Tiered pricing sucks, and here’s why.

Let’s say you own a store that sells high-end, custom-made shoes. Business is steady, you have a super loyal customer base and you barely even advertise anymore because so many of your new customers arrive via word-of-mouth referrals. Then the mail comes, and the statement you get from your credit card processor is about as legible as reading Mayan hieroglyphs.

Not only is it impossible to understand what anything means (“Network pre-paid retail debit network switch fee”), but the numbers don’t seem to add up. Between the time you signed up with your merchant service provider and getting that bill in the mail, it seems like the rates you were quoted are nowhere to be found. Weren’t you quoted “only 1.58% on swiped credit cards?” How come when you add up all the fees, it seems like you are paying 5% of your credit and debit card revenue to your credit card processor?

What happened? And can you fix this?

The answer to your first question is the subject of this week’s blog post. The answer to your second question is much shorter: Yes, you can fix this. Read on to find out how.

The Scenario
To keep the math simple, we’re going to set up a scenario, which we will refer to over the course of this blog post. Jane Smith walks into your store, immediately falls in love with a pair of black leather boots, and buys them from you for $100. Got it?

Credit or Debit?
Now, depending on whether Jane uses a credit card or debit card, a different set of fees will be assessed on you, the owner of the shoe store. We’ll walk through this scenario with a credit card first, then explain later how debit cards work.

Q, MQ, or NQ (Tiered Pricing)
Depending on the type of card Jane has, the fee assessed by your merchant service company will be either qualified, mid-qualified, or non-qualified (Q, MQ, or NQ for short). The three levels of pricing are known as tiered pricing.

“But wait,” you exclaim, “I thought there are only two types of cards: debit or credit. This sounds like there are three types of cards.”

You have much to learn, young grasshopper. There are in fact many, many different subsets of credit and debit cards.

The Interchange
The reason for this is a bit opaque, but Visa and Mastercard have a gigantic list of all the different types of cards out there and their corresponding fees for processing them. In credit card processing, this massive list of cards and their fees is known as The Interchange. Visa’s list of Interchange fees goes on for 22 pages; Mastercard’s is 9 pages long.

Wait, tell me again about Tiered Pricing?
So, the credit card Jane uses has a specific interchange rate attached to it. Let’s say it’s a Visa card with a United Airlines rewards program, because Jane travels a lot for work and wants to maximize her points account so she doesn’t have to fly in coach class every time she gets on a flight. Now, there are tons of different rewards card interchange rates out there but we’re not privy to which one an airline rewards card falls under so we’ll say that her card is a Visa Signature Preferred CPS/Retail 2 card, which you can find on page 7 of the Visa Interchange we linked to above. That particular card carries with it a 2.4% + $0.10 per transaction fee, which out of $100 equates to $2.50.

You haven’t said anything yet about Tiered Pricing!
There’s a total fee for processing Jane’s card of $2.50. Who pays for it? First of all, you don’t technically pay it. Your payment processor pays that rate – The Interchange charge – directly to Visa for processing the card. But they need to be compensated for taking on the risk of putting money in your bank account before Jane has even paid her credit card bill (there are other risks, namely credit card fraud, that are also taken into account). They also need to make money themselves, because otherwise, how could they be in business? Whatever the interchange rate is, your merchant service provider passes along a higher rate to you in order to make it viable for them to do business with you and process credit and debit cards.

This is where Tiered Pricing comes into play.

What does your Tiered Pricing setup with your merchant service provider look like? This is a pretty typical breakdown, and we’ll use it for this scenario:

Qualified credit card rate: 1.58% + $0.19 per transaction fee

Mid-Qualified fee: Qualified + an additional 0.98% +$0.19 per transaction fee (effectively $2.56% + $0.38)

Non-Qualified fee: Qualified+ 1.98% + $0.19 per transaction fee (effectively 3.56% + $0.38)

So with the case of Jane and her fancy rewards card that carries a total interchange charge of $2.50, it’s immediately clear that your merchant service provider can’t give you a qualified rate for this card, otherwise you would be paying them $1.77, which is $0.73 short of them breaking even on the charge. And obviously, they don’t just want to break even, because otherwise, they can’t be in business. So they tack on a non-qualified fee to the charge, and all of a sudden you’re paying $3.94 to accept Jane’s credit card.

Holy Cow, Batman, you lose nearly 4%!
Remember: your merchant service provider still has to send $2.50 to Visa, but in the end, they have an extra $1.44 they get to keep for themselves. Out of $100, getting an extra buck and a half is great business for them but not very good for you. And this scenario assumes Jane pays $100 on her credit card. What happens if it’s just $50? The same percentage rate applies (3.56%) but the per transaction charge of $0.38 pushes the total charge to $2.16. Out of $50 you’re now looking at paying 4.32%.

