The pricing structure you choose will affect your business’ bottom line. Fortunately for you, they’re not too difficult to understand. We’ll examine how pricing structures for credit card processors work to help you make the most informed decision for your business.
It’s hard to find a business who doesn’t accept credit cards in 2021—even laundromats and car washes now accept credit card payments. And every business with a card reader is using a pricing structure to process those credit card payments.
So what pricing structure is best for your business? Let’s find out by breaking down the two main pricing structures to see what it all means in the real world. We’ll also look at a third structure that might be the best yet.
We’ll start with the first way credit card processors charge merchants: Tiered pricing.
Tiered Pricing
What it is
Just like the name implies, Tiered pricing separates transactions into different “tiers” or “buckets” and then charges for each bucket of transactions at a different rate. What are these tiers?
- Debit cards. This is its own tier because it’s unique compared to credit cards, taking money directly out of a bank account.
- Qualified payments. This tier might be the most familiar for you, as it’s the tier for most standard credit cards used to pay in person. If the customer is swiping, inserting, or tapping their credit card, it’s likely in the “qualified payment” tier.
- Mid-qualified payments. When a card number is typed in by hand, it falls under the “mid-qualified payment” tier. You may think of receiving a payment over the phone, where the card information is entered manually.
- Non-qualified payments. Online transactions, international credit cards, corporate cards, or rewards cards usually land in the “non-qualified” payment bucket.
How it affects your business
Seeing these four distinct tiers might give the impression that Tiered pricing is a clear, straightforward pricing structure that makes processing cards easy. However, it’s not as simple as it might seem.
The flaw behind a Tiered pricing structure is how these different cards are actually grouped in practice: It ultimately comes down to the payment processor’s discretion in assigning each transaction to its respective tier. They base this decision on the source or type of transaction, or other aspects of the credit card or customer.
It’s important to note that payment processing for each tier is charged at a different rate, so “qualified” payments may be charged at 2.3%, while “non-qualified” payments are charged at 3.5%.
Why is that bad? Let’s take a look at the problems that are opened up by giving a payment processor the authority to group transactions into each tier at their own discretion:
- Processors can change tiers and processing costs whenever they want.
- It’s very difficult for merchants to get the data and know which tier each of their payments falls into.
- It’s very common for transactions to be “downgraded” or moved from one tier to another with a higher cost.
- Processors will often list their best tier rate to attract merchants. But in reality, most transactions will not fall into that tier.
Putting these facts together, it’s easy to see how this tends to result in much higher credit card processing fees for merchants than they would need to pay under the second structure: Interchange Plus pricing.
Interchange Plus Pricing
What it is
Interchange Plus processing tends to result in lower fees compared to tiered pricing. This is due to transparency and a straightforward structure.
Let’s see how Interchange Plus pricing works. As we do so, notice how a business with Interchange Plus receives a more predictable, dependable pricing structure:
- The major card networks (MasterCard, Visa, AMEX, Discover) have a standard “interchange” rate to process payments.
- The networks apply the same interchange rate to every card payment or transaction.
- The payment processor adds on a small extra fee for the services they provide (this is the “Plus” in Interchange Plus).
- The merchant then pays this combined fee for credit card processing for every transaction.
Simple, isn’t it? Instead of tiers or buckets with different rates assigned at the processor’s discretion, there are only standard prices. What does that mean for you?
How it affects your business
Because of a more standardized approach, Interchange Plus provides a more transparent process. That gives businesses like yours greater visibility and more control of their costs.
But that’s not to say that it’s an identical processing rate for every card you accept. Note that Interchange Plus fees vary between card networks, so you’ll pay a slightly different fee for processing an AMEX card compared to a Visa card.
How a card is processed also influences the rate. For example, someone swiping or inserting a card in person will result in a marginally different rate vs paying online.
So is this just another system with unexpected costs?
Definitely not. Even though there’s minor variances in fees, Interchange Plus puts you in control by showing you these fees up-front, giving you the ability to confirm that everything is correct. You will be able to see exactly how much you were charged for each card and each transaction, down to the cent.
Clearly, Interchange Plus is the winner when we learn how the two work. But there’s one more important pricing structure to consider if you want to save your business fees: cash discounting.
Cash Discounting Pricing
How it works
As the name suggests, Cash Discounting is another pricing structure in the credit card processing industry, but with a twist: it encourages the use of cash to pay for a transaction instead of a credit card.
Let’s see the Cash Discounting process:
- Your posted rates are now considered the discounted price for payment by cash or check.
- When someone pays by credit card, they will not be taking advantage of the discount and will pay the full amount usually around 4% over the cash price.
It’s distinct compared to the previous two systems we’ve discussed in that it’s not a standalone pricing structure. Rather, it’s an additional system you can use to benefit your business.
How it affects your business
This simple program reduces or eliminates having to pay credit card processing fees for your business, increasing profit margins immediately.
So can you just set up a sign on your own and program your POS terminals to change based on how your customers pay?
No, and for good reason. It’s both exceedingly difficult to do on your own and can actually be illegal to install a Cash Discounting program by yourself. Not only that, it’s also in violation of the credit card company’s agreements.
This is because there is a chance you can profit additionally off the credit card transaction. This would be considered Surcharging and is not legal in all 50 states. There is also a long process to get your business approved to be able to surcharge.
Instead, the Cash Discount Program must be through your provider and not on your own. A sign is also to be posted where the payment is received (or if you are invoicing someone, it must be shown on the invoice).
Not following these rules can mean major penalties for your business. For example, having your payment processing account shut down and punitive fines levied against you by the credit card networks.
Summary
Interchange Plus pricing is both more affordable and transparent than Tiered pricing. But as Cash Discounting reveals, other options might allow your business to save even more.
Progressive Payments Solutions is here to help you learn what’s possible for your business. That’s why we put together a complimentary guide on the five most important steps to choosing a payment processor so you can empower your business to save even more.