What kind of pricing structure should you choose with a credit card processor?
Before you dig into this question, take a look at the proportion of the type of cards your customers are handing you. On average, monthly, what kinds of cards are making the majority of your sales?
The proportion of card types, type of business you have and sales volume will give you different answers to this question.
As I mentioned in my “Fees Demystified” article, Visa and MasterCard’s interchange rates are higher for reward and corporate cards, and are categorized in the mid or non-qualified tiers in a tiered pricing structure. In a Yahoo article this January, 2009, Jonathan Silver, chief executive of Affinity Solutions Inc., a New York company that develops and manages rewards programs, stated that rewards programs are attached to 40 to 45 percent of existing credit cards. The proportion of rewards cards being issued has been steadily increasing.
The drawback to a tiered rate structure is that it is more difficult for you to know exactly what you are paying for. Visa and MasterCard actually have over 100 categories to determine an interchange rate based on business type, card type, and how a cardholder’s information is captured. Simplifying these into three or four tiers means credit card processor’s profit margins on different types of transactions will vary, but most credit card processors qualify their tiers differently. Credit card processors rarely disclose their profit margin on each category. With tiered price structures then, it is difficult for merchants to compare rates while shopping for a credit card processor without knowing the details of what type of transaction falls into each tier.
Interchange plus pricing is based on a fixed markup for every transaction. For example, instead of paying a discount rate of 1.72%, 2.64% and 2.99% for qualified, mid-qualified and non-qualified transactions respectively, you pay the price of Visa or MasterCard’s interchange rate plus a flat percentage markup (e.g. 30%) plus a transaction markup (e.g. $0.05) for every transaction. The rate for what would be labeled as “qualified” in tiered processing is higher here, so it is important to figure out which pricing structure will meet the needs of your particular business.