A quick word about the extra per transaction fee.
The cost of accepting a credit card only increases the smaller your charges get, because there is always a per transaction fee alongside the percentage charge– this explains why a lot of businesses such as takeaway restaurants or laundromats are cash only because they would get hammered by the per-transaction fees associated with accepting credit cards.

Back to why tiered pricing sucks, but first, we’re sorry if this is news to you.
Unfortunately, because most merchant service providers are willing to stretch the truth and hide important fees from their clients, you may have never been informed by your old merchant service company about Tiered Pricing. Better late than never, we say!

Anyways, the example we’ve just gone through changes if you accept a different type of credit card. Some credit cards have interchange rates that are lower than Jane’s fancy rewards card; many prepaid credit cards carry a $1.15 + $0.15 per transaction fee, which means they would qualify for the lowest credit card rate in a tiered pricing setup.

But as you’ve seen from your credit card processing statements, if the total cost of accepting credit cards for your business is way higher than the qualified rate you were originally quoted, it means most of the time your credit card charges are being jacked up to MQ or NQ levels. That’s why Tiered Pricing sucks!

The Debit Card Interlude
We promised you we would talk about debit cards too because they usually work a bit differently. A government regulation called the Durbin Amendment fixed the rate for debit cards to 0.05% + $0.21 per transaction, assuming it’s a swiped card and the PIN is entered by the customer. The risk of card fraud with debit cards is so low – not only does someone have to steal the 16 digit number, they also have to know your PIN – that Visa and Mastercard can still make a profit by charging only half of one percent on the transaction. That’s why debit card transaction fees are much lower than credit cards, although tiered pricing still offers a nasty way for merchant service providers to make sure they line their pockets every time you accept a debit card.

Back to the shoe store scenario
Imagine that Jane uses a debit card to make her $100 shoe purchase instead of her airlines rewards card. Your merchant service provider’s tiered pricing for
debit might look like this:

Q: 0.2% + $0.21 per transaction
NQ: Q + 0.98% + $0.21 per transaction

A $100 charge on a debit card means that the Interchange charge for this transaction comes out to $0.26, which is pretty darn low. But your qualified rate turns out to be $0.41, which means your merchant service provider is making a pretty slim profit on the card, of just $0.15.

On many occasions, a merchant service provider will deliberately set their qualified debit (and credit) rates too low to make much of a marginal profit, so that they can justify escalating the charge to NQ. It’s highly likely that in this scenario, instead of being satisfied with a $0.15 profit from processing the debit card transaction, your merchant service provider will tack on the NQ fee and squeeze an extra dollar and change from you.

So, at this point, you should be nodding in agreement that tiered pricing really sucks. It results in you paying much higher fees than you should to process credit and debit card transactions. What’s the solution?

Interchange Plus Pricing
The only pricing plans we offer our merchants here at Payline are based on the Interchange. You might hear a few terms for it: Interchange Plus or Cost Plus are two of the most commonly used terms for this kind of pricing within the industry.

Whatever you want to call it, it’s way better than tiered pricing.

At Payline, if you’re a retail merchant – like selling custom-made shoes – you pay the Interchange + 0.2% + $0.10 per transaction. This ensures that we profit on our end, you don’t overpay for processing credit cards, and we do business together for (hopefully) years and years because you never have to worry about switching merchant service companies in search of a better deal.

The shoe store scenario, one last time.
Jane takes out her credit card and pays you $100 for a nice pair of boots. You’ve just switched to Payline after learning about how the Tiered Pricing plan you were on with your old company was costing you a lot of money.

Jane’s rewards card comes with a total Interchange Rate of $2.50, so the charge works out like this:

$2.50 for the Interchange
0.2% of $100 = $0.20
$0.10 per transcation fee
_____________________

$2.80 Total.

$2.80 instead of $3.94 with your old merchant service provider, which means you save $1.14 (nearly 30%) in processing fees. Yippie!

No matter what kind of card you take, the Interchange Plus pricing will always give you a better total rate than Tiered Pricing.

The End.

If you are currently accepting cards for your business, there’s absolutely no reason for you to settle for a Tiered Pricing plan. If you are paying tiered pricing, contact your merchant service rep and demand they put you on Interchange Plus – there are no rules or laws saying you can’t have Interchange pricing, so if they give you any sort of excuse that suggests otherwise, they’re lying to you.

If you’re shopping around for a fair and cost-effective merchant service provider, we hope this information will make your choice easier. Choose Payline. We’re going to give you the best Interchange Plus rates in the industry, and we’re going to grow with you.

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