Tiered Pricing for Merchant Accounts

June 23, 2009

June 23, 2009

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The most common pricing scheme for small business merchant accounts (credit card processing accounts) is called Tiered Pricing.  Visa and Mastercard’s pricing rules, called Interchange, are very complicated.  The price of each transaction is calculated based on several factors, including 1. the kind of card used 2. the kind of business the card was used at and 3. the circumstances of the transaction (for more information read our article on interchange).  There are thousands of different interchange rates and a typical business will have transctions in a couple dozen different categories in a given month.

Credit card processors typically group those transactions into between 3 and 12 groups, called tiers, or categories.  Some of the transactions are given the Qualified Rate (typically this is the rate that was negotiated when the merchant account was opened) and the others are given a Mid-Qualified or Non-Qualified rate (much higher rates often buried in the small print of the contract).In theory, grouping transactions into categories to make merchant statements simpler is a valid idea.  In practice, however, it reduces transparency and often results in a bad deal for the business owner for a few reasons:
  1. What is qualified at one processor could be mid-qualified (or even non-qualified) at another processor.  This makes rate quotes from one processor very difficult to compare to another.
  2. Most processors do not disclose what interchange categories are grouped into each tier.  Since sometimes a lower interchange rate can be addressed by an action that the business owner can take, burying the actual categories within tiers can make it harder for business owner to identify opportunities to lower his/her rates.
  3. Since there is so little transparency into the rates, it is often the result of misunderstandings between the processor and merchant and sometimes can be an area where the situation is manipulated by the processor to generate additional profit at expense of the merchant.  Here is an article written by a VP at Global Payments, one of the biggest credit card processors, about how tiered pricing can be used to generate additional profit at the expense of the business owner.
Merchants – for best results, choose interchange plus pricing, not Tiered Pricing.  There are plenty of processors out there that offer interchange plus pricing and it is a much better and more transparent way of doing things.

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