by Ben Dwyer Tiered merchant account pricing is currently the most common form of pricing for credit card processing services. Tiered pricing is opaque, expensive and is the vehicle for many of the hidden fees that plague the credit card processing industry.
A more cost-effective, transparent alternative to tiered merchant account pricing is available to businesses that know enough to request it.
What is Tiered Pricing?
Tiered pricing is a merchant account rate structure that credit card processors use to assess charges. It is also referred to as bundled pricing because it allows processors to group (or bundle) interchange fees into general rate tiers of their choice.
Bundled or tiered pricing can be identified in a couple of different ways, the easiest of which is to look for the qualified, mid-qualified and non-qualified rate tiers after which the pricing model is named. However, this is not as foolproof of a method as it once was, as Visa has begun using “non-qualified” as one of its downgrade categories. We’ll come back to that later. For now, let’s look at some examples.
The sample statement below, taken from our article about how to read an Intuit merchant statement, provides a quintessential representation of how tiered pricing is shown on a merchant account statement.
The terms “qualified,” “mid-qualified” and “non-qualified” are often abbreviated. Be sure to look for variations of the terms when identifying tiered pricing. For example, the terms are abbreviated on Intuit merchant services statement above as “qual,” “mqual” and “nqual,” respectively.
In the absence of terms “qualified,” “mid-qualified” and “non-qualified,” tiered pricing can also be identified by a consistent set of rates across all card brands. These rates will generally be in the area of 1.65% – 3.25%, but may be higher or lower depending on how many tiers a processor is using. The sample statements below show examples of tiered pricing identified through consistent rates across all card brands.
In this processing statement, we see a rate of 2.00% for Visa, Mastercard and Discover.
This tiered processing statement shows a rate of 1.75% for Visa, Mastercard and Discover.
Finally, this tiered processing statement shows rates of 1.59%, 2.19% and 1.49% for various types of cards, but the rates are still consistent across all card brands. For example, the rate for MDBT (Mastercard debit) is 1.49%, and the rate for VDBT (Visa debit) is also 1.49%.
How Tiered Pricing Works
Tiered pricing allows a credit card processor to group numerous interchange fees into three or more general pricing tiers of its choice.
Interchange Fees
Before you can understand how tiered pricing works, you first have to have a basic understanding of interchange. Interchange rates are essentially wholesale processing rates that are paid to the banks that issue credit cards. For example, if a customer uses their Bank of America credit card to purchase gas, the gas station will pay an interchange fee to Bank of America through a credit card processor.
There are numerous different interchange fee categories. However, they are the same for all businesses and are determined on a per-transaction basis. The interchange category that a transaction will be placed into is not known until the transaction is actually processed. Several variables such as card type (credit or debit), card category (reward, standard, consumer, etc), transaction method (keyed, swiped, online..) and more all have an impact on which interchange category a transaction falls into.
All combined, Visa, Mastercard and Discover have several hundred different interchange categories. So, it’s not uncommon for a business to pay twenty or more different interchange rates throughout a typical month of processing.
Visa and Mastercard post interchange fee schedules online. Check out the interchange schedules for Visa and Mastercard by following these links to get an idea of how many fee categories exists.
See Visa interchange rates
See Mastercard interchange rates
Bundling Interchange Fees
When a business pays credit card processing fees via a tiered pricing model, it does not pay interchange fees directly. Instead, the business pays its processor’s tiered rates, and the processor pays interchange fees on the business’s behalf. This allows the processor to classify interchange fees under its own rate structure by assigning individual interchange categories to its qualified, mid-qualified or non-qualified pricing tiers.
The table below gives an example of how a processor might organize nine common Visa interchange categories under a tiered pricing model for a business that swipes most transactions. Actual interchange categories and fees are listed on the left, followed by the processor’s tiered rates in the center, and the markup the processor would earn on each transaction is on the right.
| Interchange Category | Interchange Fee | Processor’s Tiered Rates | Processing Markup |
|---|---|---|---|
| Retail Debit Reg. | 0.05% + $0.21 | Qualified: 1.69% plus $0.25 | 1.64% + $0.04 |
| Retail Debit Unreg. | 0.95% + $0.20 | 0.74% + $0.05 | |
| Visa CPS/Retail | 1.51% + $0.10 | 0.18% + $0.15 | |
| CNP Debit | 1.60% + $0.15 | Mid-Qualified: 2.25% plus $0.31 | 0.65% + $0.16 |
| Rewards I | 1.65% + $0.10 | 0.60% + $0.21 | |
| Retail Key Entry | 1.80% + $0.10 | 0.45% + $0.21 | |
| Business Card – Retail | 2.20% + $0.10 | Non-Qualified: 3.35% plus $0.31 | 1.15% + $0.21 |
| Signature Preferred | 2.10% + $0.10 | 1.25% + $0.21 | |
| Corporate Card – Retail | 2.10% + $0.10 | 1.25% + $0.21 |
As you can see by this example, interchange rates are substantially lower than the processor tiered rates, and the processor’s markup varies widely depending on which tier the processor uses for each interchange category.
