Tiered Pricing For Credit Card Processing: Why You Should Avoid This Common Pricing Method
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.
Table of Contents
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.
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:
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.