What Is Tier Pricing?
When you accept credit card payments in your business, your overall expenses are affected by the pricing model your merchant service provider or payment processor uses. This is why pricing models should be evaluated carefully when looking for a payment processor.
Most credit card processing charges related to each transaction are pre-set by the credit card networks. After receiving payments and collecting their share, they then send them on to customers' credit card issuing banks and the card networks.
This means payment processors must get creative if they want to make money from processing payments. Typically, they use three common processing models to be profitable: tiered pricing, flat-rate pricing, and interchange plus pricing. This piece examines what tiered pricing is all about.
How This Model Works
Processors use this structure to assess charges and the merchant group’s transactions in tiers. In turn, the processor prices all transactions based on the tier. The common tiers are qualified, non-qualified, and mid-qualified.
These have the cheapest rates and apply mostly to non-rewards credit card transactions. If you have a brick-and-mortar or physical store, a terminal will swipe or read most of your credit card transactions. Online merchants rely mainly on internet-based transactions as well as payment gateways.
After signing up for a merchant account with a processor, your qualified rate will depend on the kinds of transactions you process at your store.
Mid or partially qualified rates apply to transactions and cards that don't meet the standards for fully qualified transactions.
A transaction falls under this group if your customer uses a rewards card, transactions aren't batched out within 24 hours, or if you or one of your workers keyed a card number into the terminal rather than swiping it.
Since these transactions' processing rate is higher, it pays to consider the kinds of cards your customers usually use.
A transaction falls under this group if it has incomplete or missing information; a customer uses a card with greater risk, or a customer uses a corporate or government-issued card.
Drawbacks of Tiered Pricing
The only advantage to this model is that it presents fees and rates in a simple and easy-to-read format. Nonetheless, the model's simplicity makes it expensive and opaque. Here are the main disadvantages.
This model allows a processor to charge higher fees for processing without reflecting the increase in its rates. Processors do so by routing a huge number of interchange groups to more costly and non-qualified pricing tiers.
Difficult To Compare Rate Plans
Since merchant account providers can set their tiers and criteria for non-qualified and qualified transactions, it can be hard to compare rate plans across providers. For instance, a mid-qualified transaction with one provider might be non-qualified with another competitor.
Making things even less transparent and more confusing are providers who don't always reveal their criteria for distinguishing among the transaction groups.
Conceals What You Actually Pay for Processing
A processor doesn't reveal the actual cost. Rather, the processor's mid-qualified, qualified, and non-qualified rates are visible. By concealing interchange charges, a business never knows the actual processing cost. This means that the processor can charge exorbitant markups.
Permits Processor to Maintain Refund Credits
When your business refunds a customer for debit or credit card transaction charges, you're supposed to receive partial credit from the interchange charges paid on the initial transactions.
Since interchange rates are bundled in tiered pricing, businesses don't benefit from interchange credits. Instead, processors maintain interchange credits as extra revenue.
Tiered pricing produces a different markup for each interchange category. The way transactions are categorized and the unpredictable markups that come with tiered pricing make it difficult to compare processors.
What You Should Get Instead
The best processing model is interchange plus pricing. Here’s why you should consider this instead:
● More affordable
● Easy reconciliation
● More transparent
Processors make money by assigning fixed percentages to their interchange rates. With this type of pricing, you can expect to be directly billed by the payment processor.
Unlike tiered pricing, your markup remains the same regardless of the type of card the customer uses or how the transaction was processed.
These advantages give interchange plus a definitive edge over other pricing models. It is a model that businesses should seriously consider.
There are so many obvious drawbacks with the tiered pricing model that you’d think nobody would go for them. Surprisingly, it’s a commonly used model among merchants. Why?
Well, it’s extremely lucrative for the processors and most merchants don’t know about these pitfalls that we’ve just shared with you. Now that you’re aware of them, perhaps it’s time to review the pricing model you use with your payment processor, particularly if you’re under a tiered pricing arrangement.
At Loyent, we go against hidden fees and contracts. To learn more about how we can help you grow your small business, connect with one of our payment advisors. We’re always happy to answer any questions you may have.