Why Tiered Pricing is Bad
The only benefit to tiered pricing is that it presents rates and fees in a simple, easy to read format. However, the simplicity of this pricing model makes it opaque and, in the hands of greedy processors, expensive.
It’s Expensive
Credit card processing can be a lucrative business when a processor’s customers can’t tell if they’re paying a reasonable markup or being gouged. The reasons outlined below combine to make tiered pricing a costly pricing model. At CardFellow, businesses save between 40% – 50% on credit card processing charges by switching to a more competitive pricing model.
Conceals the True Cost of Processing
As you can see from the example table above, a processor doesn’t disclose the actual cost. Instead, only the processor’s qualified, mid-qualified and non-qualified rates are visible. By hiding interchange fees, a business is never shown the actual cost of its processing. Thus, the processor has the ability to charge markups that are often exorbitant.
Increased Cost, Same Rates
Tiered pricing makes it possible for a processor to increase a business’s processing cost without increasing its rates. Processors accomplish this by routing a greater number of interchange categories to the more expensive mid and non-qualified pricing tiers. For example, compare the table below with the table posted earlier in the Bundling Interchange Fees section above.
| Interchange Category | Interchange Fee | Processor’s Tiered Rates | Processing Markup |
|---|---|---|---|
| Retail Debit Reg. | 0.05% + $0.21 | Qualified: 1.69% plus $0.25 | 1.64% + $0.04 |
| Retail Debit Unreg. | 0.95% + $0.20 | 0.74% + $0.05 | |
| Visa CPS/Retail | 1.51% + $0.10 | 0.18% + $0.15 | |
| CNP Debit | 1.60% + $0.15 | Mid-Qualified: 2.25% plus $0.31 | 0.65% + $0.16 |
| Rewards I | 1.65% + $0.10 | Non-Qualified: 3.35% plus $0.31 | 0.60% + $0.21 |
| Retail Key Entry | 1.80% + $0.10 | 0.45% + $0.21 | |
| Business Card – Retail | 2.20% + $0.10 | 1.15% + $0.21 | |
| Signature Preferred | 2.10% + $0.10 | 1.25% + $0.21 | |
| Corporate Card – Retail | 2.10% + $0.10 | 1.25% + $0.21 |
Notice that the processor’s rates are exactly the same in both tables. But in the second table the processor considers more interchange categories to be non-qualified. This results in the business paying more even though the processor’s ‘rates’ are exactly the same in both cases.
Allows Processor to Keep Refund Credits
When a business refunds a customer for a credit or debit card transaction fees, the business is supposed to receive a credit for a portion of the interchange fees paid on the original transactions. For example, an online business receives a credit of 2.05% on interchange fees for a returned transaction involving a traditional consumer credit card.
Since interchange categories are bundled on tiered pricing, interchange credits are not passed to businesses. Instead, processors simply keep interchange credits as additional revenue.
Inconsistent Markup
As you can see from the two example tables above, tiered pricing results in a different markup for each individual interchange category. The sporadic markup and inconsistent qualification associated with tiered pricing makes it impossible to compare among processors.
Lost Durbin Savings
The Durbin Amendment that took effect on October, 1 2011 capped the interchange fee that large banks could charge at just 0.05% plus $0.21. The law capped interchange fees at the card-issuer level, not at the processor level.
This means that any business being billed via tiered pricing will pay its processor’s qualified rate instead of the newly capped rate of just 0.05%. The per-transaction loss is substantial when considering that qualified rates are typically 1.65% or higher.
Visa’s Non-Qualified Downgrade
As noted earlier in this article, it used to be that the presence of a “non-qualified” charge on a credit card processing statement indicated tiered pricing. Visa has complicated that by naming one of its “downgrade” categories “non-qualified.” What that means is that there can be a legitimate “non-qualified” charge on your processing statement that isn’t controlled by your processor.
However, the rule of thumb remains – if you’re seeing “non-qualified” on your statements, you’re overpaying one way or another. Whether it’s from your processor utilizing a tiered pricing model or because your transaction failed to meet criteria for target interchange and thus “downgraded” to non-qualified, you paid more than you had to.
You can read more in our article on credit card processing downgrades.
Alternatives to Tiered Pricing
Interchange plus pricing is the most desirable form of credit card processing pricing because it is relatively inexpensive, transparent, and easy to reconcile. Unlike tiered pricing, interchange plus functions by billing interchange fees directly to businesses. Interchange plus is often referred to as interchange pass through for the way that interchange fees are passed directly to businesses.
With interchange plus pricing, a processor makes money by charging a fixed percentage over actual interchange rates. The markup stays the same regardless of the type of card or how a transaction is processed. The result is a low consistent markup over actual cost.
The transparency and competitiveness that interchange plus provides make it an ideal pricing model for most businesses. For this reason, it’s the only form of pricing that we allow credit card processors to quote in CardFellow’s marketplace. Sign up for free at CardFellow to receive instant competitive credit card processing quotes.
