Credit Card Processing

Tiered Pricing VS. Interchange Plus

by Ben Dwyer

Tiered pricing or interchange plus? How do you know what’s best for your business?

Understanding how credit card processing fees are determined and how different merchant account pricing models work can save your business hundreds of dollars a month in transaction costs. One of the first questions you’ll ask is “Which should I go with, tiered pricing or interchange plus?” Tiered pricing is never in your best interest, but don’t just take my word for it. In this article, I’ll lay out the differences so you can see for yourself.


Understanding What Goes Into Determining Fees

Probably the biggest reason that merchant account pricing schemes can be so complicated for the business owner is that the mechanics going on behind the scenes are also extremely complex. For instance, if we refer to a “transaction,” we are not referring to the simple act of swiping and charging a card — we’re referring to any interaction between the merchant and the processing bank. If a card is refused, for example, the merchant will still pay a transaction fee. When a merchant clears his account batch, he may also pay a transaction fee. There are numerous transactions and numerous associated fees.

It gets more complicated. Things like the type of business accepting the card, the type of card being used, the industry of the business, whether the transfer is online or not, etc., all affect how the transaction will be categorized.

This system of categorization of transaction types is called interchange, and interchange fees are the backbone of credit card processing pricing models. Twice a year, the card brands (Visa, MasterCard, and Discover) announce their schedules of fees and the various categories that credit card transactions can fall under.

A wholesale transaction rate is determined based on the criteria outlined in these fee schedules. Currently, between Visa, MasterCard, and Discover, the categories of interchange fees number over 500. You can peek at Visa’s current interchange schedule for an example of what this actually looks like on paper. It’s intimidating stuff, but it’s not impenetrable, and understanding how it affects your merchant account pricing model can save you a ton of money.

Pricing Models

In this article, I’ll go over two of the most common pricing models: tiered pricing and interchange plus pricing. There are other pricing models available, such as flat rate and subscription, but they’re essentially variations of these two models, so it’s important to have a solid understanding of tiered and interchange plus.

Tiered Merchant Account Pricing

Most businesses are on tiered merchant accounts, which are unclear and expensive when compared to newer pricing models.

Tiered merchant accounts work on a system of “qualification” to determine which rate tier a merchant’s transaction falls into. These are also called “bins,” “rate buckets” or “buckets.” So, a very simple example might look like this:

It’s not usually quite that simple, and there may be various in-between tiers, as well as differences between credit and debit card charges. But the point is that the Qualified Discount Rate represents the lowest fees a merchant can pay. It’s no coincidence that acquirers (merchant service providers) will consistently advertise the lowest qualified discount rate.

Downgrades

Problematically, however, the business rarely actually sees those savings. Transactions frequently “downgrade” to a lower level of qualification, meaning the business loses more money in the transaction. The reasons a transaction may downgrade are great for acquirers at the expense of the business owner. The type of card is one thing that will cause a transaction to be downgraded. The brand, whether it’s a private or business card, whether it’s a cash back or rewards card, and other things are all handled differently by different account providers.

Of course, business owners don’t have the luxury of deciding what kind of cards their customers may use to pay, and they end up paying unnecessary fees each time a customer pays with a card that does not fall into the acquirer’s strict definition for qualification. Furthermore, the method used to charge a card matters.

Causes of Downgrades

For example, keying in the credit card number as opposed to swiping the card will almost always cause a downgrade. Not verifying the address of the card by asking the zip code will often cause a downgrade. What’s more, the various rate tiers obscure the actual interchange fees. The merchant pays fees based on questionable criteria set by the acquirer for the acquirer’s benefit, with little relation to the interchange fees that govern the wholesale price of the fee in the background.

It’s impossible to know for certain, and difficult to estimate which rate bucket a transaction will fall into until after the transaction has taken place. That also makes it impossible to avoid paying unnecessary fees when using a tiered merchant account.

Interchange Plus Pricing

Traditionally, Interchange Plus pricing accounts have only been available to businesses that do a high volume of credit card sales — usually $25,000 or more. However, the market for merchant accounts is more competitive these days, and now smaller businesses (and even brand new ones) can get accounts that work on this pricing structure.

