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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

Merchant Account Pricing | What to focus on

Posted by Alex Neir on Fri, January 13, 2012 @ 11:08 AM
Merchant Account Pricing

Merchant account pricing can be confusing in that there are quite a few moving parts that determine the overall cost month to month. This post is intended to explain how merchant account pricing is set up and give your business specific direction when considering alternate pricing plans.

There are three pricing models used to establish merchant account pricing.

  1. Interchange Plus – Transparent pricing in which you are assigned an exact markup over interchange
  2. ERR (Enhanced Rate Recovery) – One advertised rate with disguised downgrades
  3. Tiered Pricing – Multiple tiered prices depending on how credit cards are accepted

Regardless of the pricing model there are two components that make up the majority of your merchant account cost. The percentage of the sale and the per-transaction cost.

Most merchant service providers will have a preferred pricing model which is used to quote merchant account pricing. It is up to the business requesting an account to specify which pricing they prefer. The most cost effective pricing is Interchange Plus.

Specific direction when considering alternate pricing plans

Rule 1 – request interchange plus pricing. If the provider you are speaking with tells you that your business does not qualify for Interchange Plus pricing, look for another provider.

Rule 2 - Understand how your business’s transaction size and frequency affect your merchant account costs. First, determine your average sale amount. Take the total amount of sales for the previous month and divide them by the total transactions. Second determine the total number of transaction you are likely to conduct month or month.

With these two figures you can do a simple calculation to determine where you need to focus when negotiating your rates. If you have a higher average sale amount and lower transactional volume you need to negotiate a lower percentage of sale. If you have a lower average sale amount and I high transactional volume you need to negotiate a lower per transaction price.

For example - If your pricing is 1.59% and $0.25 per transaction:

  • A $1.00 transaction will cost $0.27 or 26.59%
  • A $100.00 transaction will cost $1.84 or 1.84%

Would you like more guidance on how to negotiate your merchant service pricing? Download our guide on questions to ask when looking for a merchant account.

Tags: ERR Pricing, Tiered Pricing, Interchange Plus Pricing, Merchant Account Pricing

The 3 best price structures for credit card processing | Interchange

Posted by Alex Neir on Thu, August 26, 2010 @ 04:18 PM

The 3 best price structures for credit card processing | Interchange Plus

price structures for credit card processing
There are many ways to set up the pricing structure for a credit card processing account. We will discuss the 3 best price structures for credit card processingand give a detailed explanation of each.
  1. ERR Pricing: One rate
  2. Tiered: Two to four rates
  3. Interchange Plus: Every rate

The third price structure for credit card processing is called Interchange Plus Pricing. Interchange Plus pricing gets its name based on the fact that the rate charged for the transaction comes straight from the Interchange table “plus” a surcharge amount.

As a merchant business with a interchange plus pricing structure, you will be charged the Interchange Table rate that the transaction qualified at plus a surcharge amount. The surcharge amount is negotiated with your merchant service provider. We will use 50 basis points or 0.50% for illustrative purposes.

(The Interchange Table is the rate table set up by Visa, MasterCard, Discover and American Express to facilitate the acceptance of plastic as a form of payment. There are currently over 180 different interchange rates that can apply. The rate is determined by how the card is transacted – swiped vs. keyed and the type of card that is transacted – debit card, check card, rewards card, corporate card, international card) More information on interchange fees

Transaction Amount = $100

Interchange Qualification

Interchange Rate



Check Card, Swiped




Rewards Card, Swiped




Check Card, Keyed In




Rewards Card, Keyed In




International Card, Swiped




The interchange plus pricing structure for credit card processing is most advantageous for merchants that are transacting large volumes.

What pricing structure is right for my business?

Tags: Interchange Fees, Pricing Structure for Credit Card Processing, Interchange Plus Pricing, Credit Card Processing Fees