By far one of the biggest decisions your business can make regarding how to process payments is the pricing model you choose. Knowing how payment processing costs affect your bottom line can help your finances in the long run. There are primarily two pricing models that most payment processing companies use: Tiered Pricing and Interchange Plus Pricing. Though they seem similar at a glance, they are quite different in terms of transparency, complexity, and cost.
Pick the wrong pricing model and you could end up paying higher fees and be subjected to unpredictable charges that eat into your margins. Here, let us review the difference between tiered and interchange plus pricing, examine how they affect your merchant fees, and how to choose the right model. Whether you’re just getting started or evaluating your payment processor, knowing these models will have you making an informed decision and a move toward optimization of your payment processing expenses.
What Is Tiered Pricing in Payment Processing?
Tiered pricing is a pricing model used by payment processors to categorize transactions into different tiers, each with its own associated fees. This model is to make payment processing charges easier for merchants to understand by consolidating transactions into three generalized categories: Qualified, Mid-Qualified, and Non-Qualified. There are different rates associated with the special offers, with the lowest rates reserved for “qualified” transactions, and the higher ones assigned to non-qualified transactions.
How Tiered Pricing Works?
Payment processors sort transactions according to three primary categories under tiered pricing:
- Qualified: These are the most inexpensive transactions to process and are billed. These are typically payment card transactions using standard credit cards.
- Mid-qualified: Transactions in this level will normally be a bit pricier than those in the Qualified tier, mainly because additional expenses like rewards cards or transactions processed without any specific parameters the processor prefers. For instance, a card added for an international purchase may fall into this category.
- Non-Qualified: This tier applies to transactions that are harder or more expensive to process. There are some business, corporate, and high-rewards cards in this category. These are the transactions with the most expensive processing fees.
Let’s say a merchant runs 1,000 transactions in a month. Under the tiered pricing, it could go something like this:
- Qualified: $0.25 each on 800 transactions
- Mid-Qualified: 150 transactions at $0.50 each
- Non-Qualified: 50 transactions - $1.00 each
This pricing scheme lets the merchant estimate their monthly fees according to the volume and variety of transactions they anticipate they will make.
Advantages of Tiered Pricing for Businesses
Now, let us understand the advantages of tiered pricing for businesses:
- Cost Predictability: Merchants can have more predictable figures to work with on a monthly basis, knowing what the monthly charges will be. They will also be able to estimate their costs more precisely by knowing the percentage of transactions in each tier.
- Simple pricing: For merchants that don’t need to be concerned with the nuances of per-transaction fees, the tiered pricing model can be easy to understand. The fees are broadly structured into a handful of categories.
Common Use Cases for Tiered Pricing
Tiered pricing is ideal for small to medium sized businesses who require a simpler methodology of charges. It’s an especially good option for businesses that have a consistent flow of consumer credit card transactions and want predictable monthly costs. It’s also popular with businesses that don’t process high volumes of transactions or merchants that process many different types of credit cards, like a retail shop, a restaurant or an online store.
What Is Interchange Plus Pricing?
Interchange Plus Pricing is a method of payment processing in which a business pays the direct interchange fees established by the card networks (like Visa, MasterCard, or American Express) plus a markup fee from the payment processor. The markup is the processor’s cut for processing the transaction and can be in the form of a fixed percentage or flat rate added to the interchange cost. This model is particularly known to provide great transparency and fair pricing compared to tiered ones, listing the interchange rates and the processor’s markup separately, allowing you a better understanding of costs.
How Interchange Plus Pricing Works?
In the interchange plus system, businesses are billed in two components:
- Interchange fees: These are the fees set by the card networks (Visa, Mastercard, etc) and which can differ based upon these such as card type, volume of transactions, and risk level. These fees are not managed by the processor, but rather are sent as billed to the merchant.
- Markup: This is the fee the payment processor charges on top of the interchange fee for its services. What is normally charged? Another point-of-sale fee is a flat cut that isn’t a percentage, but it is typically the same for all transactions and prearranged with your processor.
