With this pricing format, the processor throws all transactions into three buckets with only three rates. Generally, one bucket is for swiped transactions, one for keyed transactions and rewards cards, and a third for business cards or keyed-in rewards cards. The buckets are called qualified, mid-qualified, and non-qualified. This pricing system allows for an easy to understand merchant statement because there are only 3 rates listed instead of multiple rates and fees on multiple types of card transactions. However, generally, the processor is charging a slightly higher surcharge than with cost-plus pricing. The processor has to make sure he has his buckets covered for all the scenarios of rates. Tiered pricing gives the advantage to the processor. Interchange Cost-Plus pricing gives the advantage to the merchant.
Some processors have an expanded variation of tiered pricing with six or more buckets. They add additional buckets for swiped rewards cards, keyed-in rewards cards, swiped debit cards, and keyed-in debit cards. They can even get more creative than that with extra surcharges on any cards that are mid-qualified or non-qualified. This pricing is so confusing that it is difficult even for a veteran in this industry to disentangle. This type of pricing is used deliberately to confuse the merchant and pad the pocket of the processor and the processor’s salesperson.
With tiered pricing, it is nearly impossible to figure out how much your credit card processing salesman and the processor are adding on to Interchange for their profits.
Interchange Cost-Plus Pricing
The Interchange Rates are created by the issuing banks. They decide how much “discount” or interest they need to make for issuing the credit to cardholders, ie loaning the cardholder the money. The Interchange rate chart is a complicated system with over 100 different categories of rates and transaction fees depending on the risk of chargebacks and fraud. Debit cards have a lower risk and have a lower rate than corporate cards which have a high risk and a high rate. There are multiple conditions in between broken down by industry, type of card, and whether the card is swiped or entered over the phone or via the internet. All those conditions have different risks, different rates, and different transaction fees.
With Cost-Plus Pricing, you get charged the actual Interchange rate and transaction fee, the brand fees (for Visa, MasterCard, Amex and Discover) plus an extra percentage rate, and an extra transaction fee for the processor’s surcharge. The processor also adds monthly and annual fees. The processor needs to make money for servicing the merchant account. The rates and fees should be fairly straightforward on your merchant statement as to whether the fee is an Interchange fee, pass through brand fee, or a service fee from the processor. When they are not, the processor could be trying to hide something.
True Story – Only Charging 1% Scam!
One of my long time clients called me and asked a strange question. She was so tired of companies calling her to switch her processing that she finally said yes, she would listen to the salesman’s pitch. She made an appointment with him and called me and asked if I would be at her side explaining what they were going to tell her. So I agreed.
We had her statements out ready to show the salesman when he showed up. He walked in, introduced himself, and immediately opened his mouth and started to rattle off that he had rates as low as Walmart, only 1%. I immediately recognized the scam coming out of his mouth, so I asked if that was 1% over wholesale Interchange rates. He asked who I was and we explained. Then he immediately and quickly excused himself and left. He knew that I knew his scam. He certainly didn’t have rates of 1%, which was lower than the wholesale Interchange rates. He was adding 1% on top of Interchange for Cost-Plus Pricing.
It’s a Challenge to Compare Tiered Pricing to Cost-Plus Pricing!
Comparing the two types of pricing is like comparing apples to oranges, unless you have access to the entire Interchange Rate Chart. Give us a call at 505-296-2847 if you want us to analyze your statement.