No one wants to pay more than necessary for credit card processing, which can already eat into profits. When comparing merchant services, it’s important to understand how different pricing systems work. Many merchant account providers advertise very low fees as a teaser, even though most transactions do not qualify for these rates.

There are two common pricing models used for payment processing: tiered pricing and interchange plus pricing. Here’s how they compare.

Tiered Pricing
Tiered pricing is probably the most common pricing model for merchant services. While it’s advertised as an easy pricing method that makes statements simpler, the truth is it merely lumps hundreds of interchange rates into just three tiers or buckets. The processor may advertise the rate of the lowest tier, but most transactions will fall into tiers with a much higher rate. A debit card, which usually has the lowest interchange rate, can be billed using the same high rate as a rewards credit card, for example.

There are no set guidelines that determine which cards go in which category which leads to massive overcharging to merchants. Some payment processors have an incentive to downgrade transactions into a lower tier to boost profits. Transactions can be downgraded for any number of reasons, including using terminal software that isn’t updated, tips and tax that aren’t entered separately, or batches that aren’t settled within 48 hours. Not all of these factors are in your control.

As a merchant, you will have no way to predict which rate you will pay for transactions or how much you are being charged above the set interchange rate. You can’t even effectively compare tiered pricing quotes between payment processors because you don’t know what the mid- or non-qualified rates are — just the lowest available rate — and you won’t know the criteria the processor uses to categorize transactions.

Interchange Plus Pricing
Rather than using tiers, the interchange plus pricing model passes the set interchange rates directly to the merchant “plus” a small markup. Because the interchange rates are not changed or lumped into arbitrary categories, you can predict your payment processing costs and know what you are paying above interchange.

The only downside of interchange plus pricing is it does take time to understand the different rates you will pay for different types of transactions and credit cards. Your statements will be longer, but with greater clarity and transparency.

In the not so distant past, interchange plus pricing was only available to merchants with high credit card volume of $25,000 or more. Today, interchange plus credit card processing can be available to small and even new businesses. Interchange plus pricing is a smart choice with only two rates to consider: the transaction fee and the interchange markup fee. This pricing model is the safe and transparent choice with no arbitrary criteria you must meet.