Credit Card Pricing Explained - 3 Tier Method

3-Tier Pricing

The 3-Tier Pricing is the most popular pricing method and the simplest system for most merchants. In 3-Tier Pricing, the merchant account provider groups the transactions into 3 groups (tiers) and assigns a rate to each tier based on a criterion established for each tier.

First Tier - Qualified Rate

A qualified rate is the percentage rate a merchant will be charged whenever they accept a regular consumer credit card and process it in a manner defined as "standard" by their merchant account provider using an approved credit card processing solution. This is usually the lowest rate a merchant will incur when accepting a credit card. The qualified rate is also the rate commonly quoted to a merchant when they inquire about pricing. The qualified rate is created based on the way a merchant will be accepting a majority of their credit cards. For example, for an internet merchant, the internet interchange categories will be defined as Qualified, while for a physical retailer only transactions swiped through or read by their terminal in an ordinary manner will be defined as Qualified.

Second Tier - Mid-qualified Rate

Also known as a partially qualified rate, the mid-qualified rate is the percentage rate a merchant will be charged whenever they accept a credit card that does not qualify for the lowest rate (the qualified rate). This may happen for several reasons such as:

A consumer credit card is keyed into a credit card terminal instead of being swiped
A special kind of credit card is used like a rewards card or business card
A mid-qualified rate is higher than a qualified rate. Some of the transactions that are usually grouped into the Mid-Qualified Tier can cost the provider more in interchange costs, so the merchant account providers do make a markup on these rates.

The use of "rewards cards" can be as high as 40% of transactions. So it is important that the financial impact of this fee be understood. So therefore, merchants will be charged the qualified plus the mid qualified rate. Example) If your qualified rate is 1.5% and the mid qualified rate is 1 %, your effective rate would be 2.5 %.

Third Tier - Non-qualified Rate

The non-qualified rate is usually the highest percentage rate a merchant will be charged whenever they accept a credit card. In most cases all transactions that are not qualified or mid-qualified will fall to this rate. This may happen for several reasons such as:

A consumer credit card is keyed into a credit card terminal instead of being swiped and address verification is not performed
A special kind of credit card is used like a business card and all required fields are not entered
A merchant does not settle their daily batch within the allotted time frame, usually past 48 hours from time of authorization.
A non-qualified rate can be significantly higher than a qualified rate and can cost the provider much more in interchange costs, so the merchant account providers do make a markup on these rates.

For more information:

Naples Merchant Services

239-449-6040

888-601-0801 fax

info@naplesmerchantservices.com

www.naplesmerchantservices.com

"Interchange" and how it affects the merchant

"Interchange" and how it affects the merchant

Interchange fees paid by merchant-acquiring banks to cardholder-issuing banks are in place to cover the cost to convert a charge on a cardholder's card to a cash deposit at the merchant business checking account, including cost factors like billing services, credit and fraud risk, profit, etc.

All payment systems utilize Interchange as a key driving component in forging markets. Notice all card products have some type of Interchange: Discover, American Express, Diners, Debit, and even smart cards. Interchange fees are particularly fundamental with charge cards whose balances are paid in full each month.

Interchange is important to a payment system because it facilitates growth. Without cardholders, merchants would have no incentive to accept credit cards and without merchants, cardholders would not carry cards.

The network effects of adding cardholders and merchants into the payment system increase the value of the system. The more places that accept credit cards, the more
valuable it become to carry a card.

An Interchange rate payable when the card is used that is high enough for the card issuing bank to make a profit provides financial incentives for banks to market, issue, and accept credit risk of cardholders.

To sign up merchants, the system has to show enough value in bringing in new customers with a credit limit to make immediate purchases so the retailer no longer has to extend store credit or take credit risk or payment over time. By paying merchants immediately and eliminating the cost of billing and collections, merchants are willing to pay the Interchange fee charged by the issuing bank.

How do you then expand markets and grow the system? By managing Interchange levels. For example, it was not too many years ago that personal checks (paper) dominated the grocery/supermarket industry. Today, through the use of special Interchange levels set at a reduced rate specifically for grocers, electronic card payments rule. Or take the example of business, corporate, and government purchasing cards. In the beginning, Interchange rates were set high to provide an incentive to card issuers to outfit business owners and their employees with credit cards to manage spending. Now with a market of business card cardholders, more businesses are accepting cards from other businesses for payment. This balance of Interchange rates is delicate - if Interchange is too high, merchants don’t sign up, and if it is too low, issuers don’t issue cards.

As you know, MasterCard (MC) and Visa are competing card companies and have different market share depending on card type. For example, banks can choose to issue a MC card product or a Visa product. You guessed it; this choice is in part made based on the Interchange levels and income to be made. Why not issue a MC if I can make more income each time one of my cardholders uses this card at a merchant? These Interchange pricing issues speak to the competitive pressures on market share.

What's the future of Interchange? Interchange is growing more complex each year. Technology advances have made it easier to implement and manage a wide array of specialized Interchange rates and fees by card type and merchant. New indicators built into the system will allow not just by industry segmentation, but merchant segmentation within an industry. Interchange based on ticket size is another popular concept. Smart card products are likely to have reduced Interchange to help pay for the billions in terminal infrastructure upgrades is another example.

Sophisticated merchants understand that the "rate as low as " approach to sales is more in place to manage sales rep turnover at the merchant account provider than it is for their benefit. Vantage is here to provide a clear view of Interchange and help you structure your billing in the most beneficial and cost effective way.

If you want the best merchant rates and are not too concerned with billing complexity, then let us show you a merchant services quote on an Interchange plus pricing plan.

Naples Merchant Services
239-449-6040
888-601-0801 fax
info@naplesmerchantservices.com

www.naplesmerchantservices.com