It’s straightforward, with only two rates from the credit card processor to consider: the interchange markup percentage fee, and the transaction fee. Merchants pay a consistent, flat fee regardless of the wholesale processing rate, plus a small fee per transaction. So, if your business has a merchant account with a 0.30% rate and a $0.14 transaction fee, you pay the wholesale interchange fee, plus 0.30%, plus 14 cents.

In essence, the processor passes the wholesale rate (with markup) to you. Your processor calculates fees on their actual wholesale cost — not arbitrary criteria set by the processor. Keep in mind, though, that interchange plug pricing by itself is not a silver bullet. It sets the stage to get competitive pricing, but you’ll still need to ensure you have a competitive quote.

Related Article: Interchange Plus Pricing is Not a Silver Bullet.


To make finding the best credit card processor even easier, we only allow processor to quote interchange plus pricing here at CardFellow and we help you identify the most competitive option.

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Ben Dwyer

BY 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.

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13 COMMENTS

  1. from Ellen Cunningham, on April 22, 2015

    Hi Jen,
    What are your questions?

    • from Eric, on July 11, 2017

      I keep getting calls from merchant services who are telling me that I’m in interchange plus level and they can save 40~50% by changing to interchange level.
      What are the differences between interchange and interchange plus levels and would it really save money by changing to interchange level?
      Thank you

      • from Ellen, on July 11, 2017

        Hi Eric,
        Interchange plus is not a “level” and there’s no “interchange level.” Rather, interchange plus a pricing model – it means that you’re charged interchange and then the processor’s markup separately. (Interchange plus the markup.) There is no interchange only level. Interchange simply refers to the fees charged by the banks that issue credit cards. It sounds like the sales reps are trying to use marketing spin to get your business. If you’d like to compare your current pricing to see if there are better deals available, your best bet is to use a comparison tool like CardFellow’s. It’s free and private and we can help walk you through the quotes and answer questions. Try it here: https://www.cardfellow.com/sign-up

  2. from Umapathy, on August 15, 2017

    Hi Ellen,
    You have written about interchange refers to the fees charged by bank that issue credit cards.
    Then what is processor’s markup fee?. where does this fee go to?
    does it go to Bank issued credit card or VISA or Master Card Network?

    In above paragraph “Interchange Plus Pricing” i can see
    >>>It’s straightforward, with only two rates from the credit card processor to consider: the interchange markup percentage fee, and the transaction fee. Merchants pay a consistent, flat fee regardless of the wholesale processing rate, plus a small fee per transaction. So, if your business has a merchant account with a 0.30% rate and a $0.14 transaction fee, you pay the wholesale interchange fee, plus 0.30%, plus 14 cents<<<

    My Question is:
    Who takes the wholesale interchange fee?
    who takes plus 0.30%?
    Who takes 14 cents (that is transaction fee?)
    Please write me with example

    • from Ellen, on August 16, 2017

      The processor’s markup goes to the processor who facilitates the credit card transaction. Interchange goes to issuing banks, assessments go to Visa/Mastercard, processor’s markup goes to the processor. (Like First Data, TSYS, etc.)

      In your question above, the “wholesale interchange fee” would go to the banks that issue credit cards. The 0.30% and 14 cents would go to the processor.
      Note that the processor handles the payments – you wouldn’t be directly paying the banks.

      • from Umapathy, on August 16, 2017

        HI Ellen,
        >>>
        Interchange goes to issuing banks, assessments go to Visa/Mastercard, processor’s markup goes to the processor. (Like First Data, TSYS, etc.)
        <<<
        In your answer You have written that The 0.30% and 14 cents would go to the processor. There is nothing goes to Visa/Mastercard Network.??
        where is assessments amount Here?

  3. from Lila Laizinou, on November 2, 2017

    Hi!

    Can you tell me what’s the difference between 100% pass thru and two or three pricing plan?

    • from Ellen, on November 3, 2017

      Pass through typically refers to interchange plus. It doesn’t have tiers. As discussed in the article above, a tiered plan is when the processor groups all of the different interchange categories into a few tiers at its discretion. In pass-through pricing, the costs of the interchange categories are passed along to you.

  4. from Lila Laizinou, on November 2, 2017

    I’m sorry, I mean two or three tier pricing plan.