Over 80% of American adults owned at least one credit card in 2023. Moreover, credit cards contributed to 27% of the spending at point-of-sale (POS) systems worldwide. That’s over $10 trillion in transactions.
But as beneficial as credit card processing is for small businesses, you’ll have to work with a payment service provider to accept them — and processing fees can be tricky to navigate. Three-tiered pricing (or tiered pricing) is a popular strategy several payment processing companies use—not to be confused with the tiered pricing models (volume-based pricing, usage-based pricing, feature-based pricing, subscription-based pricing, etc.) that SaaS companies use when offering their services.
In payment processing, tiered pricing splits transactions into three types—non-qualified, mid-qualified, and qualified—and charges a different fee for each type of transaction.
Why does this matter to you? Because credit card processing fees can add up quickly and affect your business’s bottom line. In this article, we’ll discuss tiered pricing strategy, including the different types of cards and transactions, so you can make smarter, more profitable business decisions.
TL;DR
- Tiered pricing is a popular strategy several payment processing companies use. It splits transactions into three types—non-qualified, mid-qualified, and qualified—depending on the credit card type and payment mode used, and charges a different fee for each tier.
- Qualified transactions made with physical credit or debit cards have the lowest processing fees while manually keyed-in and basic reward card transactions constitute the mid-qualified tier and are slightly pricier. While some basic rewards cards may fall into mid-qualified, the reality is that most modern rewards, corporate, and international cards are funneled into the non-qualified tier, allowing processors to charge their highest possible rates.
- Tiered pricing works best for merchants who process large amounts of qualified transactions but isn’t quite transparent. Merchants can end up paying high fees if they have many non-qualified transactions and payment processors may even abruptly change their classification criteria.
Understanding tiered pricing and its value proposition
As mentioned above, tiered pricing is a payment model many processors use to calculate how much merchants should pay for each credit card transaction they accept. They categorize transactions into different levels based on how they are processed. Then, payment service providers determine the price levels for each of these.
Instead of a flat rate, the fees depend on the tier a transaction falls under, which usually depends on the credit card type and how the payment was made. Let’s take a look.
- Qualified – This is the most basic tier. Qualified transactions are the simplest type of credit card transactions. They generally require a standard card (non-rewards), swiped/dipped (card-present transaction), and settled within 24 hours. Merchants benefit from lower prices in processing fees.
- Mid-qualified – The fees for mid-qualified transactions are higher than those in the qualified tier. Processing transactions in the next tier is a little more complicated, as they involve payments made online, over the phone, and with basic rewards cards.
- Non-qualified – This tier covers the most complicated transactions and hence is the most expensive. These transactions are usually high-risk, such as modern rewards, corporate, and international cards or those that bypass certain security standards.
Although these tiers have different fees, they share the same key components. In a tiered model, the processor hides the actual interchange costs and processor markups behind a single, bundled rate for each tier. This makes it impossible for the merchant to see the true cost of the transaction.
How tiered pricing compares with others
Tiered pricing is just one pricing strategy payment processors use. Other popular pricing plans include flat-rate and interchange-plus pricing.
Flat-rate pricing
The merchant pays a set price for all credit card transactions in flat-rate pricing. The fee does not change depending on the card or transaction type. Such pricing offers simplicity and predictability for business owners. However, it can be more expensive for businesses that process large volumes of transactions.
Interchange-plus pricing
On the other hand, the interchange-plus pricing model requires merchants to pay the interchange fee set by credit card networks and a fixed fee set by payment processors. This pricing model is more transparent, as merchants know how much they’re paying their credit card processor and how much is going to the card network.
Tiered pricing
With tiered pricing, merchants can choose a payment processor that offers pricing options that best match the transaction types they handle. With this model, the processor estimates all the costs of processing credit cards and bundles all the fees into tiers.
However, this also leads to the biggest disadvantage of the tiered pricing model—lack of transparency. Merchants are usually unaware of how payment processors have categorized transactions, why certain fees apply, and why others don’t.
The tiers explained: Qualified, mid-qualified, and non-qualified
As mentioned earlier, transactions are usually grouped into tiers based on the card type and the mode of payment. As such, transactions are grouped based on their complexity and level of risk.
1. Qualified tier
The lowest risk and least complex payment transactions are included in the qualified tier. These transactions are usually made with physical credit or debit cards that are swiped or inserted into chip card readers. As these transactions are pretty straightforward and secure, merchants can get the best rates for them.
