The key to lowering your business's credit card processing expense is not avoiding non-qualified fees. The key is completely eliminating a processor's qualification altogether.
Who Determines Rate Qualification
Qualified, mid-qualified and non-qualified rates are set and manipulated by credit card processors through something called tiered pricing. There is one exception - Visa started using the term "non-qualified" as one of its downgrade categories, which we'll address later in this article. However, in most cases, seeing "non-qualified" on your statement is still a result of processor manipulation, and Visa and Mastercard have no influence in determining how various processors qualify transactions under tiered pricing. In reality, there are far more than just three (qualified, mid-qualified and non-qualified) credit card processing rates. In fact, there are hundreds of different rates between Visa and Mastercard, called interchange fees. Interchange fees are the basis for all credit card processing charges, and they remain exactly the same regardless of which processor a business uses. A processor uses tiered pricing to route hundreds of interchange fees to its own qualified, mid-qualified and non-qualified rates. A couple important points to keep in mind about tiered pricing and rate qualification are:- Individual processors control how interchange fees are qualified under a tiered pricing structure. This leads to something called inconsistent buckets, which makes comparing rates from different processors virtually impossible. For example, one processor may consider a Visa reward interchange fee as qualified, while another considers the same interchange fee non-qualified.
- Processors can change how interchange fees are qualified at any time without notice. This allows processors to lower a business's qualified rate while still increasing the business's gross processing fees. To do so, the processor simply routes more interchange fees to the business's mid and non-qualified rates.
Non-Qualified Interchange
There is no such thing as a non-qualified interchange fee. This may sound confusing if you're looking at your statement with a non-qualified rate, but that rate is completely made up by your processor. Qualified, mid-qualified and non-qualified rates are a processor's way of classifying Visa and Mastercard's interchange rates. There is, however, a "downgrade" interchange rate called non-qualified by Visa. In that case, it means you had a transaction that failed to meet criteria for a more favorable interchange category and thus was charged more. Regardless of where a non-qualified charge originates, it's something to strive to avoid on your statements. Interchange simply is what it is. For example, the interchange rate that a business pays to swipe a Visa reward credit card is 1.65%. It's up to a processor whether this interchange rate gets classified as qualified, mid-qualified or non-qualified under the tiered pricing structure it uses to bill business that utilize its credit card processing service.Non-Qualified Credit Cards
There is no such thing as a non-qualified credit card; there are only non-qualified transactions, and individual credit card processors decide which transactions are considered non-qualified based on how interchange categories are routed under a tiered pricing model. Visa and Mastercard do not determine which transactions are "non-qualified," with the sole exception of the downgrade category previously noted. A credit card's type is just one of the many variables used to determine the interchange category that is associated with a particular transaction. Credit card processors have no control over the interchange category assigned to a transaction, but they do control into which pricing tier (qualified, mid-qualified or non-qualified) the interchange category is routed. For example, the interchange rate for a swiped transaction involving a consumer Visa reward credit card is 1.65%. One processor may consider this transaction as qualified, while another may consider-it non-qualified. The interchange fee is consistent for both processors; the only thing that changes is how the processor qualifies this particular type of transaction under its own tiered rate structure.Over-Simplifying Qualification
Processors' sales people tend to give very general answers when asked which transactions will be qualified, mid-qualified or non-qualified. For example, it is typical for a sales person to say something like, "Reward cards and keyed-in transactions are considered mid-qualified, and business credit cards are non-qualified." The snippet below was taken from a business's processing statement before it used CardFellow to lower its credit card processing fees by 30%. You will notice that the processor's explanation of how it qualifies transactions is very vague. The processor even alludes to this fact by saying, "Qualified, Mid-Qualified, and Non-Qualified definitions are not all inclusive, but instead meant to be general descriptions."
Along with generalizing how transactions are qualified, sales people tend not to mention that the processor can change how transactions are qualified without notice to a business. So, transactions that are considered qualified one day may suddenly be non-qualified the next.
Qualified Rate
The qualified rate of a tiered pricing structure is the lowest possible rate a business will pay. Since it is the lowest, the qualified rate is often what a processor advertises, and it is often used to make pricing appear artificially low. Processors typically route only consumer non-reward credit cards and debit cards to the qualified rate tier. Processors that engage in bait-and-switch tactics will advertise a qualified rate that is below Visa and Mastercard's lowest credit card interchange rate. In cases like this, the processor will route only debit card transactions to the qualified rate tier. All credit card transactions will be routed to the mid and non-qualified tiers. Unfortunately, such tactics are common in the processing industry.Mid-Qualified Rate
In the case of retail businesses, processors typically route swiped reward and keyed-in consumer and debit card transactions to the mid-qualified rate tier. In the case of e-commerce and card-not-present businesses, transactions involving a consumer reward card make up the bulk of mid-qualified transactions.Non-Qualified Rate
Processors typically route all commercial and upper-level reward cards to the non-qualified pricing tier. Keyed-in or e-commerce transactions that are processed without the customers billing address are also often routed to the non-qualified rate. However, companies like Intuit merchant services that are known to engage in excessive surcharging may route all reward interchange categories to the non-qualified pricing tier as well.Eliminating Non-Qualified Fees
It is possible to completely eliminate non-qualified fees. To do so, you need to eliminate a processor's ability to set its own rates to which interchange fees are routed. This may sound complicated, but in fact, it's a pretty simple thing to accomplish. Simply require processors to use interchange pass-through pricing to assess processing charges instead of tiered pricing. Interchange pass-though is the only type of pricing that CardFellow allows processors to use because it is completely transparent and far more cost-effective than tiered pricing. Under a pass-through pricing model, a processor does not bill a business based on qualified, mid-qualified and non-qualified rates. Instead, it bills a business based on actual interchange fees plus a fixed markup. For example, if a processor offers a rate of 0.25% with pass-through pricing, it will charge the actual interchange rate for a given transaction plus 0.25%. Therefore, all transactions receive the same exact markup from the processor regardless of whether the transaction is swiped, keyed, reward, commercial, or otherwise. Note that in limited cases, you may still see a non-qualified downgrade charge from Visa if your transaction fails to meet the criteria for its "target" interchange category. However, these should be infrequent, if ever. If you see many "non-qualified" charges, it's time to investigate why you're overpaying and how to rectify it. To learn more about processor pricing models and how your business can lower its processing charges, check out CardFellow's free credit card processing guide.
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.
