Let’s face it, credit card processing fees are a necessary evil. No one likes giving away a portion of their hard-earned revenue. Credit card processors have also played their part in contributing to an already negative sentiment. It is perhaps one of the only industries with a worse reputation than used car dealerships. Processors promise an unbelievably low rate, knowing full-well that youwill never actually pay that rate. Oftentimes, statements are intentionally confusing and complex, designed to make it difficult for the untrained eye to calculate what they are truly paying.
In previous posts, we've covered how credit card processing works and the difference between interchange plus pricing and flat credit card rates. This post outlines tiered pricing - a third type of credit card processing that's easily the most disadvantageous for merchants. If your business is currently on a tiered pricing structure, you’re likely paying more than you think you are and more than you should be.
How Tiered Pricing Works
Regardless of which processor you use, you always pay the same interchange rates as defined by credit card companies like Visa and Mastercard.
With tiered credit card rates, the credit card processor bundles the interchange rate into a variety of buckets, or tiers. Processors can create as many tiers as they want, but a three-tiered system is the most common.
Typically, the three tiers are qualified, mid-qualified, and non-qualified. The processor sets the rates and fees for mid- and non-qualified payments as they see fit.
That is why this pricing model is tricky and dishonest. Not only are the criteria and rates for each tier subjective, but also the entire tiered system was made up by credit card processors. Visa and Mastercard do not even recognize the tiered credit card processing model. As far as the credit card companies are concerned, there is no such thing as a mid-qualified or a non-qualified transaction.
If you have a tiered pricing model, your processor probably told you that your rates will be as low as, say, 1.59% +$0.05 per transaction. That's a great rate! However, that number is really just your rate for qualified transactions. It's very likely that most of your transactions each month will fall into the processor's mid- and non-qualified tiers, which means you pay the subjectively assigned rates for those tiers and not that too-good-to-be-true rate after all.
A tiered pricing model could look something like this:
- Qualified = 1.59% + $0.05. This only applies to transactions when a major credit card is used and the card is swiped.
- Mid-Qualified = 2.00% + $0.10. This rate is applied to all transactions in which a rewards card, or a non-major credit card (like a corporate card) is used.
- Non-Qualified = 2.59% + $0.15. This rate applies to all keyed-in transactions and all transactions that do not fit the criteria your processor has set for qualified and mid-qualified transactions.
Your effective rate is the total amount you pay in fees relative to the amount you sell in a given month (Download this free credit card rate calculator to quickly calculate your effective rate). So, if you were expecting the promised “as low as” rate, the actual amount you pay every month will be much higher than you expected. How much more you’re paying each month depends on the number of each type of transaction you process and how your processor defines each tier.
To illustrate this metaphorically, let’s use this model in the context of rental cars. There is a new rental car company that is offering its cars for $25 per day (the qualified plan). In the fine print, it notes that this rate only applies if you drive less than 25 miles before returning the car. For each mile that you drive beyond 25 miles up to 50 miles, you pay an extra $0.50 per mile. This is your mid-qualified rate. For distances beyond 50 miles, you pay an extra $1.50 per mile. This is your non-qualified rate. Throw in a slew of confusing verbiage, miscellaneous addendums, and sneaky hidden fees and you’ve got a pricing model that resembles tiered credit card pricing.
Additional Tiered Pricing Issues
Since the individual processor sets the rates and the criteria for which transactions fall under each tier, the tiers are inconsistent among different processors. This makes it nearly impossible to compare rates from different processors. A corporate card, for instance, might fall under the qualified tier with one processor, while other processors consider the same transactions mid- or non-qualified.
If all this wasn't confusing enough, the processor can change their criteria at any time without notifying you and adjust the rates and fees associated with each tier at any time! It is not uncommon for merchants to receive a message from their processor like this one, with little advanced notice.
These changes are not driven by any fluctuations in the actual interchange rates; they are completely and autonomously applied by the processor.
What You Can Do About It
Since tiered pricing is created and controlled by individual credit card processors, there is very little you can do to improve your rates if your processor uses the tiered model.
Merchants should make sure that they understand the criteria for each tier and that they take the time to carefully read and decipher their statements at the end of each month.
Merchants should also check-in with their processors regularly to find out if and how the tiered criteria has changed.
Honestly, the only real solution is to abandon the tiered system entirely. The best thing that you, the merchant, can do is find a different credit card processor who doesn’t operate on a tiered pricing model. In the past, interchange plus and flat rates were only available to established businesses with a very high volume of monthly credit card sales. Due to increased competition in the credit card processing industry in recent years, that is no longer the case. Interchange plus rates are now available to everyone. Some processors also offer flat credit card rates to new businesses and those that do a low volume of monthly credit card transactions.
No matter what a processor or sales representative might tell you, tiered pricing is not your only option. Make sure that you do your own research and talk to a variety of processors to determine which rate structure and processor is the best option for your business.