Tiered Pricing v. Interchange Plus Pricing v. Account Fee Focused Pricing: A Case Study
Credit card processing companies typically use one of two methods of pricing their product, Tiered Pricing and Interchange Plus Pricing. In this article we’re going to look at two pricing quotes to understand how these two structures are different.
Definition: Tiered pricing is the most common way that credit card processing companies charge merchants for transactions. Under this method, credit card processing companies bundle the hundreds of different types of transactions into different tiers (usually 3 or 6 tiers) and charge the merchant a fixed amount for a transaction in that tier, regardless of the credit card processor’s underlying cost.
These tiers are a construction of the merchant account companies, so the number of tiers and their names can differ from company to company. The most typical, however, is a three tier system, with the tiers called “Qualified”, “Mid-Qualified”, and “Non-Qualified”. Thus, any swipe you made would be labeled as fitting into one of the three tiers, and for that transaction you’d be charged that tiers rate.
The Skinny: The problem with tiered pricing is that the deal you think you’re getting, isn’t actually what you’re getting. And that misdirection is happening on two levels, the “Qualified Rate Misdirection” and the “Downgraded Transaction Misdirection.
The “Qualified Rate Misdirection” Here, the goal of the Credit Card Processor is to get you to look at the lowest rate, aka the “Qualified Rate” and ignore the other two pricing tiers. Their marketing materials focus on this rate, and because an average merchant doesn’t know what’s going on, when they’re shopping for rates the end and are comparing Tiered Pricing offers they look at the “Qualified” rates. For example, they might get two quotes, one where the qualified rate is 0.6% while a second is 1.0%, and think, no brainer, I’m picking the first offer. However, what they don’t look at the Mid-Qualified and Non-Qualified rates, which can often be much higher, since a lot of companies use their Qualified rate as a loss leading teaser rate.
The “Downgraded Transaction Misdirection” Remember that the merchant pays a different rate depending on which tier the transaction falls into. However, if you ask your credit card processor how they determine which transactions fall into which tier, you likely won’t get a clear answer. That’s because they want to have the freedom to play the “Downgraded Transaction” game in order to boost their profits with your account.
In general, the tiers are determined by the way you swipe your card. If you, for instance, own a retail store and swipe a customers card via the terminal, that’s probably a “Qualified” transaction. Whereas, if you took the same card over the phone it might be a “Mid-Qualified” rate, whereas an internet transaction might be a “Non-Qualified” rate. The exact opposite might apply for an internet based company. The point is, its arbitrary. Making it even more confusing, is the fact that some credit card processors move transactions in which you accept a specific card into a lower tier. For example, accepting a credit card with a very good rewards program (which typically means Visa charges more to the credit card processor to accept that card) might automatically be best case a mid-qualified rate, regardless of how you accepted the card (swiped via terminal v. over the phone v. internet).
The point of all of this mess, is that it’s virtually impossible to figure how much markup you’re being charged on a given transaction. Moreover, its virtually impossible to compare tiered pricing quotes because you usually don’t know what the mid-qualified and non-qualified rates are, and even when you do, you don’t know which transactions fit in there, and which don’t for a given credit card processor because almost every provider is engaging in some form of the “Downgraded Transaction Misdirection”.
All of this confusion and misdirection, and we still haven’t gotten to another pricing area where another level of misdirection is going on, account fees. These are discussed at the end of the article.
Interchange Plus Pricing
Definition: A good way to think of this pricing structure is Cost Plus. Processors take the interchange rate (aka the rate that Visa, Mastercard or Discover charges them) and add a fixed markup for every transaction. The interchange rate for a particular credit card is set by Visa, Mastercard, Discover, AMEX, etc. and is non-negotiable. The part that is negotiable, is the markup amount (or the “Plus” part in “Interchange Plus”).
The Skinny: When your service is priced in interchange plus, you know exactly how much markup you’re paying every time you accept a customer’s card. That means you won’t have to wonder how much profit the merchant account services provider is making on a given swipe, or wonder if you’re being taken advantage of by the shady practice of the “Qualified rate misdirection” or the “downgraded transaction misdirection”. That’s because tiers don’t exist here, and because of that the company can’t fool with using a teaser qualified rate or downgrading your transaction.
But, in the same way that comparing the qualified tier rate in tiered pricing is misleading, believing that securing interchange plus pricing with what appears to be a low markup will get you a good deal, is equally fools gold. Despite some obvious transparency benefits, the biggest downside to me, of interchange pricing is it lulls the merchant into a false sense that they can understand the deal they’re getting by looking at a single number. In fact, interchange plus pricing causes a lot of merchants to focus on the amount of the per transaction markup, or “Plus”, and while they’re focused on that, they get fleeced through tons of fees, which companies that offer interchange plus pricing are getting ever more creative at implementing.
Account Fees: Account fees, along with Transaction fees (discussed above) form the two major components of your merchant account services companies.
Account Fees, refer to any fee not related to an individual transaction. These range in frequency from one-time Activation Fees, to Annual fees like PCI Compliance, to monthly fees just for having an account (aka the “Monthly Fee”), to daily fees like the “Batch Fee”. They also vary wildly in amount, from as much as $250+ for startup fees to batch fees as low as $0.10 per day.
The Skinny: One reason Account Fees fees are so concerning is that they frequently hidden in the fine print of contracts and at times are never fully disclosed except in that fine print (however, if you sign up for service through our site, we require all participating companies to agree to disclose all fees ahead of time). Another reason is that they are so ubiquitous but vary wildly in name, type and amount from one credit card processor to another. For example, with some companies these fees form a very small portion of your overall bill, while for others they are the largest component. Thus, this wild variation, combined with the confusing nature of Transaction Fees, makes it even more difficult for small business owners to compare quotes from two or more credit card processors to determine if they’re getting a good deal.
This article, and the accompanying case study, demonstrates three very different ways that merchant account service companies price their product. We selected examples in which the overall cost of processing came out about even for the merchant so that we could demonstrate the truth, that there is no single number you can focus on in a quote if you want to ensure you’re getting a good deal price-wise. Instead, you have to total up all of the various prices that will apply from a given processor to understand your total cost.
It’s certainly possible for an individual business owner to do that, but credit card processors are counting on the fact that most wont, and thus they can gouge them and get away with it.
This is the sort of duplicitousness that as a company we’re fighting. So, if you’re in the market for merchant account services, and you want to make sure you’re actually getting a good deal, use our Match Tool. We’ve done the work for you, in terms of cataloging the features that a processor has / doesn’t have, we’ve pre-negotiated discount rates, and exacted agreements from the merchant account providers that ensure more transparent fine print terms than going at it alone.