Accepting credit card payments at your business is a surefire way of increasing customer satisfaction and retention. Don’t believe it? Here are the numbers to prove it.
Over 80% of American adults owned at least one credit card in 2023. Also, credit cards contributed to 27% of the spending at point-of-sale (POS) systems worldwide. That’s over $10 trillion in transactions.
As beneficial as credit card processing is for small businesses, you’ll have to work with a payment service provider and their 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.) 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.
Why does this matter to you? 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 and 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 reward card transactions constitute the mid-qualified tier and are slightly pricier. Payments made with international cards, business cards, and specific high-benefit rewards cards are classified as non-qualified and have the highest fees.
- 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. Low-cost transactions made with standard credit cards fall under this category. 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 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 corporate card payments or those that bypass certain security standards.
Although these tiers have different fees, they share the same key components. The first key component is the transaction fee, which is the base cost merchants must pay for each credit card transaction. The interchange fee is another component, set by card issuers. Finally, the fees also include a processor markup, which the payment processor sets.
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
Merchants often prefer tiered pricing as the model is simple. They can choose a payment processor that offers pricing options that best match the transaction types they handle. Payment processors estimate all the costs of processing credit cards and bundle 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.
Another important benefit of the tiered pricing plan is that it helps businesses keep credit card processing costs low as they can choose the pricing model that best suits the transaction type most common in their business. Also, as their needs change, businesses can negotiate different terms to maximize profitability.
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
Payment processors offer many different pricing models, but business owners find certain benefits of tiered pricing particularly attractive.
Cost savings for merchants
Merchants can analyze the type of transactions they deal with most and choose the tier that best aligns with their transaction profile. This helps them optimize profits as they aren’t stuck with fixed yet expensive rates on all transaction types.
Tiered pricing works best for merchants whose transaction profiles feature a large percentage of low-cost transactions. Due to volume pricing, businesses that process large amounts of qualified transactions can significantly reduce their credit card processing costs by switching to a tiered pricing model.
Merchants that mainly process low-risk, in-person payments that are simple and secure get to enjoy the lowest processing fees with tiered pricing.
Simplicity of the pricing model
Another 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 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
With tiered pricing, merchants usually have room to negotiate rates with their payment providers. 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
If you decide tiered pricing isn’t right for your business needs, you may explore the following options that might be a better fit.
Interchange-plus pricing, offered by Payment Depot, gives 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.
You could also opt for membership-based pricing like Stax offers. You will be charged a monthly fee with no additional percentage-based charges, which makes it easy to predict your monthly card processing costs.
Of course, flat-rate pricing remains a good option (where you pay the same fee for every transaction) if your transaction volumes are low.
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.
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