually result in a downgrade that costs you more money. It’s also not possible to determine at the time of sale whether a customer’s credit card offers a rewards program that will also put the transaction in a more expensive tier.
While both tiered and flat-rate pricing can result in overpaying for some types of transactions (PIN debit, for example), flat-rate pricing is usually more affordable overall for a typical small business.
Tiered Pricing VS Interchange-Plus Pricing
Unlike tiered pricing, your processor’s markup isn’t obscured or variable with interchange-plus pricing. This popular pricing method passes through the interchange fees at cost (including assessments charged by the credit card associations) and charges a fixed, fully-disclosed markup that generally does not vary from one transaction to another.
An interchange-plus rate quote looks something like this: Interchange + 0.30% + $0.15 per transaction. In this case, your provider’s markup will always be 0.30% + $0.15 for every transaction. You don’t have to worry about whether or not your transaction is downgraded. The tradeoff is that the interchange fees can vary widely from one transaction to the next, so you won’t know in advance how much it will cost you in total to process a transaction.
Interchange-plus pricing offers significant savings on total processing costs for most mid-sized and larger businesses. However, small businesses (i.e., typically those processing less than $5,000 per month) will usually save money overall with a flat-rate pricing plan, such as that offered by Square or PayPal.
Tiered Pricing VS Membership Pricing
Membership pricing is a relatively new variation of the interchange-plus pricing model. With membership (or subscription) pricing, your provider eliminates the percentage-based portion of the markup on your transactions in exchange for a monthly subscription fee. This fee combines all the recurring fees that other providers charge separately, and also includes a fixed amount for processor markup.
A typical membership pricing quite looks like this: Interchange + $0.15 per transaction. Pretty simple, right? Just remember that the subscription fee for your account will be quite high ($49-$199 per month, typically). You’ll want to carefully compare a membership pricing quote against what you’re paying now to confirm that you will, indeed, save money with this type of pricing.
Membership pricing can save businesses a lot of money overall, but it’s usually only cost-effective for large businesses with a very high (and stable) monthly processing volume. Nonetheless, it’s usually less expensive overall than tiered pricing. The reason for this is that providers using tiered pricing usually tack on a variety of additional monthly fees that will add up to just as much as — if not more than — a monthly membership fee. Per-transaction costs will also be higher under tiered pricing, as you’ll always have to pay a percentage-based markup on each transaction.
Why You Shouldn’t Settle For Tiered Pricing
Tiered pricing began as an effort to simplify processing rates so merchants could understand them better. Ironically, it’s now the most confusing rate plan you could end up with, mainly because of the way it’s advertised.
Opposition to tiered pricing has been growing for years, and today it’s gradually fading as interchange-plus pricing becomes more dominant.
Nonetheless, as we’ve mentioned above, the majority of merchants in the US are still on a tiered plan – either due to a lack of an alternative or through indifference to paying higher costs than necessary. Don’t be one of them!
If you find that you’re still on a tiered plan, either call up your provider and ask about switching to an interchange-plus plan (you might need to negotiate a bit) or switch to a new provider.
As we’ve seen, there are several types of processing rate plans available to merchants today.
Of the four major plans, three of them offer some kind of advantage to merchants who fit a particular business profile. Tiered pricing is the lone holdout. Put simply, tiered pricing offers no benefit to you as a merchant under any circumstances. All it does is make more money for your provider.
Understanding credit card processing rate plans is a complex subject, and this article only covers one of the ways in which your processing charges can be calculated. For a more in-depth look at other processing rate plans, please see our complete guide to credit card processing rates and fees.
FAQs: Tiered Merchant Account Pricing
What is tiered pricing for credit card processing?
Tiered pricing for credit card processing is a method for determining how much a business will pay to process a credit card transaction.
This method consolidates dozens of interchange fee categories into several ‘tiers.’ Tiered pricing reduces the number of possible rates a merchant might have to pay for a transaction but usually costs more overall due to the need to set the rate for each tier high enough for the processor to avoid losing money on a transaction.
How does tiered pricing for credit card processing work?
Tiered pricing usually assigns each transaction to either a qualified, mid-qualified, or non-qualified tier, based upon a number of factors such as card-present vs card-not-present, credit card reward programs, etc.
While the rate charged within each tier is fixed, the processor’s markup will vary widely depending on how much of the processing fee must be paid to the issuing bank as an interchange fee. Note that the total rate for processing a non-qualified transaction can be as much as 2-3 times higher than for a qualified one.
Is tiered pricing the best option for credit card processing?
No. Tiered pricing disguises the processor’s markup by blending it in with the interchange fees, allowing the processor to charge higher rates for low-risk transactions where the interchange fee is low. Overall, tiered pricing is almost always the most expensive option for merchants, and offers no offsetting advantages.
Which alternative pricing models are better than tiered pricing for credit card processing?
For most businesses, any alternative pricing model will be less expensive overall than tiered pricing. The most common options available include flat-rate pricing, interchange-plus pricing, and subscription pricing. We recommend flat-rate pricing to most small or seasonal businesses processing less than $5,000/month. Businesses processing above this amount will usually save money with an interchange-plus or subscription pricing plan.