Everything You Need to Know About Tiered Pricing for Credit Card Processing

Everything You Need to Know About Tiered Pricing for Credit Card Processing

We continue to move towards a cashless society. In 2017, credit cards were used for more than 60% of consumer payments by a dollar spent — more than any other form of payment. 

If you’re not accepting credit cards as a form of payment, you’re missing out on major sales opportunities. 

But credit card transactions also come with extra fees that cash payments don’t accrue. And with so many pricing structures from processing companies, it’s hard to know which one is best — especially if you’re just getting started. 

Below, we’re taking a look at the tiered pricing structure for credit card processing, what it means, and how to determine if it’s right for your business. 

What is tiered pricing for credit card processing?

Tiered pricing, or bundled pricing, is a credit card processing fee structure that determines how much merchants pay processing companies for each transaction. Fees are broken down into three tiers: qualified, mid-qualified, and non-qualified. Qualified transactions get the lowest fees, while non-qualified accrue the highest. 

How does tiered pricing work?

Before diving into the specifics of tiered pricing, let’s recap how credit card processing works in general.

Credit card processing rates include fees charged by the merchant bank, payment processor, third-party ISOs and MSPs, the issuing bank, and card networks. Consumers and merchants are responsible for paying these fees, depending on the transaction. 

When it comes to the breakdown of the fees for credit card processing, this involves an assessment due to the card network, an interchange fee payable from the merchant bank and payment processor to the issuing bank, and markup due to the merchant bank and payment processor to cover the interchange fee. The markup is what you pay to the processing company. 

The lowdown on tiered pricing

In the tiered pricing model for credit card processing, the markup is assessed depending on what “type” of transaction it is. Processing companies create three tiers they use to categorize each transaction:

  • Qualified rates are applied to debit cards and non-reward credit card transactions that are swiped or inserted as a chip.
  • Mid-qualified rates pertain to a membership rewards card, loyalty card, and manually keyed-in transactions. 
  • Non-qualified rates are for the corporate card, high-reward credit card, international card, and card-not-present transactions. 

How much does tiered pricing cost?

According to Value Penguin, processing rates range from 1.4% to more than 4% depending on the category. Fees are applied based on the category the transaction falls under. Qualified rates would be closer to the 1.4% end of the spectrum, while non-qualified transactions would be assessed closer to the 4% range. 

Pros of tiered pricing

The list here is short. “The only benefit for merchants is that it’s easy to comprehend the rates and fees in a tiered system,” says Chase Steiner, CEO of Crediful. There are only three rates “buckets” — a straightforward fee system that’s easy for small businesses to understand. 

But that’s pretty much it. “Card processors derive the biggest benefits as they don’t disclose their costs and tiered pricing is more expensive,” Steiner says. “Using tiered pricing, a processor can actually charge a merchant more without increasing their rates.” 

Cons of tiered pricing

The negatives outweigh the positives when it comes to tiered pricing for credit card processing. The first of which being cost. Processors advertise their qualified rates — the most attractive ones. Rarely do merchants get these rates. It’s typically unpredictable and higher than SMBs anticipate. Plus, it lacks transparency about how the fees break down. It’s hard to discern markup from interchange, and it’s hard to tell at the POS which category some transactions will fall under. 

Not to mention, you’re at the processor’s mercy. “A processor can increase the cost to the business without increasing their rates,” says Steiner. “Also, with tiered pricing, a processor can charge an excessive additional cost to the merchant who’s completely unaware how much they’re being taken advantage of.” They can change the rates for the mid- and non-qualified transactions. 

Generally speaking, tiered processing rates are higher than other fee structures. 

Alternatives to tiered pricing structures

We mentioned other fee structures — many of these are set up more favorably for merchants. While tiered pricing could be great for business owners who are just starting out, there are better alternatives out there. 

Interchange plus

Interchange plus, or cost-plus pricing breaks down as the interchange, the fee applied by card networks, and the “plus,” the processor’s markup (typically applied as a percentage). Processing companies have no control over interchange rates, but they can apply markup as they choose. 

Interchange plus pricing rates compared to tiered merchant credit card processing is more transparent. Statements will show the breakdown of interchange vs. markup, so merchants know exactly how much is going to the processing company. 

“Interchange plus is a superior option because the interchange fees are passed through directly to the merchants,” says Steiner. “The processor charges a fixed percentage so this system is priced more reasonable in addition to more transparent.”

Generally, merchants pay lower fees in this pricing structure. However, statements can be more confusing because fees are typically applied as a flat rate plus a percentage of the transaction total (for example, $0.30 + 2.7%). 

Flat pricing

Flat, blended, or fixed pricing is another transparent pricing structure. In this scenario, merchants pay a single fee for every credit card transaction — regardless of transaction type or amount. (Note: Card-not-present and other high-risk transactions may incur higher fees.)

This fee is typically applied as a percentage, and some processors also tack on an added flat fee, similar to interchange plus. 

Unless you have very small average order value, flat pricing ends up being a bit more costly than interchange plus but still cheaper than tiered. 

Membership

A newer pricing structure, some processors have membership models where merchants pay a monthly fee for a specific amount of card transactions. This flat recurring fee makes processing expenses more predictable and easy to understand. You might also pay a per-transaction flat fee. 

Membership-based processors like Payment Depot don’t take a cut from each transaction. Instead, they give merchants direct access to interchange rates without markup. Overall, these rates are typically lower than other processing fee structures, especially for businesses that process a high volume of transactions.

The bottom line

TLDR: Tiered pricing for credit card processing might be easy to understand, especially for new merchants, but there are plenty of alternatives designed with merchants’ interests in mind. Check out membership-based credit card processing companies like Payment Depot for predictable, straightforward and affordable rates. 

Learn more about Payment Depot’s membership model pricing >

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