Credit card processing is fundamental to modern commerce because it allows businesses to accept electronic payments securely and conveniently. However, understanding credit card processing fees and pricing models can be overwhelming. This article will summarize the mystery surrounding credit card processing by exploring three traditional pricing models businesses commonly encounter.
What are the Different Credit Card Pricing Structures?
Credit card payments have revolutionized how businesses operate, allowing for a seamless transfer of money and expanding the avenues for trade. However, the convenience of credit card transactions comes with associated business costs. These costs are determined by various credit card processing pricing structures available in the market.
It is crucial for organizations to select the pricing strategy that best suits their operational requirements and transactional patterns because each pricing model has a different set of features, advantages, and disadvantages. Let’s discuss each one.
1) Tiered pricing model
Tiered pricing, or bundled or qualified pricing, is one of the most widely used pricing models in credit card processing. This model categorizes transactions into tiers based on criteria such as card type, transaction method, and risk level.
Tiered pricing typically consists of three main tiers:
Qualified: This tier includes standard credit card transactions, often processed at the lowest rate. It applies to in-person, swiped transactions with standard credit cards.
Mid-Qualified: Transactions that don’t meet the criteria for the qualified tier but are still accepted with an intermediate rate fall into this category. Examples include manually entered card-not-present transactions.
Non-Qualified: The non-qualified tier covers transactions with the highest fees, such as rewards cards, corporate cards, and international transactions.
Advantages
Tiered pricing offers simplicity and predictability, making it easy for businesses to understand costs. It’s often used by small and mid-sized businesses.
Disadvantages
Tiered pricing lacks transparency, as the criteria for each tier can vary between processors. This can lead to higher overall processing costs for businesses, especially if they process various card types.
2) Interchange-plus pricing model
Interchange-plus pricing is considered a more transparent and cost-effective alternative to tiered pricing. It separates the cost of processing into two components: interchange fees (set by card networks) and a processor’s markup.
In this model, businesses pay the actual interchange fees set by card networks plus a fixed markup percentage and transaction fee charged by the payment processor. The markup is typically expressed as a percentage over interchange (e.g., “interchange + 0.30% + $0.10 per transaction”).
Advantages
Interchange-plus pricing offers transparency, which allows businesses to see exactly what they’re paying for interchange and the processor’s services. It can lead to lower overall costs for businesses with a high volume of transactions.
Disadvantages
While more transparent than tiered pricing, interchange-plus pricing can be complex for businesses to calculate and compare. In addition, businesses may need to negotiate the markup with processors.
3) Flat-Rate Pricing Model
Flat-rate pricing is a straightforward and predictable model in which businesses pay a fixed percentage fee and a fixed transaction fee for all credit card transactions, regardless of card type or transaction method.
Businesses pay a consistent fee for each transaction, often with no distinction between debit cards, credit cards, or card-not-present transactions. For example, a flat rate might be “2.9% + $0.30 per transaction.”
Advantages
Flat-rate pricing is simple to understand and calculate, which makes it suitable solution for small businesses and startups. It offers predictability in processing costs.
Disadvantages
While simple, flat-rate pricing may not always be the most cost-effective option for businesses processing high volumes of transactions or transactions with high average ticket values. It may result in higher costs for certain transactions compared to interchange-plus pricing.
Which is the Best Credit Card Pricing Model for Your Business?
There isn’t a “best” credit card pricing structure. It will depend on several factors, including the volume of transactions, average transaction size, and the type of cards typically processed.
Ideally, the one with the lowest monthly fees would be the most profitable for your business. However, we recommend assessing the pros and cons of each one and not solely guiding yourself with pricing. Expert payment processors should be able to sort this out.
Conclusion
Credit card processing pricing models vary in complexity and transparency. Understanding the three traditional pricing models—tiered, interchange-plus, and flat-rate—can help businesses make informed decisions based on their specific needs, transaction volume, and budget. Evaluating these models in light of your business’s circumstances is crucial to optimizing your credit card processing costs and ensuring a seamless customer payment experience.
If you need help choosing the proper credit card pricing model, don’t hesitate to contact Max Value Processing! We will help you find the perfect payment solution for your business.
If you need help with your business’ payment solution, Contact us today!