2. Mid-qualified tier
Transactions that are slightly riskier and more complex fall into this category. For example, manually keyed-in transactions are grouped in the mid-qualified tier. Payments made with reward cards also fall into this category.
To complete online credit card payments or those over the phone, card details must be manually typed in, which makes them more complex and less secure. Hence, this tier is slightly pricier than the qualified tier.
3. Non-qualified tier
This tier covers the riskiest payments made with non-standard cards like international cards, business cards, and specific high-benefit rewards cards. As a result, its fees are the highest.
Transactions in this tier are usually very high-risk or premium and sometimes don’t adhere to certain security guidelines. Processing them can be complicated, which is reflected in the fees merchants pay for this tier.
Benefits of tiered pricing
While processors with tiered pricing market the “qualified” rate as a way to save money, it is often a “teaser rate” that applies to a shrinking number of basic cards, while the majority of transactions are “downgraded” to more expensive tiers. However, some business owners may find certain benefits of tiered pricing attractive.
Simplicity of the pricing model
One reason why the tiered pricing model is so appealing is its simplicity. Payment processors create the tiers and the conditions that go along with each, and merchants, in theory, only have to match the right tier with their business.
If a business consistently deals with the same type of transactions, tiered pricing can give them a high level of predictability. Plus, merchants don’t need to dive into complex topics like card network interchange fees.
Room for negotiation
While you can negotiate the rates of the tiers themselves, you cannot negotiate the “bucket logic.” The processor maintains the power to “downgrade” transactions at their discretion, effectively nullifying any negotiated savings.
But if merchants are able to analyze their financial data and understand how their transactions can be categorized, they can leverage this knowledge to secure the best rates. Moreover, this pricing model allows merchants to move to more favorable tiers as their business evolves.
Drawbacks of tiered pricing
Despite its benefits, small business owners should keep in mind that tiered pricing comes with its fair share of downsides. Let’s take a look.
Lack of transparency
This is probably the biggest issue with tiered pricing. Its structure may be simple to understand but comes at the cost of transparency. Business owners don’t usually have clarity on the breakup of the price, processor markups, and interchange fees.
Risk of paying higher fees
Merchants can end up paying higher fees than other pricing models if they have many non-qualified transactions. For example, if a business handles many international payments or reward card transactions, its card processing costs could be exorbitant. Ultimately, this can severely affect profit margins.
Payment processors adjusting tier classifications
Payment processors can abruptly change the way they classify transactions. This could push more transactions into higher tiers, thereby increasing the processing costs that merchants have to pay. Businesses may find it difficult to accurately estimate monthly card processing costs if their transactions come under different pricing tiers.
Alternatives to tiered pricing
Tiered pricing relies on “opacity”—the less you know, the more the processor makes. At Stax, we believe in radical transparency. Our subscription-based model eliminates tiers entirely. You pay the direct cost of interchange with 0% markups, plus a simple monthly subscription and small cents per transaction fee. No buckets, no downgrades, no hidden fees.
Moreover, Payment Depot offers interchange-plus pricing. This model provides more transparency into pricing and greater control over processing costs. In this model, the price includes the interchange fee and a fixed markup added by the payment processor. So, you don’t have to worry about how your transactions may be classified.
How to evaluate and negotiate tiered pricing terms
Data is your friend when it comes to negotiating the terms of tiered pricing with payment processors. Review your financial statements and processing records to understand which tiers your transactions will fall under.
This will also help you figure out which transactions are being classified into higher-cost categories and why. Use this information to not only improve business strategies but also negotiate better fees for lower tiers, as the bulk of transactions will fall under them.
Always keep an eye on the processing fees you’re paying on a monthly basis. If your processing costs change unexpectedly, check if the payment processor has changed their categories or terms. Be proactive and renegotiate terms as soon as possible.
Final words
The tiered pricing structure classifies transactions into different price points so that merchants have to pay different rates for different types of transactions. By diving deep into the transactions processed by your business and with some clever negotiations, you can significantly lower your business’s credit card processing costs if you choose this pricing model.
While the structure of this pricing model may be simple to understand, you need to constantly monitor your card transactions and fees to see if you’re paying a higher price. You should be ready to negotiate or change business processes to keep processing costs low.
Alternatively, if you want to learn how your business could benefit from Stax’s subscription-based pricing, contact us today.
