As a business owner, it’s easy to feel like you’re getting ripped off by your payment processor. But this doesn’t have to be the unfortunate reality of running your business. Yes you need processing, but you do NOT need to get ripped off for it. In the credit card processing industry, there are two prevalent forms of payment for merchants: interchange plus pricing and tiered pricing. Wondering which payment processing method is right for your business? Keep reading.
Before we analyze the two biggest forms of payment, you need to get the skinny on the backbone of credit card processing: interchange. Interchange is the direct cost of credit card transactions. Whether the card is swiped or keyed in, there are always rates associated with it. The rates are the same across the board for every provider because they are set by the credit card companies themselves.Twice per year the major card brands (Visa, MasterCard, and Discover) announce their schedules of fees, and the various categories that credit card transactions can fall under. An entire transaction rate is determined based on the criteria outlined in these fee schedules. Currently, there are over 500 interchange fee categories between those big three head honchos. You can take a peek at Visa’s current schedule to see how this looks. If you understand how these schedules can affect your merchant account, you can save yourself a lot of money. All right, now we can talk about pricing.
Most businesses are on tiered merchant accounts, which can often be unclear and expensive when compared to the newer pricing models. (Hello, that’s where Centurion Payments comes in.)
Tiered merchant accounts work on something called “qualification” to determine which rate tier a merchant’s transaction falls into. The “qualifications” are implemented by the credit card processors; the credit card companies do not distinguish a qualified, mid-qualified, or non-qualified card. This is just another way for merchant services providers to profit from your business’ volume. The different tiers can also be referred to as bins, rate buckets, or just plain old buckets. A really simple example of tiered pricing will look something like this:
Qualified Discount Rate: 1.XX%
Mid-Qualified Discount Rate: 2.XX%
Non-Qualified Discount Rate: 3.XX%
However, it’s usually not that simple whatsoever. There are numerous in-between tiers, and differences between credit and debit charges on top of that. The qualified discount rate represents the lowest fees a merchant can pay. Oftentimes a merchant provider will consistently only advertise the lowest qualified rate, even if your transactions don’t fit into this tier. Some tiered accounts have as many as 12 or more additional tiers on top of the lowest qualified discount rate, which is completely confusing and tedious to try to understand.
Merchants rarely see that lowest qualified rate though, which is the problem with tiered pricing. Transactions are downgraded to a lower level of qualification, so the merchant loses more money in the transaction. Downgrades can be caused by simple nuances, such as type of card, brand of card, whether it’s a private or business card, whether it’s a rewards card or cash back card, and other small things like that.
So business owners tend to get the short end of the stick because they can’t exactly decide what kind of card their customers use. They end up having to pay unnecessary fees each time a customer pays with a card that doesn’t fall into that merchant account’s qualification.
To add even more salt to the wound, how that card is processed matters just as well. If you key in the credit card number rather than swiping the card, this can cause a downgrade too. It’s almost impossible to estimate which rate bucket a transaction will fall into until after the transaction is already done. Sounds awful, doesn’t it?
Interchange Plus Pricing
Until recently, interchange plus pricing accounts have only been open to businesses with high transaction volumes— around $25,000. However, the industry is changing and now smaller businesses are gaining access to these accounts on this pricing structure.
This type of payment method is pretty straightforward. You only have two rates from the credit card processor in addition to interchange: the markup percentage fee and the transaction fee. Merchants pay a consistent flat rate, regardless of the wholesale processing rate, in addition to a fee per transaction. A simple pricing plan based on this method will look something like this:
Interchange fee from Visa, MasterCard, and Discover
Interchange markup rate: 0.30%
Transaction fee: $0.40