Processing Fees, What are they?
In merchant services there are two different types of pricing. “Tiered Pricing” (Bucket Pricing) and Interchange pricing (Interchange PLUS). These two pricing are very different in the way they charge your business for processing fees. Simply put, interchange pricing is a much more exact pricing for the types of cards you are accepting, whereas tiered pricing takes a much more relaxed approach. We here at SoCal Merchant Services believe Interchange is almost always the route to go, but tiered pricing does sometimes benefit the merchant as well. We’ll get into both below.
What is Interchange Pricing?
As a business, you are going to accept all sorts of different types of cards; Rewards Cards, Corporate Cards, business cards, frequent flyer cards, regular debit cards, and so on. The types of cards currently in circulation are in the thousands. Each of these cards has an “Interchange Pricing” attached to it. That’s the cost that you’ll pay for each card when you accept it at your business. The more benefits attached to the card for the cardholder, the higher the interchange price is going to be. When you are setup on Interchange PLUS pricing, you are paying the exact fee for each individual card PLUS a very small addition fee that the processor collects for service, Hence the name “Interchange PLUS”. Interchange is great because you are only paying for the types of cards that you’ve accepted. When setup properly we believe interchange pricing is almost always the winner for the merchant.
What is Tiered Pricing?
As stated earlier tiered pricing takes a much more relaxed approach towards how you are charged for merchant services. Typically tiered pricing has three buckets in which any particular card you accept with fall under. Those three buckets are swiped sales, keyed sales, & non-qualified sales. Each of these buckets has only one rate attached to it. So even though you are accepting thousands of different card types which all have different interchange rates you will only ever be charged one of these three bucket rates. The reason we aren’t the fondest fans of tiered pricing is because the three rates for each bucket are always high enough of a percentage to ensure that the processor is always going to make money from your sales. These bucket rates are ballooned to encompass even the highest interchange cards, whether you ever see those cards or not. Why pay bucket rates for cards you aren’t sure you are taking? We’ll visit that below.
What’s best for my business?
We did mention earlier that sometimes tiered pricing works best for merchants, this statement still holds true. In our research of all of the many types of businesses, and all of the many types of card acceptance behaviors tiered pricing usually works best for those businesses who accept credit cards infrequently. We believe tiered pricing will almost always be better for those businesses out there that take $4,000 dollars or less in volume monthly. The reason being is because many of these companies that offer tiered pricing usually offer it without any monthly fees. A great example is a competitor of ours Square. They offer a flat rate of 2.75% without any other fees on swiped sales. Interchange Pricing will almost always have a higher average rate on volume $4,000 or less. Tiered pricing is a great way to save on payment processing costs for those who would like to take credit cards, but don’t necessarily depend on it.
If you are a business that on average takes more than $5,000 dollars a month tiered pricing is almost always a bad choice. We can almost guarantee a savings by switching to interchange pricing 100% of the time on these cases. Interchange pricing on larger monthly volume will always have a lower effective rate than tiered.
Whatever the case, contact us and lets have a conversation! We know that every business is unique, and has completely different needs. We absolutely love educating merchants on the many different topics surrounding merchant services and always strive to find the best solution for each individual, even if it means turning them away to a competitor.