How Credit Card Fees Work

 In Credit Card Processing

Credit Card Fees Explained

In order for merchants to understand the true cost of card acceptance, and more importantly, if they have great rates or are being taken to the cleaners, it’s important to first understand how credit card rates and fees work.

Why Are Credit Card Rates Variable?

There are three main components to the processing fee that every merchant pays:

  1. The first types of fees are called Interchange: Interchange is the fee that card issuing banks charge merchants to accept the credit cards.  Interchange fees vary based on the card type used and are comprised of over a hundred different rate categories. For example, rewards card or non-rewards, credit or debit card and so on.  Interchange is made up of a flat fee and a percentage of the amount of the transaction. Interchange makes up the lion’s share of a merchant’s monthly processing fees. (Think of interchange as the wholesale rates.)
  2. The second type of fees, called Dues & Assessments are the fees charged by Visa, MasterCard and Discover. Assessments, which are variable by card brand, are a set percentage of the amount of the sale and the same for every transaction processed.
  3. Finally, the processor, also known as an acquirer or merchant services provider, charges its own fee for setting up and maintaining the merchant account, deploying equipment, providing support and facilitating the transaction (typically a discount rate and transaction fee). How and how much a processor “marks up” interchange plus dues & assessments is what separates one provider from another.

As enthralling as this all is ?, having a basic understanding the fundamentals of how pricing works, (particularly what factors are variable (processor fees) and which are static (interchange, dues & assessments) is critical in making an informed decision as to which pricing structure is the best fit for the merchant. In this three-part blog series, we’ll look at the most common pricing structures in the marketplace today and discuss the pros and cons of each.  First up, Tiered Pricing.

What is Tiered Merchant Pricing?

A tiered pricing structure bundles interchange fees into a smaller number of tiers.  Each tier is then assigned a charge. Fees are calculated by using the tiered rate instead of the actual interchange rate for the transaction type.

The most common tiered pricing structure includes three tiers: qualified, mid-qualified, and non-qualified.  The two things that determine what interchange category a transaction will fall under is how the transaction is entered (swiped, keyed, etc.) and what type of credit card is used (reward, non-reward, corporate, etc.).

Tiered Pricing Pros and Cons

From a merchant’s perspective, tiered pricing can be economical if you have mostly qualified rates as qualified rates are the lowest, and the transaction rates increase for each tier – mid-qualified and non-qualified.  Unfortunately, there is no way to know at the time of sale which tier a transaction will fall into. Monthly processing statements typically provide this detail. Tiered merchant pricing is straightforward but not always very transparent as merchant services providers generally quote merchants a qualified rate where only a subset of transactions will land.

Adding complexity, merchant services providers all set up their own tiers as well as pricing for those tiers. What is consistent across providers is that the price of each tier is set high enough to cover the most expensive interchange type in that category which means merchants end up paying more for transactions with lower wholesale interchange rates which are grouped together. Clear as mud, right? ?

Lastly, Visa and MasterCard adjust interchange categories twice per year. These increases usually effect only one or two interchange rates but these rate changes can raise the rates on entire tiers – meaning merchants pay more on ALL interchange categories within that tier.

How to Make the Best Decision for your Business

Find a payment processing partner or merchant services provider that you can trust.

At Paragon, we can accommodate all merchant pricing models and are committed to a PURESM and Simple pricing philosophy. During the sales process, our account managers educate merchants about the various rate structures available and listen to understand which will serve the merchant best.

For software providers, choosing a flexible payments partner who offers a highly customizable approach allows you to provide customers with the best solution possible while monetizing your payments program in the process.

Ready to see our API or open a test account?  Looking for more information on our Partner Programs?  Are you a merchant with a question?  We are here to help!

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