Credit Card Processing Rate Structures – Which is the Best Fit for Your Business?

Do the terms interchange, flat-rate, tiered and cost-plus have your head spinning? If so, you are not alone. Even seasoned merchants who have been utilizing a merchant account for years may not have clarity on what their credit card processing rates actually equate to, or what rate structure makes the most sense for their business. This article will explain what some of the most common rate structures for credit card processing are, and why particular rate structures may or may not be beneficial to a merchant’s business.

Interchange

Let’s start with the basics. All rates, regardless of how they are structured, include a fee component called interchange. Interchange is one of those fees that cannot be changed by the credit card processor, no matter how hard they try. At the beginning of interchange implementation, the banks stated that interchange was developed to reimburse issuing banks for lost interest due to cardholders’ grace periods. Today, Visa states that interchange is used as a transfer fee between acquiring banks and issuing banks for each transaction. Interchange fees are set by the card issuer banks and consist of  several different rates depending on what type of transaction is run. Interchange fees can run anything from 2.95% to less than one percent.

This means that Visa and Mastercard run the show when determining the largest portion of fees that the merchant pays when a customer utilizes their credit card. When I say that there are several different types of interchange fees, I mean SEVERAL. Take a look at the Visa link below to view examples of how interchange fees vary depending on whether a card is present, not present, the type of business transaction that occurs, and the list goes on and on.

https://usa.visa.com/content/dam/VCOM/download/merchants/visa-usa-interchange-reimbursement-fees.pdf

Flat Rate or Fixed Pricing

Now that you have an understanding of interchange, let’s start with an explanation of the least complicated rate structure – flat rate pricing. Flat rate is just what is sounds like. One flat rate for all of your consumer’s transactions. It doesn’t matter if your customer is swiping their Visa, Amex or Discover card to purchase that shiny new item. You, as the merchant, will be charged the same rate no matter what the type of transaction is. Easy to understand, right? Even though this rate structure looks nice and clean to the business owner, it may be hiding some very high fees that could be avoided altogether.

The main caveat with flat rate pricing is that processors can pad the interchange (more on this later) and charge the merchant more of a transaction fee than they realize. You won’t be able to determine what your current interchange rates (which can change twice a year) are by looking at your statement or what fees you are getting charged for each type of transaction. The main pro to flat rate pricing is that there are no surprises when it comes to this type of rate, but the primary con is that you may be paying much more than necessary. Many of the well-known payfacs such as Square utilize flat rate pricing.

Interchange Plus Pricing

Interchange plus pricing is also known as interchange pass through pricing. This type of pricing is much more transparent than flat rate pricing, as the per-transaction cost paid by merchants is visible. The first portion of cost-plus pricing is interchange, which we had discussed previously. The second part of the fee that is called the assessment fee. These assessment fees are passed on from the card networks (Visa, Mastercard, Amex and Discover). Assessment fees reimburse the card issuers for the use of their cards, and are where the credit card associations make a profit (in comparison to their interchange fees). The third and last portion of interchange plus pricing is the processor markup. This is where there is some room for negotiation. Interchange plus pricing will be displayed as interchange + x (the markup). Generally, companies that are considered higher risk by the banks have a higher markup due to the increased probability of the bank taking a loss on the account.

The pros of interchange plus pricing are that the fees are extremely transparent, and the merchant can see the exact interchange cost for each transaction. Also, because the difference in types of transactions is accounted for, the merchant may save quite a bit of money. The primary con is that it can be a bit confusing to analyze processing statements, as interchange rates vacillate quite a bit. It can also be difficult to estimate costs upfront due to the numerous types of interchange that are charged for differences in transactions. However, this is typically the preferred pricing model for any seasoned merchant.

Tiered or Bundled Pricing

Tiered pricing is another one of those pricing structures that is broken down into components based on the type of transaction. Although tiered pricing is somewhat transparent, it is not as transparent as interchange plus. In tiered pricing, merchant rates are typically broken up into three tiers. These are known as qualified, mid-qualified and non-qualified. Let’s break down where each type of transaction gets categorized.  Qualified rates generally consist of debit cards, non-reward-based credit cards and chip inserted transactions. These types of transactions accrue the lowest fees, due to being the lowest risk. The second category is mid-qualified. This rate applies to membership rewards cards, and manually entered transactions, which we commonly see in mail order/telephone order purchases. The third, and highest priced category, is non-qualified transactions. These fees generally apply to high reward credit cards, card not present transactions and corporate cards.

One of the cons of tiered pricing is that some merchants do not disclose which debit and credit cards fall into each tier. For example, the debit card, which should be in the least expensive of the tiers, will be misplaced into the non-qualified tier, making transactions much more expensive than they should be. Another con is that it may be difficult to forecast how much you will be paying for credit card processing each month, as the types of transactions that customers have can vastly fluctuate month by month. The primary pro of tiered pricing is that the rates are straightforward and easy to understand. There are only three categories, so perusing statements and determining the breakdown of charges is easy to do.

Bottom Line

Choosing the correct pricing structure for your business can seem like a daunting task. However, gaining an accurate knowledge base is the first step in understanding what is right for your organization. 365 Glacier Payments offers a free savings analysis that provides a review of your rate structure and informs you of where you can cut costs on your credit card processing fees.  

365 Glacier Payments has over two decades of experience in providing high-risk merchants with credit card processing solutions, enabling business owners to meet their financial goals. If you have additional questions or are ready for your free savings analysis, please schedule an appointment here. If you prefer, you can reach us at 866.857.8766 or email info@365glacierpayments.com. We look forward to hearing from you!