The Frustration of Non-Qualified Rates
Frustration with non-qualified rates goes something like this for most business people: It all starts when you read your credit card processing statement and cringe at all the non-qualified fees. Then you pick up the phone and call your processor's customer service center to inquire about the charges. The person that answers the phone tells you that non-qualified fees are a fact of life, and you are accepting business and reward cards that are considered non-qualified. At this point you start to get frustrated, so you push a little harder for a solution. Alas, it never comes. So, by now you're getting even more frustrated, and the representative agrees to lower your rates to appease you. Here's where you pause and ponder... it all seemed too easy. How can the processor lower my rates so quickly? Having accomplished what seems like a victory, you hang up the phone with a hollow feeling in the pit of your stomach. You won the battle, but know that the war is far from over. You fully expect to see those non-qualified fees next month, but at least the rate will be lower this go-around, right? (Repeat process next month.) If this sounds remotely like your situation, this article will save you time, money and a big headache.Interchange Rates are the Only Reality
There's a little something called interchange that dictates what processing banks pay issuing banks when you process a credit card. Since interchange is the same for all processors, the details of how it works are incidental, so you don't have to worry about the terminology or intricacies of how things work. Just understand that interchange is the equivalent of a wholesale price list for credit card processing.Processors Use the Complexity of Pricing to Increase Profits
There are a lot of different interchange rates, about 400 or so, and they're assessed individually on a per transaction basis. This means that every single transactions is assigned an interchange rate based on the type of card the customer uses, how the transaction is processed (swiped, keyed, etc.) and a host of other variables. Some of this may sound familiar because processors will often use a version of this truth to sell the story about non qualified rates. For example, you may have been told that "all of your transactions will be qualified except for reward and business cards," which is simply not the case.A Non-Qualified Rate Example
A perfect example of this twisting of the truth comes courtesy of Wells Fargo. If you check out that link, you'll notice that in the very first paragraph Wells Fargo says,"A non qualified fee ... is ... generated when a transaction ... does not meet Visa®, MasterCard®, and Discover® Network requirements."The truth is, only Visa has a "non-qualified" interchange rate, and it's a "downgrade" category. (Meaning, you should strive to avoid it anyway, just like any other non-qualified transaction. We'll address Visa's non-qualified charge a little later in this article. MasterCard and Discover don't have any requirements that determine whether a transaction is non qualified. They have guidelines that determine into which interchange category a transaction qualifies, but there is no such thing as a non-qualified rate from the card brands' perspective. Wells Fargo goes on to say,
"... Visa, MasterCard and Discover Network assign the appropriate interchange level. Each account is set up [Read: Wells Fargo sets up each account] with an interchange level according to its processing method and business type. Any transaction that does not qualify at that level [Read: Any transaction that does not qualify at the level Wells Fargo determines] may result in a non qualified fee being charged."So, which is it? Do MasterCard and Discover determine which transactions are non qualified, or do they simply "assign the appropriate interchange level?" The answer is B. VMasterCard and Discover assign the appropriate interchange level, and Wells Fargo determines what it feels is "non-qualified."
Your Processor is the Puppet Master of Your Rates
The reason why tiered pricing is so evil is because it gives your processor the ability to manipulate costs behind the scenes by allowing them to control which pricing tier they use the most. For example, your processor doesn't have to raise your rates to increase its profits (and your costs). All it needs to do is route more interchange fees to your mid- and non-qualified tiers. Sure, you will still have a nice low qualified rate, but the processor will rarely use it. Remember how your processor was able to lower your rates so easily in the phone call scenario above? Your processor knew that lowering your rates a few percentage points wouldn't hurt its profits because it can simply route a larger portion of your transactions to the mid- and non-qualified tiers. Sure, your rates went down, but your overall cost will remain the same, or may even increase.Interchange Pass Through: The Light at the End of the Non-Qualified Tunnel
This article began by telling you that non-qualified fees are nothing more than a figment of your processor's imagination. Well, it's true. Tiered pricing isn't the only game in town. All you need to do to completely rid yourself of non-qualified rates is to get interchange pass through pricing. That's it! Dump tiered pricing for pass through and you will eliminate your processor's ability to play games with your rates. Unlike tiered pricing, pass through functions by allowing you to pay the actual interchange fees and a separate markup. Instead of charging several different rates, your processor makes money by charging a single fixed markup. The result is lower cost and a more transparent processing statement. Imagine, you will actually be able to see where your money is going each month. So, where can you get pass through pricing? If you want to do things the easy way, sign up for free at CardFellow and get competitive quotes from multiple processors instantly. We'll even help you decide which option is best, and we'll make sure you rates stay low for as long as you're processing. Here's a short video about how CardFellow works: However, as of 2023, even on a pass-through pricing model, you may see one lingering "non-qualified" rate: Visa's.Visa's Non-Qualified Rate
In the past, it was easy to say that any "non-qualified" rate on a processing statement was in your processor's control. Visa has made that a little bit harder. The credit card brand now has a downgrade category called "non-qualified." When one of your transactions fails to meet the criteria for a lower cost interchange category, it may "downgrade" to the Visa non-qualified category and be charged at that rate. This means that it's possible some "non-qualified" transactions on a processing statement really are from Visa and not from your processor. However, one thing remains true: non-qualified charges on your processing statement mean you're paying more than you had to. Whether those come from Visa or from your processor, non-qualified is never a good thing. If you're seeing those on your statement, it's time to investigate. Those businesses seeing non-qualified from the processor will want to consider a switch. Those seeing non-qualified from Visa will want to dig deeper into how to reduce downgrades.
Ben Dwyer
Ben Dwyer began his career in the processing industry in 2003 on the sales floor for a Connecticut‐based processor. As he learned more about the inner‐workings of the industry, rampant unethical practices, and lack of assistance available to businesses, he cut ties with his employer and started a blog where he could post accurate information about credit card processing. As the blog gained in popularity, Ben began directly assisting merchants in their search for a processor. Ben believes in empowering businesses by providing access to fair, competitive pricing, accurate information, and continued support. His dedication to transparency and education has made CardFellow a staunch small business advocate in the credit card processing industry.
