What Merchant Account Type Is Right For You?
Cost plus vs. tiered pricing is commonly misunderstood. If you’ve ever scouted for better credit card processing rates, you may have been asked by competing merchant account providers to present your previous months’ processing statements for them to analyze. When you get back quotes from these companies, you could see differences in cost from just a few tenths of a percentage point to hundreds of dollars a month in potential savings. If the rate you’re being quoted is approximately the same as the one you have right now, how is there such a discrepancy in numbers?
Enter one of the most misunderstood and potentially confusing parts of the payment industry: merchant account pricing and its various forms, most commonly appearing as Interchange Plus or Cost Plus Pricing versus Tiered Pricing structures.
Before we get into comparing and contrasting why one is better than the other, it should first be understood that one reason why there could be such a huge difference in cost from one account provider to the next is the way they have your company set up to process. If you’ve been with the same account provider for a number of years and your company has grown or changed substantially in your product offerings, location, or whatever, you should contact them first to review whether or not your processing is even set up to fit your business’s needs anymore. There are a lot of different factors that can influence the rate you are given by your merchant account provider:
- Type of card being used (a no-frills Visa card versus a Visa Rewards Card will process at different rate “buckets” or “tiers;” the interchange on a rewards card will be higher)
- The way a transaction is processed (swipe in-person, over-the-phone orders, keying in card number in-person, accepting payments online)
- The type of business accepting the card (are you selling high-risk, high ticket items? Is your business type historically prone to troublesome chargebacks?)
For example, if your business started out as an online store and you’re now open for business at your local shopping center processing face-to-face, you will save an incredible amount of money if you simply inform your merchant account provider of this change. Essentially, each transaction will cost you less because processing a card face-to-face via card swipe is a lot safer and less prone to error than typing in digits manually. So before you start shopping for new rates, make sure your business is set up to process the right way.
Let’s first look at how tiered pricing works. The word “tiered” indicates that the merchant account provider splits all card transactions into separate “tiers” or “buckets.” The most common tiered pricing structure includes three tiers of pricing: Qualified, Mid-Qualified and Non-Qualified. Less frequently, you’ll see a six tier system which includes special pricing for PIN-entered and PIN-not-entered debit card transactions. Three tier pricing is much more common, so for the sake of brevity, we’ll focus on that system only. The major credit card networks post something called a Qualification Matrix which dictates what interchange category a transaction will post to based on:
- How the transaction is entered (swiped, keyed in, etc.) and
- What type of card is used (rewards, non-rewards, corporate cards)
Once the card is swiped or keyed in, the credit card terminal talks to the cardholder’s bank to identify the card type and then places the transaction into one of the three tiers. It’s easiest to understand this system if we run through an example:
- Qualified Rate: 1.79% (regular card, swiped face-to-face transactions)
- Mid-Qualified Rate: 2.09% (rewards card swiped, keyed in)
- Non-Qualified Rate: 2.39% (corporate card, ZIP code verification incorrect)
Example: A rewards card is swiped at your terminal. You pay Qualified 1.79% + Mid-Qualified 2.09%, equaling 3.88% for that transaction.
Example 2: A corporate card is swiped at your terminal. You pay Qualified 1.79% + Non-Qualified 2.39%, equaling 4.18% for that transaction.
When speaking to a merchant account representative and they quote you “their rate” of X% and if you know they’re based on a tiered system, be aware that X% is the QUALIFIED RATE only. You’re bound to process cards that fall under the mid and non-qualified tiers, so be aware of that fact when considering merchant service providers.
Cost Plus or Interchange Plus Pricing
The second and equally common pricing structure offered by merchant account providers is interchange plus or cost plus pricing. This structure is somewhat easier to understand. When a card is processed, it doesn’t fall into a “tier” or “bucket.” Rather, each card has its own interchange rate attached to it, and then your MSP adds on its own interchange markup fee (a percentage) plus a flat-rate transaction fee (the transaction fee is usually $0.10-$0.20). For example, let’s say you process a run-of-the-mill Visa card via swiped transaction. That specific credit card is looked up on a standardized rate table that breaks card types into over 400 categories and assigns each card a percentage based off that table. Your merchant services provider then adds their own fixed percentage PLUS $0.10-$0.20, and that total of percentages and cents is your processing cost for that transaction.
Example: Merchant account provider charges you 1.59% + $0.15 per transaction (their flat rate fee). You accept a run-of-the-mill MasterCard with an interchange rate of 1.89%. Your cost for that transaction is 1.89% + 1.59% + $0.15 = 3.48% and $0.15.
After reviewing the differences between interchange plus / cost plus versus tiered pricing, you probably want to know which pricing model is best for your company. The answer is: it depends on your business type, processing volume, and type of cards you encounter most frequently. I would suggest gathering at least three previous months of processing statements or, if you’re opening a new business, make some educated guesses about the aforementioned questions, and send them on to several merchant account providers. Most will analyze your statements (or the information you’ve provided them) and be able to quote you how much they would charge you based on your transaction history. Some will be able to come in much lower than others based on either their flat interchange / cost plus fee or the way they have their tier “buckets” set up. It pays to look at several offers from competing service providers while trying to secure the best rate and price structure for your company.