Credit Card Processing Rates & Fees: Understanding Tiered Rate Pricing for Small Businesses

Today’s modern business owners require robust credit and debit card processing to manage everything from in-person retail sales to e-commerce solutions with scalable customer demand. Most businesses are already aware they need a powerful payment gateway to manage and accept these transactions but may be unfamiliar that many of the best payment processors on the market offer a variety of pricing models. This is to ensure clients receive the best possible fees, interchange plus pricing, flat rate payment processing, and more.

While the goal of any reasonable payment processor is to also have a lucrative business, there is a balance that can be struck so owners and clients grow in a fair and balanced way. One of the better merchant pricing models that is available to ensure this support is through a 3-tiered rate structure.

At North American Bancard, we always do our best to keep our clients informed about any decision they need to make concerning service providers. That is why we thought it a good idea to go into more detail about how tiered rate pricing can benefit your business model. By the end of this service page, you should have an excellent understanding of how this structure works, the potential benefits it provides to your business operations, and the possible pitfalls if not managed correctly. So let’s dive in, and don’t forget, if you have any questions, send us a note, and our team will respond as soon as possible.

What is Tiered Pricing Structure for Card Processing?

While most businesses are used to interchange plus pricing and flat rate credit card processing, tired rate structures offer a lucrative alternative. This is a merchant pricing model utilized by payment processes that charge merchants based on certain categories or criteria. That could be the type of card used, method of payment, or risk level of the transaction.

Each tier is given a rate or fee, which is charged to the merchant based on the transaction category. In most cases, these structures have three tiers:

• Qualified — lowest rate and often includes in-person swipes of a card.
• Mid-Qualified — tends to cover transactions that do not meet qualified criteria, like cards being keyed instead of swiped.
• Non-Qualified — highest rate and applies to higher risk transactions like corporate cards or reward cards.

There is some variance in the industry between what criteria are used for each tier, and that can cause some confusion for merchants and clients. That is why you see some providers sticking to flat-rate merchant services, but at North American Bancard, we like to provide more robust solutions that meet the induvial needs of all our clients.

How Does Tiered Pricing Work in Practice?

Anytime your business allows a credit or debit card as a payment method for services or products, you have to pay a processing fee to the provider or payment gateway. These fees are usually calculated by taking a percentage of the transaction as well as a fixed amount agreed upon before allowing card payments.

For example, at North American Bancard, we start with a tiered rate structure of 1.39% of the transaction amount plus an additional $0.10 cents. This is easy to remember and low enough to make our services highly competitive in today’s modern marketplace. Those fees fluctuate based on the tier of each transaction. So if you plan on having frequent debit card purchases in-person, you save money by using a tiered rate pricing model as compared to a flat rate pricing model.

Still confused? It’s okay. This involves a lot of the nitty-gritty details of business finance and how to maximize each of your transactions, so you minimize risk and increase potential revenue. Let’s get a little more in detail about each tier so you can make a well-informed decision about whether or not it is suitable for your business operations.

Tier 1 — Qualified Transactions

The first tier we need to cover concerns those regular transactions that tend to happen in person or with cards that offer as little risk as possible. This tier provides the lowest rates because it is the most reliable. Payment processors don’t have as much risk to consider because the customer shoppers are physically there, can be confirmed through pins or signatures, and use debit cards more than credit cards associated with corporations and rewards. That continuity leads to more predictability and, thus, lower rates.

Tier 2 — Mid-Qualified Transactions

Mid-Qualified transactions are a tier meant for a little more risk. These may be rewards or loyalty cards that offer cashback bonuses or other features. Most of the time, this includes credit cards on the consumer marketplace or keyed-in payments. Any other transactions that are processed in a 24-hour time period for authorization may also end up in this tier because they require more authentication. While this tier does have a higher rate than the first, it is lower than the next tier, which covers higher-risk transactions.

Tier 3 — Non-Qualified Transactions

A non-qualified transaction is exactly what you think. These are cards that have a bit higher risk when processing. You can consider corporate cards, international cards, or any payments made with a CNP (card not present) type of transaction. As you can imagine, these types of payments carry a much higher risk of fraud and authorization. As such, they are subject to higher fees than the other tiered rate structure options because the processor is also assuming that risk.

What is the Cost of Tiered Rate Pricing?

Remember that every payment processing service is going to be unique based on the banks and stakeholders backing their operations. That being said, there is no “one-stop” unified solution to tiered rate structures. Every processor will calculate how much risk, what they need for profits, and how to remain competitive in the market to develop their own pricing model for fees.

This idea of a case-by-case basis extends to manipulating the tiers. Many processors may blur the lines between Tier 1 and Tier 2 concerning corporate cards or systems like Apple Pay, where a card is not required to be present. Your best bet is to ask questions upfront, read through the terms and services, and get to know your payment processor. We at North American Bancard always encourage our clients to ask any questions they want ahead of time, so our relationship remains as easy and smooth as possible.

