Most people believe the price of credit card processing (also called non-cash payment
processing) is complicated. Taken as a whole, it can be bewildering until you break the
processing pricing down and understand the components that make up the pricing schemes.
With each instance of accepting credit card payments, there are a number of calculations and processes initiated that add up to the entire amount charged for any swipe or transaction.
In fact, a transaction is really defined as any interaction between you as the merchant and the processing bank. If a card is declined, you as a merchant still pay a transaction fee; likewise, when you close your account batch at the end of a day, you might also pay a transaction fee. Add these factors to others, such as your type of business and industry, the card used for the purchase, online transactions and many others also affect how the transaction is categorized and charged to you.
The overall system of categorizing transactions is referred to as interchange and the
associated fees for interchange form the basis for all online credit card processing fees. Visa,
MasterCard and Discover revise their fee schedules in April and October every year and
provide an updated list of categories under which their credit card processing transactions
fall. In addition, the banks issuing the cards have a say in how the transactions are directed,
making it daunting to figure out what is really the best tiered pricing scheme for your
business.
Tiered/Bucketed/Bundled Pricing
Most businesses use three-tiered merchant service accounts and these are confusing and
more expensive than the interchange plus pricing plans. Six tiered pricing (separate buckets
for credit and debit transactions) are also coming into popularity.
Tiered (also called buckets, rate buckets, bins or bundled) pricing merchant accounts base
their pricing on a set of qualifications for each instances of processing credit cards. At the
most simplistic level, the tiers look something like this:
Qualified discount rate: 1.xx%
Mid-Qualified discount rate: 2.xx%
Non-Qualified discount rate: 3.xx%
When you’re shopping for a merchant services provider, they always quote the qualified
discount rate, as it’s the least expensive for you. However, in reality, the card brands and the
banks work to move your transactions into higher priced categories and you are pretty much
helpless to appeal their decisions.
Buckets of Inconsistency
Merchant services providers are notorious for making their buckets or tiers “apples to
oranges” with other processors so that you find it impossible to compare tiered pricing
credit card processing quotes. Tiered pricing gives the processor free rein to adjust their rates behind the scenes so they covertly raise your costs without overtly raising your rates. This occurs by routing your incoming interchange fees to higher priced mid- or non-qualified tiers. With no standards over interchange qualification, it’s effectively impossible to accurately compare tiered pricing schemes from processor to processor.
Here’s a fictitious example of tiered pricing quotes from two different merchant service
providers:
Provider #1
Qualified rate: 1.48%
Mid-qualified rate: 2.58%
Non-qualified rate: 2.99%
Provider #2
Qualified rate: 1.68%
Mid-qualified rate: 2.26%
Non-qualified rate: 2.48%
On the surface, Provider #1 offers a much better deal on the qualified rate but you can’t
know how many interchange categories will be directed to that tier. If Provider #1 routes
most of your transactions to the mid- or non-qualified tiers, that makes Provider #2 a better
alternative. Unfortunately, you really can’t tell much by just looking at their quotes
superficially. Experience with each provider may be the only way to understand their pricing
in action.
Action – Whether you should select tiered pricing or interchange plus pricing for your
business depends on many variables. Get a free, no obligation analysis and comparison of
processing rates for your business by contacting Sales Sense Payments at 585-704-6453
today.