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Understanding Credit Card Processing Charges: A Look at Interchange, Tiered and Flat Rate Pricing

Does your head spin when trying to make sense of credit card processing charges? You’re not alone. Many business owners and managers are left puzzled by the elaborate ways in which they’re charged for credit card processing.

It’s fair to guess that, unless you’re in the payments industry, you have, at one time or another, found yourself overwhelmed when evaluating your current provider’s rates against those of a company attempting to earn your business.

At Constellation Payments, we believe in clear and simple communication that allows our partners and merchants to feel that their payments partner has their best interests in mind.

That said, this article will explain — in simple terms — the different pricing options and methods of billing available for merchant processing services through Constellation Payments. 

3 Pricing Models Explained

There are three different pricing models available to Constellation Payments partners and merchants:

1. Interchange Plus

The most straightforward of all the pricing models, Interchange Plus is the term used to describe a merchant account pricing model where a fixed mark-up is applied directly to interchange fees published by VISA, MasterCard and Discover.

What’s an interchange fee? Interchange fees are fees that the acquiring bank (merchant bank) pays to the issuing bank (cardholder’s bank) as compensation for transaction-related costs.

Think of interchange fees as wholesale credit card processing fees. Every single credit card has its own wholesale (interchange) rate.

Interchange Plus is the most cost-effective way to price for businesses, but it’s very difficult to read the statements as every card type (business, rewards, platinum, gold, etc.) has its own rates.

You can view the current interchange fees by following the links below on VISA and MasterCard’s websites:

VISA Interchange Rates

MasterCard Interchange Rates

What’s the “Plus” all about? The “Plus” in Interchange Plus refers to the mark-up over interchange that is added by the merchant processor or partner. This extra amount is shared among all of the different entities that facilitate the processing of the transaction. The issuing bank that supplied the card to the consumer and the acquiring bank that processes the transaction are two examples.

Unlike Tiered Pricing, Interchange Plus pricing is fixed no matter what type of card you accept, or how you process it. This simplicity is what makes it very attractive to merchants. So if a merchant has a rate of Interchange + .25% and a $.25 fee per transaction and $.25 per authorization, they know they are paying the Interchange rate along with a quarter of a percent of the transaction price and 50 cents.

It’s important to note that there will be monthly fees for items such as statements or PCI compliance, but again everything is fixed. The only variable is the particular interchange rate that is established for each card type by transaction.
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2. Tiered Pricing

Tiered Pricing, sometimes referred to as bundled or bucket pricing, describes a pricing model where the processor essentially divides the 400+ permutations of risk factors, into three groups, sometimes called buckets.

A basic explanation of the three different tiers:

Fully-Qualified is the rate you will be charged for most major consumer credit card and debit transactions when they are entered in a card present transaction and the appropriate AVS (Address Verification System) information is included with the transaction. This is the best processing rate that would apply to your transactions.

Mid-Qualified or Partially-Qualified discount rates apply to cards and transactions that don’t meet the standards for a Fully-Qualified transaction, for a number of reasons. Many rewards cards will not merit Qualified discount rates, and are therefore classed as Mid-Qualified. This is important to bear in mind, as some merchants process a high number of rewards card transactions.

Mid-Qualified rates also apply to transactions in which a standard consumer credit card (such as a card that would otherwise be used for a Qualified transaction) is keyed into the credit card terminal rather than swiped.

Non-Qualified is when a transaction does not qualify for either Fully-Qualified or Mid-Qualified rates, and falls into the highest rate at which a merchant will be charged for accepting a credit card.

In addition to certain card types, these transactions often involve missing or incomplete information, which are therefore more risky for the credit card processor, and result in a higher rate for the merchant.

Keying a transaction on a card present account and NOT entering any AVS information will cause it to downgrade to Non-Qualified. Not providing the AVS information on card not present transactions will also cause the transaction to downgrade to Non-Qualified.

Additionally, special card types such as Corporate, Government and International Cards will qualify at this rate.
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3. Flat Rate Pricing

Flat Rate Pricing is the easiest for merchants to understand on a statement, but it is the most difficult to price accordingly without knowing the types of cards that may be used by customers.

Flat Rate Pricing is also the least attractive from a revenue standpoint for a channel partner. For example, say a merchant is charged 2.99% and $.25 per transaction but the merchant’s customers use a lot of rewards cards or non-qualified cards that have a higher interchange rate compared to the flat rate. In this scenario, these merchant customers would show as lost revenue for the channel partner.

On the other hand, if clients are paying via ACH only, this pricing model would be very attractive.

As mentioned, it’s difficult to account for all the many interchange rates, so this rate structure is rarely used.

I hope that this article has helped you better understand credit card processing changes, so you can now feel more comfortable reading statements and evaluating rates. As always, if you have any questions, or need assistance in comparing rates, please call 888.244.2160 or send an email to sales@csipay.com.
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Angela Summa is the Vice President of Constellation Payments. She is responsible for business development, implementation, channel partner support, and merchant support. Her goal is to ensure businesses offer the highest level of payment processing security and ease of processing to customers. You can reach Angela by sending an email to asumma@csipay.com.

Images courtesy of Pixabay.
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