Credit Card Processing: Pricing Structures

Choosing the wrong processing company can be a costly mistake – but choosing the right one, with the wrong pricing structure can cost you just as much. When it comes to credit card processing, there are a few different pricing structure’s businesses could be presented with. Here, we’ll take a brief look at each of them and see which one might be the best fit for your company.

Interchange Plus (Cost Plus or True Cost)

Interchange plus pricing, sometimes called “cost plus” or “true cost” pricing, is a pricing model in which the business pays the “True Cost”, which is delegated by the card brands (Visa, MasterCard etc..) and a mark-up which is the percentage that you would be charged by your processing company. For example, if the interchange fee is 1.5% and the processor’s markup is 0.50%, then the merchant would pay a total of 2% for that transaction. The processor will typically also charge additional fees, such as transaction and monthly fees, so its important to ask about all fees before signing up for an account.

Interchange plus pricing is widely regarded as the most transparent pricing model. While it’s not impossible for processors to hide fees or surcharges, it is a lot harder then it is with other pricing models, like Tiered pricing.

In general, merchants on Interchange Plus programs both pay less on average and have a much better idea of what they’re paying for on each transaction, making it easier to comparison shop for credit card processing services.

Tiered Pricing (Bundled)

Tiered Pricing or “bundled pricing” is a simplified model used by credit card processors to assess charges to merchants. It’s also known as bundled pricing because it bundles interchange rates into general categories, which can range in price anywhere from 1% to 7%+.

These categories, commonly known as “Qualified”, “Mid-Qualified” and “Non-Qualified” are used as buckets to separate the different types of credit cards and different methods of acceptance.

Qualified Rate: The lowest of the three, with rates often falling somewhere between 1.5% and 2% (but can often be as high as 3%+) and is generally used to classify card present transactions made with debit and non-reward or non-corporate cards.

Mid-Qualified: This is the second tier with rates often falling somewhere between 2% to 3%+ and is generally used to classify transactions using cards with loyalty, rewards, cash back, points etc.. Because of the benefits being collected by the card holder, these cards incur a higher rate then the qualified tier.

Non-Qualified: The third and final tier with rates falling somewhere between 2.5% and 4%+ and is generally used to classify card-not-present transactions, as well as transactions made with corporate, international, and high-level rewards cards. Because of the higher risk nature and benefits of these cards, they incur the highest fees.

Tiered pricing is very common because of how simple it is, but be aware that this simplicity comes at a cost. The terms “Qualified”, “Mid Qualified” and “Non-Qualified” are not terms that are recognized by the card brands (Visa, MasterCard etc..), they are entirely invented by the processing companies and how each transaction or card type is qualified, is entirely at their discretion.

Businesses on Tiered programs are often paying well above what the interchange rate is on each individual transaction.

Flat Rate

Flat rate pricing is a simple and popular pricing structure but can easily be on the more expensive end. With flat rate pricing, merchants are charged a single, fixed percentage of the transaction amount, regardless of the card type used. Typical flat rates range anywhere from 2.6% to 3% for card present transactions. More often than not, companies that offer a flat rate also have a card-not-present rate that sits somewhere around 3.5%+.

The simplicity of these programs can be an appealing option for some businesses, but it’s important to understand that you’re often paying well above what the interchange rate is for each individual transaction. If you’re a small business (less than $1,000/month in credit card volume), then there’s no doubt that a flat rate program could benefit you, given that flat rate programs often come with minimal to no monthly fees, but if you’re a business doing more than that, the more you do, the less appealing the flat rate program becomes given the higher percentage.

If minimizing your cost is the goal, you’re better off exploring a different program.

In conclusion

Examining your credit card processing rates and fees can be overwhelming and confusing but it’s important that you understand how you’re being charged. Don’t hesitate to contact us if you need help deciphering your statement or determining which structure is right for your business. We’re happy to offer our expertise and guidance!