It may help to cover what types of rates you can expect from the industry. This will help put the tiered rate structurein perspective and give you a better idea of what you need to account for concerning taking payments for your business.

Interchange Fees

Every single credit card network requires an interchange fee. Visa, Mastercard, American Express, and Discover all ask for a fee for every transaction that is processed through their networks. These tend to be small fees and fixed as these provider networks know they are in tough competition with one another and want your business. You will most likely never see these fees as they are paid by the banks issuing the cards and not the merchants themselves.

All these interchange fees are automatically subtracted from the transaction funds. Yes, that does mean you receive less in your merchant account than the price your clients have paid, but it also means you don’t have to handle the fees outside of the transaction. That saves you time in the long run.

There are also interchange plus pricing models that list all fees handled on a monthly merchant statement. This will include any wholesale fees determined by the issuing banks and credit cards, as well as any markup fees determined by a processor. You can expect most interchange fees to hover around 1.15% and 3.25%, with a possible potential small flat rate as well.

Pros of Tiered Rate Pricing:

• Transparency for merchant records.
• Flexibility in the marketplace based on your needs.
• Cost-effective solution for businesses with low-risk transactions.
• Easy to manage risk based on the style of business you are running.
• Incentives for you and your customers to use more reliable payments.

Cons of Tiered Rate Pricing:

• It is more complex than flat-rate credit card processing.
• May have higher costs if you experience a lot of non-qualified transactions.
• It can be a bit more unpredictable, depending on your payment policies.

Is there a Downside to Tiered Rate Structures?

At North American Bancard, we always want to be transparent with our clients to ensure we maintain the quality trust and customer relationships we have spent years cultivating. In that spirit, we should review some of the disadvantages merchants may see with the tiered rate pricing model.

Unpredictable Rates

Some providers may change the pricing model occasionally based on market demand, current economic stressors, or other situations that may lead to lower profits. This inconsistency can be costly if the rates for subsequent tiers shift without notice. Or, if the processor changes what criteria determine what tiers. Good communication between you and your processor is critical to avoid this type of situation.

Pricing Opaqueness

Unlike our team, there are providers out there who will mask or hide the fees of higher-risk tiers. That can lead to drastically high risk when it comes time to issue payment for the services rendered. Even when such processors advertise low rates with attractive fee schedules, you always want to read the fine print. That way, you avoid paying out more than you need to when the bill is due.

The Risk of High Costs

If you want a business to succeed, you need to mitigate expenses. Using a tiered rate pricing model can lead to a much more cost-effective solution for your business. However, if you have a great deal of mid to non-qualified transactions, those solutions become much more expensive quickly. This is why we always encourage clients, especially in the e-commerce realm, to look closely at the tiered structure. You wouldn’t want all your transactions to be non-qualified while thinking you are paying the lower rate.

Why Do Banks Choose the Tiered Rate Structure?

Most of the time, banks choose tiered rates because of risk mitigation. Banks assume the liability that the end customer making the transaction will pay their bills. There is some fraud to be worried about here. Things like chargebacks or stolen identity can lead to high bank expenses.

To lower the risk they experience, banks prefer a tiered structure where that liability is shared among all stakeholders instead of squarely on their shoulders. Think of this as a type of insurance policy for the bank to prevent paying out higher expenses in the long run.

What About Alternatives to Tiered Rate Pricing?

There are absolutely alternatives to tiered processing that are available. We’ve discussed a couple already, but let’s do a quick review:

• Interchange plus pricing: This will include a percentage-based fee for each transaction plus an additional fixed fee. For example, a 1.29% fee on the total transaction value plus $0.10 on end. This is slightly more reliable and transparent than tiered pricing because you know what to expect regardless of the payment type.
• Flat Rate Credit Card Processing: This is the most straightforward alternative where every transaction is given a flat rate fee. That can mean less money changing hands and lower expenses to the bank and merchant, but it doesn’t account for risk.
• Membership-Based Fees: As the name suggests, this is when you agree to a subscription or membership with a processor based on a monthly fee for a certain number of transactions. That typically doesn’t include any interchange or network fees from the cards, but it does give you a lot of predictability.

Wrapping Up Tiered Rate Structure Models

While there are some disadvantages you need to overcome that mean the tiered rate pricing model is not suitable for your business structure, it does offer a ton of flexibility for other organizations.

At North American Bancard we take the time to get to know your business and operations. Our team can offer the best solutions fit to your specific needs. Whether that is using a tiered rate structure, interchange plus pricing model, or flat rate merchant pricing, rely on our experts to get you up and running and receiving customer payments. So give us a call today, and let’s find a cost-effective solution for your needs!