To “lessen” confusion, merchant account providers typically compile all similar Interchange categories and bundle them into a few groupings such as qualified, mid-qualified and non-qualified. However, this is just one way merchant accounts can be priced. Some merchant account providers quote an “Interchange Plus” structure, which combines the actual cost of the transaction based on the Interchange category into which it falls, the applicable Assessment Fee, plus an additional specified value on top of each.
In the end, the bulk of a merchant’s credit card processing expenses and the root of all merchant account pricing structures derive from the combination of the Interchange and Assessment fees, regardless of the pricing structure.
Tiered Pricing (3-tier)
Tiered Pricing splits different types of transactions into arbitrary “tiers,” with a different rate for each tier. When you receive a quote for tiered pricing, processors will often quote the price from the lowest tier (typically in-person debit cards transactions), which usually make up a very small portion of processing volume. For example, advertisements for credit card processing will often say “rates as low as 0.97%!” without really disclosing how few transactions will really qualify for that rate. The downgrade fees are hidden in the fine print and deemphasized although they often constitute the majority of a merchant’s transactions. In their purest form, downgrading transactions makes sense. If the interchange rate is higher for a transaction, it is fair for the processor to recoup the higher cost from the merchant. However, processors almost always recoup more than the additional cost. This is called “marking up the downgrades” and can ending up costing business owners 2-3 times more in processing fees, often without their knowledge. There is no way to figure out exactly how much the processor is making off of you because the actual interchange categories for your transactions are being hidden within the tiers. One trick often played by processors is to progressively reclassify interchange categories into less favorable tiers. Tiered pricing also makes it more difficult to address the root cause of your downgrades.
Interchange plus is the most transparent form of pricing because it’s clear how much of your total fees were due to interchange, assessments and processor markup.
Simply put, Interchange Plus pricing passes along hard costs that are paid to VISA and MasterCard. It also adds a very small markup to those costs to cover the risk associated with each transaction – the ‘plus’ in the name.
When a merchant accepts credit cards, there are many different ways those cards can go through the interchange system, each with a specific cost based on a number of different factors. These costs are called interchange fees, dues and assessments.
Interchange Plus is the best type of merchant pricing program that completely eliminates all Non-Qualified fees and surcharges associated with premium and high-spend credit cards!
Think of it this way – on a Prime Plus Mortgage, you are the paying the actual cost of the product. The ‘Plus’ is the small mark-up added to compensate the loaning bank for any risk.
Learn More about Interchange
ERR – Enhanced Billback / Enhanced Reduced Recover
The least business-owner-friendly way of pricing a merchant account is called Enhanced Recover Reduced. Some providers even sell this as an “Interchange” pricing but that isn’t completely truthful. Some people think they are getting a 3 tier pricing when looking at their statements. Technically speaking, bill back/ERR is a variation on interchange plus pricing. It has some variations but the basic concept is that the merchant pays one set rate for qualified cards then is “billed back” for ”MID or NON QUAL” cards via an additional “surcharge” fee. Merchants will be charged the qualified rate for all of their transactions, usually something that is suspiciously low, like 1.5%. Then, for the transactions that are mid or non qualified, you will be charged again for the difference of the qualified rate (the 1.5%) and the interchange rate (variable cost to the processor based on card) PLUS a surcharge. There are two reasons this is called bill back. 1. Merchants are billed one rate and then “billed back” another. Also because you will typically see the surcharges on the next month’s statement rather than the same month the sale was made. It requires a great deal of time to research the actual cost per transaction with the bill back system as it is often buried due to the variable interchange rates.
Example of BILLBACK/ERR: Bill Back pricing: 1.75% Qualified Rate 0.50% Mid and Non Qualified Rate.
It doesn’t look bad but in reality it is this: 1.75% Qualified Rate 1.75%+0.50%+(Difference between 1.75% and variable interchange rate) on Mid and Non Qualified Rate.
Here is the simple math example: If you ran $1000 and you keyed in a regular credit card, that charge is now considered mid qualified because you did not swipe it. Interchange for a keyed credit card is 1.8%. The difference of the interchange (1.8-1.75=.05) plus the surcharge (0.50) is 0.55%. Below is how it would look on your bill.
$1000 X 1.75%= $17.50 (billed in month of transaction)
$1000 X 0.55%= $5.50 (billed “back” in the following month)
Best case is that the processor doesn’t has a surcharge of 0%, so you are only billed the difference in the interchange. This would actually be pretty decent pricing. Unfortunately, that is seldom the case and you will end up being charged extra based similar to our example above. (Enhanced actually denotes the enhanced margins the processor earns by utilizing this method). The worst thing about this pricing scheme is that the downgrades are normally charged a month later than the original transaction occurred, which makes it more difficult to determine the overall cost of your processing, known as your net effective rate as they don’t all show up on the same statement.
Our friends over at Feefighters.com provided a great document that a major credit card processor (NOT Payline) used to educate its sales partners on this method of pricing. The whole point of the document is that it will allow them to sneak through extra fees without business owners noticing. It can be a little complicated for the non-accounting savy but this is what your statements end up looking like when you try to figure them out too! Look on the second page for some examples of how, the same $300 transaction can cost the business owner anywhere between $1.50 (interchange plus) and anywhere between $4.79 and $8.54 using Enhanced Recover Reduced. Check out the document, and scroll down for an explanation if you are interested.
Fixed Rate Pricing
The simplest type of merchant account contract, fixed pricing is structured with a single percentage-based and per-item for all transactions. Some of the alternative payment methods, such as Google Checkout, Square, Stripe and Paypal, have fixed rate pricing. Fixed rate pricing can be fair, if you can get it at a reasonable rate but is generally only reserved for very small volume accounts (less than $3,000 per month). Payline has some options for merchants interested in this but with a little better rates via our Pay Simple pricing plan.
How can I tell what kind of pricing I have?
Interchange plus pricing is usually the most cost effective option for business owners. With tiered pricing, processors often try to sneak in extra fees or mark up the downgraded transactions exorbitantly in hopes that the business owner will not notice. Even worse, most tiered quotes do not clearly disclose which types of transactions will fall into each tier… and some processors even add clauses into the contracts that allow them to change the structure of the tiers over time without informing the merchant!
Here are some ways to tell the difference:
An interchange plus quote will look like this: “Interchange PLUS 0.35% PLUS $0.15—that’s why its called Interchange Plus. The PLUS part is the the processor cost and markup on top of interchange. As a general rule of thumb, this rate should be less than 0.50% of your volume and less than $0.30 per transaction, anything more than that is way too high unless you are a low volume or high risk merchant.
With tiered pricing usually just one price is quoted (called a qualified rate or discount rate). It will always be more than 1%. For example they will quote 1.6% or 2.3%. What they do not tell you is that there are ALWAYS downgraded transactions, and a potentially large portion of your transactions could be classified into the Mid-Qualified or Non-Qualified rate. Often, the salesperson will not tell you about those rates unless specifically asked—they count on making most of their money by marking up those rates very high without you noticing.14FeeFighters • How to Be a Credit Card Processing Ninja • http://feefighters.comLet’s say you are quoted a rate of 1.6% (tiered). Some good questions to ask are:1 1.6%, does that apply to every single transaction?2 What about a rewards card? How much is that?3 How about a business card? How much is that?4 What happens if the customer calls in the order and doesn’t sign the receipt? How much does that cost?
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