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Processing Fees: Tiered vs. Interchange

Credit Card Processing Fees: Tiered Pricing Methods vs. Interchange Plus Plans

If you’re a small business owner and utilize digital banking and e-commerce options to sell your products and service, you probably have something called a merchant account. A merchant account is a bank account which allows businesses to accept various types of payment methods. Merchant accounts are agreements between a credit card payment processors and the merchant’s bank account. Different merchant accounts use different pricing models to calculate processing fees. These models can come off as complicated and daunting to business owners because of the complex processes that take place during a transaction.

The average shopper thinks a transaction is as simple as swiping their MasterCard and signing their signature or punching in their pin. Simple, right? Well, it’s a much more complicated process. Every time someone uses their credit or debit card, the merchant or business owner pays a transaction fee to the credit card company. When factoring in transaction costs, you should take multiple variables into account, like the credit card company, type of card being used, online or offline, etc.

Interchange Fees

Many different kinds of hidden fees can slip by the wayside and leave you scratching your head if you do your bookkeeping. The merchant account provider sets some fees, but most of the fees are sent from the bank to the credit card companies. These elusive processing fees have a name, interchange fees. These fees are the core of credit card companies.

Twice a year, major credit card companies like Visa, MasterCard, and Discover release a schedule of what their fees will be. If you go to a credit card company’s website, you can usually find a schedule of fees. Most companies’ costs vary in numbers over 500, it seems very scary but understanding how these fees work and having the know how to stay on top of the schedule of fees will go a very long way in saving your business hundreds, if not thousands of dollars a month.

Tiered Pricing Methods

Three tier pricing is the most modern and user-friendly payment method. In three-tiered pricing methods, merchant accounts are classified into three groups or tiers Qualified Rates, Mid-Qualified Rates, and Non-Qualified Rates. There are also six-tiered pricing fees and various other discounts. Let’s look at these more in depth, check out the list below.

Tier One- Qualified

A qualified rate is the percentage rate you will be charged whenever a customer uses a standard consumer credit card. By standard consumer credit card, I mean a consumer credit card that is accepted by your merchant account provider. The qualified rate is determined by the payment method a merchant will be receiving most. Qualified fees are usually set at the lowest standard rate a merchant can obtain. These usually hover around one percent or so.

Tier Two- Mid-Qualified

Mid-qualified rates, also known as partially qualified fees, is the rate that merchants will be charged for accepting payment from a credit card that doesn’t apply for the lowest, qualified rate. There are several circumstances why this may happen. One circumstance is when a credit card number is directly imputed into a point of sale system by a clerk in a physical location. Another circumstance is when a specialized credit card, such as a rewards card or a business or agency credit card. Make sure you decide if such specialized cards are worth the merchant processing fees.

Mid-qualified rates are higher than qualified rate and can cost the provider much more in fees, which can directly impact the cost of merchandise. Using specialized credit cards can incur charges up to 40 percent per transaction, make sure you take the financial aspects of such cards into consideration before accepting such payment methods for your business. Mid-qualified methods usually incur fees of around two percent or so.

Tier Three- Non-Qualified

Non-qualified rates have the highest percentages of fees a merchant will be charged for accepting a credit card. Particular circumstances directly impact if you must pay non-qualified fees or not. Much like mid-qualified prices, imputing the credit card number directly into a point of sale and using specialized credit cards will charge your merchant account directly. One unique circumstance that will automatically downgrade your fees to non-qualified fees is if you fail to settle your daily batch of transactions within in the allotted time frames. This time frame usually lasts up to 2 days. Making sure you finalize and accept your business’s credit transactions could save your business some serious money on merchant processing fees. Merchant fees are around 3 percent or more per transaction that fit the circumstances mentioned above.

Other Discounted Fees

Recently, six-tiered pricing method has been utilized by individual credit card providers, such as Visa and MasterCard. The six-tiered method differs from the others because debit card transactions are charged a lower rate than most standard credit cards. In most cases, the much lower, six-tiered fees are directly charged to the merchant instead of the credit card company. This method is new, but it’s fascinating to see what plans will come out of the works in the future.

Interchange Plus Pricing Methods

Interchange plus methods have a history of only being available to businesses that handle a hefty amount of credit card transactions but, in more recent times, smaller companies have increasingly had access to this method. This process is simple, merchants consistently pay two fees, the transaction fee and a markup fee. The fee a business pays entirely depend on which merchant account is being utilized. Many of these fees are usually around .20-.30% and a 14 to 20 cent fee per transaction. If you have a large client base that use credit cards frequently to purchase your products and services, processing plus payment methods are a good solution to keep track of consistent fees you have to pay. This approach entirely depends on your personal preferences and your budget.

There are so many ways to utilize credit card payment options for your business, do the math and see which payment method is best for you. Taking the time to determine which payment methods are best for your company to accept could save you thousands of dollars a month in unnecessary merchant processing fees.