Interchange Pricing Versus Tiered Pricing

SONY DSCPlanning a vacation on the amount we will save you. Not impossible!

Being a small business ourselves, we understand how important it is to save every penny possible. We shop around for everything – office space, technology, office supplies – to ensure we are getting the best deals  possible. Many business owners overlook the possibility of saving with their credit card processing  primarily because they do not understand the different credit card processing pricing structures. Take a few  minutes to read through this article – it might save you BIG money! Let me start off by saying, last week we met with a doctor’s office in Lincoln Nebraska. After completing a free cost analysis, we were able to save them $275 per month or $3,300 per year – they did not need to sign a long term contract and we were compatible with their current credit card terminal which means it cost them absolutely nothing to switch over to our processing solution.  What if I told you that you could potentially save enough in a year’s time to pay for a much needed vacation? Impossible you may think, but think again!

What is Interchange?

Before we dive into the different pricing structures, there are a few things we need to clarify. The first being what exactly is interchange?

Interchange is a specified percentage determined by Visa and MasterCard associations that is paid to the credit card issuing bank – this is how banks or financial institutions pay for rewards programs! There are approximately 200 different interchange rates depending on the card type such as debit, corporate, rewards, etc. Interchange rates are evaluated and released in April and October of each year. The issuing bank also charges a small fee for the processing of each transaction which helps to pay for monthly statements, 24/7 support, and lovely advertising.

What the heck are dues and assessments and why do I have to pay them?

Now that you know that interchange gets paid directly back to the issuing bank or financial institution, you may be asking yourself how does Visa and MasterCard make money? Never fear – they do. Another part of the equation that you will pay at each transaction is called dues and assessments. The dues and assessments charge is 11 basis points or .11 percent on the volume processed. This money helps pay for their advertising – did you see their commercial during the Super Bowl?

Let’s break it down – Interchange Plus Pricing.

The Interchange Plus pricing model allows each merchant acquiring company such as Best Card to add a fixed discount rate to each interchange level. This pricing model is extremely transparent and you can actually calculate how much Best Card is making on your account – which on average is about $15-30 per month. Not as much as you thought?

So, when you are discussing pricing with a provider that offers Interchange Plus pricing, it may sound something like this: “interchange + dues and assessments + discount rate = the actual amount you are paying to process each card.”

Let’s break it down some more – Tiered Pricing.

There are many credit card processing companies out there that offer Tiered Pricing. Why? Because they generate more revenue. This pricing model is very hard to comprehend if you are trying to evaluate your statement. So, let me make it easier for you. Typically there will be three different tiers (they have been known to go all the way up to twelve!). The different tiers can be labeled like so – qualified tier, mid-qualified tier, non-qualified tier. The qualified tier offers the least risk to the issuing bank or financial institution so it is the cheapest. You will notice that this rate is commonly noted in Google paid ads and large print of a website – but don’t be fooled. The truth will be told in the fine print, hopefully.

When you are discussing pricing with a provider that offers Tiered Pricing, it may sound something like this: “Your swiped is 1.98% your keyed is 3.03% and everything else is this 3.98%.” What they most likely will not tell you is that most transactions fall in the mid-qualified tier which be the 3.03% mentioned above. Rewards are heavily surcharged and one of the most popular cards used.

Which pricing model is better you ask? You be the judge…

graph

The blue area represents the interchange rates that are consistent for every processor and pricing structure. The red area represents the discount rate for interchange plus pricing – notice it is consistent for each interchange level or transaction type. Finally, the green area represents the tiered pricing structure.

Let’s take it a step further…

Here is the actual cost analysis we prepared for a local dentist.

  • 162 transactions and $20,806.42 processed on Visa, MasterCard and Discover cards
  • 47% fell into the Qualified Rate Tier @ 1.98% + $0.20
  • 50% fell into the Mid-Qualified Rate Tier @ 3.03% + $0.30
  • 3% fell into the Non-Qualified Rate Tier @ 3.98% + $0.30
  • The merchant’s Interchange Plus Pricing is 0.6% + $0.10

NOTE: Over half of all transactions fell into the much higher processing rate!

Here are the results:

Pricing ModelMonthly CostsAnnual Costs
Cost using 3-Tier Pricing$613.23$7358.76
Cost using Interchange Plus$518.98$6227.76
Total Savings$94.25 per month$1131 per year

Where do I go from here?

You may be asking yourself “where do I go from here?” The next step is to dig out your last month’s credit card processing statement and evaluate. If you are on a tiered pricing plan, contact us. If you don’t know how to read your statement to even figure out what pricing model you fall under, contact us. We will be happy to prepare a free cost analysis to determine how much we could save you. Who knows, you may even save enough to pay for long awaited vacation – Bahamas anyone?!

2013-04-09T13:12:14+00:00