Credit card processing fees are extensive, complicated, and can be overwhelming.  Nevertheless, you must pay them if you want to process credit cards through your business.  Rather than paying these charges blindly, you might as well try to understand them.  That way, you can get a better understanding of your true overhead.  In this attempt to clarify things a bit, I will break things down into explanations and definitions.  So hold on….here we go!

Credit Card Processing Rates

Most merchants know the processing rate they were quoted when they signed up for an account, or at least have seen rates by various processors.  Why, then, does one processor have a rate of 0.20% + $0.12 and another has a rate of 2.9% + $0.30 and still another offers a “Qualified” rate of 1.79% + 0.12?

The simple answer is that the first example is “Interchange-Plus” pricing and the second is known as “Flat Rate” pricing and the third is known as “Tiered” pricing.

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To break this down further:

Interchange-Plus pricing is the processor’s markup over the wholesale cost (interchange rate) of transactions. This is the most transparent pricing model with the most understandable terms and fees. This is generally the model that will be the most cost efficient for the business owner.

Flat Rate pricing is the model used by most online facilitators such as Square, PayPal, Stripe.  This pricing model is like the “tiered” model but without the tiers.  Instead, all transaction cost the same percentage and transaction fee regardless of the wholesale cost.  This model tends to make the transaction cost very high.

Tiered pricing is an assigned percentage for each “tier” of card known as qualified, mid-qualified and non-qualified.  Tiered pricing models categorize credit card transactions into three categories: qualified, mid-qualified and non-qualified.  Generally, qualified rates are the lowest, and the transaction rates increase for mid-qualified and are highest for non-qualified transactions.  This is a more opaque and expensive pricing model. 

This brings us to the infamous “Interchange” rate and what it is.

Each card and transaction type has a specific interchange fee set by the corresponding card association, and that fee is ultimately collected by the card-issuing bank.  The interchange rate makes up the bulk of your processing cost.  These interchange fees are not negotiable.  The card types refer the “tier” of card it is (how many rewards or miles the customer gets back) and the transaction type refers to a face to face transaction (swiped or chipped) or a keyed in transaction.

I think we’ve done quite enough for now!  Go take two aspirin and call me in the morning!

Stay tuned for Part 2 where we will examine the other costs involved and exactly what and who a “processor” is!

If you would like to get in touch with the author, please contact:

Barbara Ewell
Retriever Merchant Solutions