For a transaction where the interchange fee is $0.30 and the markup fee is $0.15, the total transaction fee would be $0.45. The merchant pays the actual interchange fee plus the processor’s markup.
Transparency of the Interchange Plus Model
One of the greatest benefits of interchange plus pricing is the transparency. The fact that interchange and processor markup are separate means that merchants can easily understand the cost of each transaction and the way that their fees are determined. This type of transparency enables businesses to make better-informed decisions around processing payments; they can monitor changes in interchange fees over time, and they know what they’re paying for.
Advantages of Interchange Plus Pricing for Businesses
Now let us understand the advantages of interchange plus pricing for businesses:
- Visibility Into Costs: Interchange plus pricing enables merchants to clearly observe the cost of every single transaction, comprising the card network’s interchange fee and the processor’s markup. This visibility helps companies know their charges more clearly.
- Direct Pass-Through of Interchange Fees: Interchange fees are passed through without markup on a merchant statement. The upshot is that businesses are only paying for what the card networks charge, which can, in theory, mean lower costs overall, especially for companies that handle lots of transactions.
Common Use Cases for Interchange Plus Pricing
For small to medium businesses, high volume merchants, and those with more complex payment processing needs. It’s also great for businesses that want to know what their cost will be and track how the pricing is derived. A few e-commerce companies and B2B enterprises with varied types of payment and international transactions advantage from this model because it is flexible. For companies that handle large volumes of transactions, interchange plus can result in notable savings in the long run.
Pros and Cons of Tiered Pricing for Businesses
Pros of Tiered Pricing
- Predictable Monthly Fees
One of the main advantages of tiered pricing is the predictability of monthly fees. With transactions grouped into categories (Qualified, Mid-Qualified, Non-Qualified), businesses can estimate their payment processing costs more easily. This can be particularly helpful for budgeting purposes, as businesses know upfront what to expect based on their transaction volume. - Suitable for Smaller Businesses with Low Transaction Volume
For smaller businesses with relatively low transaction volumes, tiered pricing offers a simplified pricing structure. Since these businesses typically have more straightforward transaction patterns (such as in-person, low-risk payments), they are more likely to qualify for the lowest-tier rates, keeping their overall payment processing costs low and manageable. - Easier to Understand for Merchants with Little Expertise in Payment Processing
Tiered pricing is often seen as a user-friendly model, especially for business owners who aren’t well-versed in the complexities of payment processing. The set tier structure makes it easier to grasp compared to the more detailed, transparent models like interchange plus pricing, which can be difficult to follow without a good understanding of interchange fees.
Cons of Tiered Pricing
- Potentially Higher Fees for Certain Transactions
The downside of tiered pricing is that businesses may face higher fees for certain types of transactions, particularly non-standard payments such as online transactions or international payments. These transactions often fall into the higher-cost Mid-Qualified or Non-Qualified categories, which may be much more expensive than anticipated. - Lack of Transparency Regarding the Actual Cost Breakdown
A significant disadvantage of tiered pricing is the lack of transparency. Since the processor bundles fees into a fixed rate per tier, businesses have little visibility into how much of their costs are attributable to interchange fees versus markups. This lack of breakdown can make it difficult to assess whether they are paying a fair price or if they could negotiate better terms. - Harder to Optimize for Businesses with Varying Transaction Volumes
Businesses with fluctuating or seasonal transaction volumes may struggle with tiered pricing. If a business’s transaction volume spikes unexpectedly, it could push more transactions into higher-cost tiers, increasing the overall processing costs. This makes it more challenging to optimize costs compared to a more flexible pricing model, like interchange plus.
