Interchange Rates vs. Flat Rates vs. Tiered Pricing

Posted by Saad Rehman on 4th Aug 2023

If you are a business owner who accepts credit cards, then you need to understand how payment processing fees work and how different pricing models affect your business. In this blog, we will compare these three most common pricing models.

What are payment processing fees?

Payment processing fees are the charges that you pay to a processor for accepting credit card and debit payments. These fees consist of two main components: passthrough and markup fees.

  • Passthrough fees are those that are set by the issuing banks (the banks that issue credit cards to customers) and the credit and debit card networks (such as Visa, Mastercard, American Express and Discover) and include interchange, dues, assessments and network costs. They vary depending on the type of card, the type of transaction and other factors. For example, a keyed-in transaction will have a higher fee than a card present one. Passthrough fees are not negotiable and are the same for all merchants.
  • Markup fees are those that are added by the processor or acquirer (the middleman that communicates with the issuing bank to approve and settle or decline transaction). These fees are also called processor fees. They vary depending on the processor and the pricing model they offer. Markup fees are based on risk, business type and other factors and may be negotiable.

What is flat rate pricing?

Flat rates are a simple and predictable pricing model that blends passthrough and markup fees into one consistent rate and fee for all transactions. With this model, you pay the same percentage and per-transaction fee regardless of the type of card, the type of transaction or other factors.

The advantages of flat rates are:

  • You can easily calculate and forecast your payment processing costs and budget accordingly.
  • You do not have to worry about fluctuating pass-through fees or different types of transactions affecting your fee structure.
  • You may not have to pay any monthly or annual fees to your processor for using this pricing model.

What is tiered pricing?

Tiered pricing is a pricing model that categorizes pass through fees and markup fees within tiers. With this model, your processor assigns each transaction to one of three tiers: qualified, mid-qualified or non-qualified. Each tier has a different rate that is supposed to reflect the risk and interchange level of the transaction.

  • The qualified rate is typically billed for a normal payment made on a standard credit and debit cards. These transactions are the least expensive for merchants because they carry the smallest risk of fraud or human error. Non reward, business and foreign debit credit and debit cards fall into the qualified rate category unless they are manually keyed into the terminal.
  • The mid-qualified rate is typically charged for transactions that do not fit the criteria for the qualified rate. For example, the mid-qualified rate is billed if the card is manually keyed in credit card information instead of swiping the customer’s card (typically the user must perform address verification; otherwise, the merchant will pay the non-qualified rate). Rewards cards and some business cards may fall into the mid-qualified category.
  • The non-qualified rate is the highest rate a merchant can be billed for a credit card transaction. This rate is charged when a user manually enters a card and does not perform address verification or when other necessary information is absent at the time of the transaction. Most corporate, rewards and foreign cards fall into the non-qualified category.

The advantages of tiered pricing are:

  • You may receive lower rates for some transactions that fall into the qualified tier, such as swiped debit cards or regular credit cards.
  • The most common and second easiest billing structure to understand.

What is interchange or cost-plus pricing?

Interchange rates are a transparent pricing model that separates passthrough fees and markup fees. With this model, you pay the exact passthrough fee for each transaction plus a fixed percentage and per-transaction fee as markup.

The advantages of interchange plus rates are:

  • You can see exactly how much you pay for pass through and markup fees on your monthly statement.
  • You can pay less from lower pass-through fees for certain types of transactions, such as debit cards or cards present or more for rewards, foreign and business cards and keyed transactions.
  • You may be able to negotiate lower markup fees with your processor.

We hope this blog helped you understand the differences between billing methods. If you need more help choosing the best payment processing solution for your business, feel free to contact us on our sales line.