Interchange Pricing Vs. Tiered Pricing

Which pricing method is your best option; tiered pricing or interchange plus? Below is a comparison for you to review before you decide.

On a previous article, we compared Interchange Plus Pricing vs Flat Rate.

In this article the comparison will be for two common pricing models: Tiered Pricing and Interchange Plus Pricing (that we looked at previously).

Tiered Merchant Account Pricing

Tiered merchant account rates are determined based on qualification to see which rate tier a merchant’s transaction falls into. Here is a simple example:

  • Qualified Discount Rate: 1.XX%
  • Mid-Qualified Discount Rate: 2.XX%
  • Non-Qualified Discount Rate: 3.XX%

However, they usually are not that simple. There may be various additional tiers, including differences between credit and debit card charges.

Notice however that the Qualified Discount Rate represents the lowest fees a merchant can pay. Normally you will see the merchant service providers will advertise the lowest qualified discount rate.

Downgrades

Most businesses very rarely qualify for these low qualified rates and savings. More often transactions are downgraded to a lower level of qualification. This translates to a higher rate and fee. This means that your business will lose more money for each transaction. Downgrading a transaction is a benefit for the merchant service provider at a higher cost in fees to your business.

Transaction may be downgraded based on:

  • Type of card
  • The brand, whether it’s a private or business card.
  • A Cash back or Rewards card.
  • Other things are all handled differently by different account providers.

Unfortunately, you as a business owner don’t have the option of deciding what kind of card your customers pay with. You may end up paying unnecessary higher fees each time a customer pays with a card that does not fall into the merchant service providers strict qualifications for the best rate. Furthermore, the method used to charge a card matters.

How to help avoid causing a Downgrade

  • Avoid Keying in the credit card number, whenever possible swipe the card.
  • Verify the address of the card by asking the zip code to avoid a downgrade.

You, the merchant will pay fees based on criteria set by the merchant service provider to benefit the merchant service provider. These are set by the provider and are not based specifically on interchange fees that govern the wholesale price of the fee in the background.

Until a transaction is processed you will not know for certain which rate bucket a transaction will fall into. When using a tiered merchant account, it is almost impossible to avoid paying unnecessary fees.

As far as Pros vs Cons…

Pros:

  • Really, none for the Merchant

Cons:

Here a just 2 that stand out.

  • Since you cannot control the type of card your customer uses, you will not be able to avoid higher merchant fees.
  • Processor will retain the refund credit because they are seen as a bundle.

From our previous document, let’s review Interchange Plus Pricing.

Interchange Plus Pricing charges the Interchange cost plus a flat markup per transaction.

As a business owner you will be required to have a proper merchant account. Improper merchant underwriting may cause funds to be held, limiting your cash flow.

Interchange pricing will also give you interchange refunds when you give a customer refund for a purchase.

Interchange plus rates will give you a clear merchant statement with lower average transaction costs. This is because you will not have a higher flat rate for every transaction.

Pros:

  • There is no risk of held funds.
  • As a merchant you will receive true debit pricing.
  • Interchange is returned on refunds.
  • You receive cost effective wholesale pricing.
  • Your processor will take time to review your business and provide a long-lasting solution

Cons:

  • Interchange plus is tailored for each business, making the application process longer, onboarding can take 24 – 48 hours.
  • For a newer business with a lower volume of processing, you might not qualify for the individual merchant account. This would make Flat rate your best (or only) option.

For most businesses Interchange Plus Pricing is the better choice.