When it comes to choosing a merchant services provider (MSP), one of the biggest factors to consider is pricing.
But with so many different factors involved—interchange rates, assessment fees, markup, tiers—it can be difficult to understand the true cost of payment processing. To make merchant account fees even more complicated, not all MSPs structure their pricing the same way.
So, how do you determine which pricing model is best for your business?
Unfortunately, payment processing services aren’t always clear about how they calculate transaction fees. But the more you know about common pricing structures, the better informed you’ll be when choosing a merchant services provider for your business.
This article provides a breakdown and comparison of interchange plus pricing vs. tiered pricing. Our goal is to help you understand these pricing structures, so you can determine which model is best for your business.
What Merchants Should Know About Payment Processing Costs
Before we dig into the details of these pricing models, let’s start with some basic FAQs.
What is interchange plus pricing?
Interchange plus pricing is a payment structure that bases transaction fees on the wholesale interchange rates set by credit card associations. Your MSP charges a fixed processing fee on top of the interchange rate. When interchange rates are lower, merchants pay a lower rate per transaction.
What is tiered pricing?
In the payment processing world, tiered pricing is a merchant account pricing model that calculates transaction rates according to three different tiers: qualified, mid-qualified, and non-qualified. A transaction’s tier is determined by several factors (like card type and payment method) and each tier has a unique processing rate associated with it.
What do transaction fees pay for exactly?
Although interchange plus pricing and tiered pricing are two different merchant account pricing models, they do have some important similarities. For instance, both factor in the cost of interchange rates as well as a separate payment processing fee for your merchant services provider (MSP). Interchange fees are collected by your MSP but ultimately paid to the credit card associations.
What are interchange fees?
Interchange fees are a variable cost that your MSP pays to credit card companies for processing card payments. Interchange rates are set by credit card associations and can vary over time and between different industries.
Who sets interchange fees?
It’s important to note that your merchant services provider has no power to increase or decrease interchange rates, as these fees are set by (and paid to) the credit card associations.
Why is it so important to choose the best pricing model for your business?
The differences between interchange plus and tiered pricing can have a significant impact on the rates you pay to process credit card payments. As your sales volume scales, so do your payment processing costs. So, the bigger your business, the more important it is to optimize the rates you pay per transaction.
Interchange Plus Pricing vs. Tiered Pricing: Which Is the Better Option?
Now let’s take a closer look at what interchange plus pricing and tiered pricing have to offer, as well as the top pros and cons of each.
A Closer Look at Interchange Plus Pricing
Interchange plus pricing is essentially wholesale interchange fees with a small, flat-rate markup. For example, depending on your industry, you might pay 1% interchange + $0.10 per transaction. While interchange rates are variable costs set by credit card associations, your markup fees are a fixed rate.
The Pros and Cons of Interchange Plus Pricing
What’s the biggest benefit of interchange plus pricing?
Whatever the interchange rate, markup fees remain fixed—so you’re always guaranteed fair, wholesale-based rates for every transaction. Looking for ways to reduce your merchant account fees? Interchange plus pricing is an affordable, transparent pricing model for eCommerce and omnichannel businesses, especially those with a high or rising sales volume.
Are there potential drawbacks?
Since wholesale rates are reflected in the fees, your payment processing fees fluctuate with changes to interchange rates. When rates are low, your fees are low; however, this also means that if interchange rates are higher, your fees will be higher, too.
A Closer Look at Tiered Pricing
Unlike interchange plus pricing, tiered pricing operates with a varied markup. Fees are determined by whether a transaction is considered qualified, mid-qualified, or unqualified; each transaction tier has its own associated rate.
Here’s what you should know about each of these tiers:
- Qualified transactions are billed at the lowest rate, which makes them the preferred transaction type for merchants. Payments made with non-reward consumer credit cards are the only transactions that can be classified as qualified.
- Mid-Qualified transactions receive the second-lowest rate. This tier typically includes standard consumer reward cards.
- Non-Qualified transactions are billed at the highest rate, which means they present the greatest risk to your bottom line. Certain types of credit cards—including international cards and high-level rewards cards—fall into the non-qualified tier. Additionally, card-not-present transactions (especially those that don’t include the billing address) are more likely to be rated as non-qualified.
The Pros and Cons of Tiered Pricing
What’s the biggest benefit of tiered pricing?
If you know which type of cards your customers use most, tiered pricing can mean more consistent payment processing costs. Each tier has its own processing rate, so you always know that you’ll be charged one of three rates for every transaction.
What are the drawbacks?
Depending on the types of transactions you process most often, tiered pricing can increase your costs and eat into your margins. This is particularly problematic if you process a lot of card-not-present transactions or international cards that come with a higher transaction rate.
With tiered pricing, your transaction costs are also impacted by downgrades. When a transaction is downgraded to a lower tier, you end up paying a higher rate for it. Transactions can be downgraded for a variety of reasons, such as using specific types of credit cards (including rewards cards and international credit cards).
It can be harder than it seems to qualify for lower rates. As a merchant, you can’t control what type of credit card your customers use to pay. Worst case scenario, you could even lose money on downgraded transactions.
The Difference is in the Markup
For tiered pricing and interchange plus pricing alike, transaction rates are a combination of interchange rates set by credit card associations along with your MSP’s processing fee. However, there’s a major difference between interchange plus and tiered pricing in how markup is calculated.
Regardless of pricing structure, interchange rates are variable. With interchange plus pricing, markup is a consistent fee on top of interchange; with tiered pricing, you’re dealing with the unpredictability of varying markup.
Remember, interchange plus pricing is based on fluctuating interchange rates plus a small, fixed markup for your MSP. So, any wholesale savings from lower rates are passed directly on to you as the merchant.
If your MSP uses tiered pricing, on the other hand, the markup can be much higher. Why? Because a low interchange rate doesn’t benefit you if a transaction is rated as unqualified—you’ll still have to pay the highest rate. In this case, any savings from low interchange rates are pocketed by your MSP.
So, which is best for your business? As a general rule, tiered pricing is a workable solution for new small businesses that don’t have a ton of sales. But for fast-growing businesses or those with high transaction volume, interchange plus pricing is the only way to get the best rates and transparent pricing on every sale.
Are You Getting the Best Rates for Your Business?
Now that you know the pros and cons of interchange plus pricing vs. tiered pricing, you can make an educated decision about which pricing structure is right for your business.
Remember to choose an MSP that offers transparent pricing that suits your business size, industry, and goals for growth. They should provide you with fast, reliable service as well as high-value features like chargeback alerts and next-day merchant account funding.
If your current provider isn’t offering fair, competitive transaction rates—or if they’re not willing to be transparent about their pricing model—it’s probably time to think about changing MSPs.
GetPayment will partner with your business to help you navigate the specifics of setting up the right type of merchant account, optimizing your revenue with interchange plus pricing, and scaling your business. To get started, contact GetPayment today to schedule your free consultation.