Simple Guide to Payment Processing Pricing Models

The payment processing industry has created a number of different methods to price merchant accounts. By understanding these different ways to calculate fees, you can potentially save thousands of dollars per year on restaurant merchant account fees.

The different card processing pricing models used today include:

• Interchange Plus Pricing
• Tiered Pricing
• Flat Fee Pricing
• Flat Rate Subscription
• Back Bill

Each one comes with its own set of pros and cons. It’s important for you to understand each model and how it affects your business before choosing one. Here’s a simple breakdown of each model and how it works.

Interchange Plus Pricing

This is considered by many merchants to be the best pricing model available. The pricing is transparent and consistent, regardless of transaction volume or average ticket price. Here, the processor passes the interchange fees and card association fees directly to the merchant, along with an agreed-upon markup fee to cover their costs. Each transaction will have the standard interchange fee that is charged by that specific card, along with the fee charged by your provider.

The great thing about this pricing model is that it’s much more cost-effective than the others. You don’t have to be concerned about how your transactions will be categorized. You also don’t have to worry about small transactions being charged more than they should be, as is often the case with flat fee processing. The only drawback is the difference between the interchange fees, which can vary significantly between card-issuing banks, and might be difficult to anticipate or plan for.

Benefits:

• Transparency on every card type processed
• Little to no hidden fees because of how transparent the model is
• Highly cost-effective, the chosen model of most large companies

Drawbacks:

• Long credit card statements due to details of every card type
• Statements can be difficult to read and understand

Tiered Pricing

With tiered pricing, your credit card statement will be much easier to understand, but you’ll probably pay higher rates. This model takes all transactions and categorizes them into tiers, generally referred to as qualified, mid-qualified, and non-qualified. Each transaction in a given tier will be charged at the rate that has been assigned to that tier. As you can imagine, this makes the credit card statement less confusing and more streamlined.

The qualified tier includes mostly card-present and debit card transactions because they tend to be the most secure. The mid-qualified tier often includes reward and cash-back cards, along with some online and phone transactions. The non-qualified tier includes everything that does not fall into one of the other categories, including high-end reward cards. Processors downgrade many transactions into this tier so they can charge a higher rate.

The card associations (i.e. Visa, MasterCard, etc.) set the interchange fees, but the payment processor decides which transactions fall into each category. This means that different processors will categorize transactions differently. This model can be very cost-effective, but it can also drive your costs up, depending on how your provider categorizes transactions.

Benefits:

• Low fees for qualified transactions
• Statements are easy to understand

Drawbacks:

• Unqualified transactions can cost you a lot more money
• The processor gets to choose which transactions fall into which tiers
• Markups can be hidden in the tiered fees

Flat Fee Pricing

As the name suggests, this type of pricing offers one flat fee for every transaction of the same type. For example, the fee will be the same for every type of credit card, regardless of what the interchange fees are for each one. Since Visa, MasterCard, AMEX, and others all have different fees, this can make your statement super easy to read.

In this model, providers will lump the interchange fee, network fee, and markup all into one fee. Since the cards all have different fees, the provider generally uses the higher fee in order to cover their own costs. This makes your fee structure much higher than it would be with interchange-plus pricing. Additionally, many providers charge different flat fees for credit cards than for debit cards or other payment types.

Benefits:

• Easier to budget and plan for your fee expenditure each month
• Generally easy to read statements
• Ability to process luxury reward cards for the same price as basic cards

Drawbacks:

• You will likely pay more in fees than you would with other models
• Processors markup fees to wholesale prices to mitigate their losses
• Your provider may charge different flat fees for different transaction types, which can be confusing

Flat Rate Subscription

Flat rate subscription pricing is the only pricing model that does not base its fees on a percentage of sales. Instead, the merchant pays the exact interchange and network fees that are being charged by the cards. In addition to those fees, the merchant pays a flat monthly or annual fee to the processor for their services.

This is often a great option for new or growing businesses that don’t have a huge amount of sales. However, as sales increase, the provider often requires a more expensive monthly membership to be purchased. This is generally done through a cap on the number of transactions processed. A provider may offer a few different levels of membership, each with its own number of transactions included. Once your business hits the max number of transactions, your provider will likely ask you to upgrade to a more expensive membership.

As a business owner, it’s smart to compare these rates to what you would pay with some of the other pricing models. Sometimes it can be a great option, but it can also be very costly.

Benefits:

• Simple processing statements that are easy to read
• Potentially lower costs if your business doesn’t do a ton of transactions
• Ability to plan and budget for your processing fees
• Great for businesses with high transaction totals and fewer transactions

Drawbacks:

• Most memberships have a limited number of transactions before you need to upgrade
• Not great for businesses with a high number of transactions each month

Back Bill

This pricing model is much different than the others we’ve discussed so far. With this type of pricing, the provider will charge the merchant a fixed rate for all card transactions for the entire month. At the end of the month, they review all of the charges to determine whether the actual fees paid to the card networks were more or less than what they charged the client. Any charges that were higher than what the provider charged the client, will be added to their next bill.

For example, if your provider charges 1.75% flat for each transaction, this is the amount you will be billed for the month. 1.75% times the number of transactions processed. On the following month’s statement, you will be billed again for any of these transactions that were higher than 1.75%. If an interchange fee on one of these transactions was 1.9%, the merchant will be billed the difference of .15% on the next bill.

Conversely, the provider generally does NOT go back in and give the merchant any money back if the card networks charged less than 1.75%. They simply keep the difference as profit.

This model may seem fairly simple in that you’ll only see one charge on your statement for the current month and one for the previous month. However, unless you’ve got the time or manpower to review the previous month’s transactions, you may never know whether or not the bill back amount was accurate. It can be extremely confusing and difficult to track.

Benefits:

• One single charge on your monthly statement for the current month’s expenses
• Flat fee for all transactions, so it’s easy to understand

Drawbacks:

• You could be charged more than necessary for some transactions
•  Tracking the bill back amount can be a challenge

Conclusion

Generally speaking, Interchange Plus pricing is the most cost-effective type of pricing available to merchants. Since the interchange and network fees are passed directly to the merchant, you never have to worry about paying more than you should. The only thing you need to shop around for in terms of price is the provider who offers the best markups.

To get a better picture of how credit card processing fees affect your bottom line, check out our free card processing and bundled POS calculator.