Pros and Cons of Interchange Plus Pricing for Businesses
Pros of Interchange Plus Pricing
- Transparent Fees and Costs
One of the key benefits of interchange plus pricing is the clarity it offers. Businesses can easily see the interchange fees set by the card networks, plus the markup added by the processor. This level of transparency allows businesses to understand exactly what they are paying for, eliminating any hidden fees or complex pricing structures that are often found in other models. - Lower Overall Transaction Costs for Businesses with High Transaction Volumes
For businesses that handle a large number of transactions, interchange plus pricing can be a more cost-effective solution. Since interchange fees are passed through directly without a large markup, businesses with high transaction volumes can benefit from lower overall costs compared to models like tiered pricing, where fees can quickly escalate. - Allows Businesses to Track and Understand Fees in Real-Time
With interchange plus pricing, businesses have the advantage of being able to track and monitor fees in real-time. This means businesses can see the breakdown of each transaction, including the exact interchange fee and markup, making it easier to track expenses, identify inefficiencies, and manage payment processing costs over time.
Cons of Interchange Plus Pricing
- More Complicated Structure and Harder to Predict Monthly Fees
The main downside of interchange plus pricing is its complexity. Since businesses are charged based on the actual interchange fees and the markup, monthly processing costs can fluctuate, making it harder to predict what the exact fees will be. This can create challenges for businesses that need a more predictable pricing structure. - Businesses May Need More Understanding of Interchange Fees
To make the most of interchange plus pricing, businesses must have a solid understanding of interchange fees. These fees can vary significantly depending on factors like card type (credit vs. debit) or transaction method (in-person vs. online). Businesses that lack expertise in payment processing may find it difficult to navigate this model without additional support or education. - Possible Fluctuations in Costs Based on Card Type and Processing Volume
Since interchange plus pricing directly passes through interchange fees, businesses may experience fluctuations in costs depending on factors like the type of card used, transaction method, or overall processing volume. For instance, high-risk transactions such as international or rewards card payments may incur higher interchange fees, increasing the cost for the business.
Conclusion: Difference Between Tiered and Interchange Plus Pricing
When determining which pricing model is the best for payment processing, learning the standout differences between tiered pricing and interchange plus pricing will be valuable for your business.
Tiered pricing is easier for most merchants to comprehend, and has predictable costs, which can be useful for businesses with low transactional volumes. But it can hide the real cost of processing, leading you to pay inflated fees for some types of transactions. Conversely, interchange plus pricing provides better transparency by passing the actual interchange fees directly with a set markup, which may result in lower costs for businesses with larger trading volumes. But this would probably also make the model much harder to interpret and predict.
The right option for your business will depend on a number of factors, such as the volume and average size of your transactions and whether they are primarily online or in-person. In order to make the best decision, however, you need to do a critical assessment of what your business actually requires, and potentially seek the help of an expert payment processor. A processor who knows their models can help you make sense of the complexity of both models, and point you to the most affordable solution and make sure you’re not being overcharged for payment processing.
Frequently Asked Questions
Q1: Is interchange plus pricing always cheaper than tiered pricing?
Not necessarily. While interchange plus pricing can be more cost-effective for businesses with high transaction volumes, tiered pricing might be cheaper for smaller businesses with lower volumes. The best model depends on your specific transaction patterns and volume.
Q2: How can I find out which pricing model my business is on?
You can typically find out by reviewing your merchant account statements or asking your payment processor directly. They should be able to clarify the pricing model you’re using and whether switching to a different model is possible.
Q3: What should I do if I want to switch my pricing model?
To switch your pricing model, contact your payment processor and ask about available options. Be sure to evaluate your business’s needs to ensure that the new model aligns with your transaction volume and business goals.
Q4: Can I negotiate interchange plus fees with my payment processor?
Yes, negotiating fees is possible, especially if you have a high transaction volume or are able to commit to a long-term contract. Many processors are open to discussing rates and fees to secure your business.
Q5: Does the type of business affect the choice between these two models?
Yes, the type of business plays a key role. For example, e-commerce businesses might benefit from interchange plus pricing, as it allows for better cost control. On the other hand, small, in-person businesses with lower transaction volumes may find tiered pricing to be a more predictable and manageable option.