Payment Processing: Which Pricing Model is Best?

Accepting credit cards and debit cards can be a significant expense for businesses of all sizes. The costs of payment processing are largely driven by transaction fees including interchange and assessments. The other major component is processor fees, also referred to as markup. The way these fees combine to create the monthly cost of payment processing is determined by the pricing models that processors provide to merchants.

There are three common types of pricing models used in payment processing. They include interchange-plus, flat-rate, and tiered pricing. Here’s an overview of these three pricing models and the advantages and disadvantages of each.

1. Interchange-Plus Pricing

Interchange-plus pricing produces highly detailed statements that display interchange fees plus markup charged by the payment processor. Markup is typically calculated as a percentage of the transaction amount plus a flat fee.

✔️ ADVANTAGES: Transparent pricing. Merchants can quickly identify interchange costs versus processor markup, making it easier to compare and contrast among different providers. The transparency of interchange-plus pricing often results in lower costs for merchants.

❌ DISADVANTAGES: Highly detailed statements that can be difficult for businesses to read and understand. Interchange-plus pricing clearly spells out the fees associated with processing payments and some merchants might find this high level of detail difficult to digest.

2. Flat-Rate Pricing

Flat-rate pricing is just as the name suggests. This model typically assesses a fixed percentage, for example 2.5%, calculated on the dollar value of each transaction. A flat fee such as $0.15 per transaction is often an added component of fixed-rate pricing.

✔️ ADVANTAGES: Simplicity and predictability. Flat-rate pricing models are simple to understand and merchants can easily predict the monthly costs of payment processing. Flat-rate pricing also produces easy-to-read monthly statements.

❌ DISADVANTAGES: Higher likelihood of overpaying for processing. Interchange rates can vary widely, from high fees on rewards cards to lower fees for debit cards. However, the flat rate does not vary and therefore cost savings on lower interchange rates will not be realized.

3. Tiered Pricing

Tiered pricing establishes three rate categories for payments – qualified, mid-qualified, and non-qualified. Transactions are assigned to each category according to criteria established by the processor. Qualified transactions have the lowest rate and that rate will rise as transactions are downgraded to mid-qualified or non-qualified. Downgrades can occur for a variety of reasons, including how physical cards are processed (dipped, swiped, or keyed-in) or when payments are made without the physical card being present (ecommerce, phone orders, etc.).

✔️ ADVANTAGES: Statements can be easier to read. Transactions fall into three categories, simplifying the presentation of payment processing statements.

❌ DISADVANTAGES: The real costs of payment processing are hidden. Transactions are routed into pre-established tiers and the rate assigned to each conceals the true costs of each transaction. Tiered pricing makes it impossible to separate interchange from markup charged by the processor. The variability of how transactions are assigned into tiers also makes it difficult for businesses to predict their monthly payment processing costs. Also, merchants are typically quoted the lowest rate for qualified transactions. However, there's a slim chance that all monthly transactions will fall into the qualified tier.

Which pricing model is best? It depends on your business and payment processing needs. Above all, it’s imperative to work with a processor that delivers transparent pricing with no hidden fees.

Learn how Paystri’s straightforward approach to pricing can save your business money with a complimentary statement analysis. Click here to get started.