Interchange Plus vs Tiered Pricing Structure

Interchange Plus vs Tiered Pricing Structure

There are two common pricing structures when setting up a merchant account, a tiered structure and Interchange Plus. Depending on the type of business, one might work better than the other.

Tiered Structure

The way a tiered pricing structure works is there’s a ‘qualified’ rate that usually covers debit cards and regular credit cards, i.e. non-rewards type cards. The qualified rate is always the lowest rate and typically the rate that’s highlighted the most. However, not a lot of cards fall into this category. Most consumers, if they’re using a credit card, are using a ‘rewards’ type card. Rewards cards fall into what’s called the ‘mid-qualified’ or ‘rewards’ rate in a tiered structure. Mid-qualified cards typically have an extra percentage added on and sometimes an added transaction fee. Rewards type cards are credit cards that have a points program, cash back, airline miles, etc. Some merchant providers also have some business and corporate cards covered in their mid- qualified rate. The last tier is called the ‘non-qualified’ rate. Non-qualified adds a higher percentage to the qualified rate than what the markup on a mid-qualified rate would be. Non-qualified rates will always be the highest and typically cover some corporate cards, international cards, and key entered cards on a swiped account. A tiered pricing structure is the most common pricing structure in merchant processing and is usually fine for small to mid sized businesses.

Interchange Plus

The interchange plus pricing structure isn’t always available to some merchant service providers but once understood it’s a lot more transparent and potentially cost effective way of setting up a merchant account. Interchange is the true cost of the card, what Discover, MasterCard, and Visa charge merchant providers. Interchange is a constant and does not vary from one merchant service provider to the other, in other words, it’s the merchant service providers true cost of doing business. Each type of card has a different interchange rate, for example debit cards have a lower interchange rate than a corporate card. In an interchange plus pricing structure, a merchant provider will put a flat markup above the set interchange rate. Interchange for a debit card is 0.05%, a merchant service provider might quote a 0.5% markup, making the rate of a debit card 0.55%. This is obviously a lot lower than what a standard qualified rate would be in a tiered structure. An interchange plus pricing structure is typically reserved for high volume merchants with processing history but is recently becoming an option for new and low volume businesses. Since there are over 400 interchange categories depending on the card, this pricing structure might be overwhelming when compared to a tiered structure but definitely a good option to look into if it’s being offered.

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