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Interchange pricing vs. tiered pricing | Pay attention to the margin

Posted by Alex Neir on Mon, April 09, 2012 @ 03:59 PM
Interchange Pricing

Interchange pricing and tiered pricing are two popular models used to calculate the rates and fees that your business will be charged to accept credit cards. Both interchange pricing and tiered pricing use interchange to determine the total fees charged for the month.

The term interchange is used to describe the rates that are charged by the credit card associations to accept a piece of plastic as payment. The interchange rates are set by each individual association, Visa, Master Card, Discover, Diners, JCB etc. Interchange rates are associated to each individual transaction according to:

  1. Industry of the merchant (retail, restaurant, supermarket,  etc)
  2. Transaction method used to accept the payment (swiped / keyed in)
  3. Credit card type (debit, credit, rewards card etc.)  

Here are the published interchange rates for both Visa and Master Card:

It is helpful to look at the differences between the two pricing models with an actual sales example. The example given below is for a retail merchant that is swiping 3 different credit cards through a terminal. The qualified rate applies to a swiped check card. The mid-qualified rate applies to a swiped rewards card and the non-qualified rate applies to a swiped corporate card.

Tiered PricingRateVS.Interchange PlusRate
Qualified Rate 1.48% Qualified Rate Interchange + 0.30%
Mid Qualified Rate 2.29% Mid Qualified Rate Interchange + 0.30%
Non-Qualified Rate 3.05% Non-Qualified Rate Interchange + 0.30%

Example sales with tiered pricing

QualificationSaleRateActual InterchangeMarginFee Paid
Qualified Rate $25 1.48% 0.95% 0.53% $0.37
Mid Qualified Rate $25 2.29% 1.15% 1.14% $0.57
Non-Qualified Rate $25 3.05% 2.10% 0.95% $0.76

Example sales with interchange plus pricing

QualificationSaleRateActual InterchangeMarginFee Paid
Qualified Rate $25 1.25% 0.95% 0.30% $0.32
Mid Qualified Rate $25 1.45% 1.15% 0.30% $0.36
Non-Qualified Rate $25 2.40% 2.10% 0.30% $0.60

The fundamental difference between the two pricing models is that the rate in the tiered model is set at a predetermined level. The interchange plus model fluctuates based on the actual amount charged from Visa / Mastercard / Discover (aka Interchange).

It is important to pay attention to the margin. The margin is the difference between the rate that is charge by interchange and the rate your business is billed. With a tiered pricing structure there is quite a bit of margin built into each transaction. So as the number of transactions raises over the month so does the total margin paid. With Interchange plus the margin is pre-negotiated, stays the same for every transaction and effectively lowers your overall costs.

Tags: Interchange Fees, Interchange Plus Pricing, Interchange Pricing