Deceptive Tiered Pricing for Credit Card Processing

A merchant on tiered pricing schedule is overpaying for their credit and debit card processing.

Tiered pricing means the merchant account provider states a low base rate (say 1.49% + a $0.25 transaction fee) for processing. The low base rate is generally meant to be enticing.  However, the under-the-breath caveat for the low base rate is that it is for “qualified transactions only.” Generally, “qualified transactions only” means

• the customer is present,
• the magnetic information on the card is read, and
• all of the other qualifications meet the requirements.

For Internet-based vendors and phone-order-mailed-order merchants, the first problem with this seductive, low base rate is the customer is not present when making the payment and the magnetic information is not read.  Even dental offices and medical offices, where the credit card is present, may find that only 10% to 20% of the credit card transactions meet the requirements for “qualified transactions only”.    I know of a number of professional service firms who thought they had a great deal with their merchant account provider and did not even realize that not a single transaction was being processed at the low base rate written on their merchant bank agreement.

It gets even worse

The transactions that do not “qualify” they are now moved into different pricing tiers with much higher rates.  The three-tier rate plan is the most common, and is made up of “Qualified”, Mid-Qualified”, and Non-Qualified” rates.

• Basic debit and credit cards where the magnetic swipe is not read, cards which earn hotel, airline miles, and alike generally qualify at the Mid-Qualified level.   The “Mid-Qualified” level rate is generally around 2.50% – 3.50% plus transaction fees.
• Business cards, International cards, plus basic cards and reward cards that do not meet the Mid-Qualified requirements qualify at the Non-qualified level.  The “Non-Qualified” level is generally around 3.50% – 4.50% plus transaction fee.  However, I have seen rates over 7.5%.

Other than the merchant account provider; bookkeepers and CPAs like the tiered rate because it looks simpler on the merchant statement. However, owners of service professional firms interested in being priced fairly and maximizing profits should always insist on “Interchange Plus” pricing.