If your business accepts credit cards, you are probably paying for these services through one of the three most common pricing models: tiered, flat rate, or interchange plus. As a merchant, you should be familiar with all three options in order to determine the best fit for your business.
This method of pricing works on a tiered qualification system. Typically the merchant service provider will divide transactions into several classifications or “buckets” and charge a transaction rate for each tier. You may see tiers listed in several ways. For example, some merchant services divide their tiers into various qualification levels. As such, Qualified transactions might be charged at a rate of 1.XX, Mid-Qualified at 2.XX% and Non-Qualified at 3.XX%. This tiered system works well for merchants if they can get all or most of their transactions in that lowest priced tier.
This pricing method is problematic for many merchants because transactions can be downgraded to a Mid or Non-Qualified transaction for a myriad of reasons, some within the control of the merchant and some not. Transactions may downgrade simply due to the type of card presented or it could be how the merchant handles the transaction. There are rarely guidelines presented to merchants on how to improve their transaction qualifications and since these tiers have no tie to interchange, it is not a transparent method of pricing.
Flat rate pricing is a popular model because it is a very simple and a seemingly easy-to-understand mark up. With flat rate pricing, the processor charges the merchant a fixed percentage on each transaction. Common flat rates typically vary between 2.75% to 3.50% and often charge between $0.20 to $0.30 per transaction. The interchange rates charged by the card associations vary from 0.05% to 3.17% in general, depending on variables such as card type, card brand, processing method, and other variables. Interchange fees and assessments are bundled into the flat rate, so the merchant may not know for which interchange rate they qualify. The benefit to flat rate pricing is that it is easy to understand and the costs are predictable, but it is not always the most economic rate.
Interchange plus pricing was historically offered to businesses with a certain processing volume; however, as the acceptance of credit cards has become ubiquitous in the market, merchant account pricing has become increasingly competitive. Now many merchants are offered the Interchange Plus pricing structure as an option for their business.
In most cases, Interchange Plus is a very straightforward and transparent method of pricing. It is a simple cost-plus structure in which the merchant services simply passes through the interchange rates (the wholesale rates) and add on their “plus” fees. There is often a transaction rate added and a per transaction fee, so you may see the pricing listed as interchange plus 0.75% and $0.30 per transaction.
Keep in mind that while Interchange Plus is a very transparent pricing model, there can be hidden costs buried in the interchange fees, so it is important to review your statements carefully and compare them to the published interchange fees.
Educating yourself on the different pricing models for payment processing lets you pick the best option for your business. If you are interested in learning how ChargeLogic can help you get the best rate and services for your business, contact us for a quote.