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Credit Card Rate Types Explained

Bailey Jarrell

Every processing company in the neighborhood has their own angle on which credit card rate type you should choose. Some are shouting the praises of flat-rate pricing while others advocate for tiered, billback, or interchange plus models. The problem is, every company suggests its own pricing models which makes it difficult to discern which route is the best for your business. We thought it would be a huge help if we broke down each model so you can choose the one that makes the most sense for you.

Flat Rate

One of the models that a lot of consumers gravitate toward for its simple structure is flat-rate pricing. In this model, you’re charged one rate for every transaction. Regardless of which type of card, transaction, or security feature used, you only have to pay a single flat rate (ex. 2.7 – 2.9% + a fee per transaction). This leads to relatively predictable processing statements that are easier to understand because it blends the interchange fee and the markup into a single rate reflected on your monthly bill.

While it is incredibly simple, there’s a catch. The fact that your processing fee is one, simple number makes it impossible to know how much margin the processing company is making off of your business. Take note of the fact that you are charged the same rate for both debit and credit cards. This means you will pay more than necessary for low-risk transactions. In addition, companies who provide the flat-rate structure don’t normally charge other fees for their services, meaning they will likely charge more in that one, all-encompassing fee to cover their operating expenses. Flat-rate pricing is more convenient (and profitable) for the company through which you’re processing payments than it is for you as a business owner.

Here’s a very basic example of how it works. According to standard interchange rates, a regulated debit card transaction ran in-store (card present), can have an interchange cost of 0.05% + $0.21 per transaction, depending on which card brand is used. With flat-rate pricing, the cost to the business could be 2.7% + $0.30 a transaction. For this example, if the transaction is $100, the actual interchange cost would be $0.26 or 0.26% for this transaction. Now let’s consider what a flat-rate processor would charge you for the actual transaction. Using the same example, a $100 transaction at a flat-rate of 2.7% + $0.30 per transaction would cost you $3 or 3%. Do the math. This would mean that the processor is charging you $2.74 for a transaction that only cost them $0.26 in interchange fees. Is that difference worth the convenience of budgeting your statements each month? Are you willing to pay that much for simplicity? Here’s our take: Its simplicity, overpriced.

It’s important to mention that flat-rate processing is a reasonable pricing model for small businesses with low processing volumes. If you’re doing $5,000 or less in business each month, this may be the best route for you. But as your business grows, you will want to look into alternative pricing methods.

 

Interchange Plus

Unlike the flat-rate pricing model, Interchange Plus is structured so that you only have to pay a small, fixed percentage for every transaction. This means processors like us at Rev19, pass the interchange cost directly through to you, the business, while adding a small percentage to each transaction. For example, if your company charges an interchange plus rate of  0.30% plus $0.10 per transaction, that cost would be added to the interchange cost for every transaction. To further break it down, let’s say a customer makes a $100 purchase with a debit card and pays for it at your card terminal (card present). With an interchange rate of 0.05% + $0.21 per transaction, the interchange fees would only be $0.26 or 0.26%. According to the interchange plus model, you would only be charged $0.40 on this $100 transaction. This means you would save $2.34 per $100 transaction by switching from a flat-rate processing company like Square, PayPal, Stripe, etc to a company that offers wholesale or (discount) interchange plus rates with no hidden fees.

Interchange plus pricing plans are the most affordable and transparent model for any business. This pricing structure ensures that interchange fees will be passed through at cost, and your processor’s markup will be fully transparent.

 

Billback

While the Billback pricing model is often presented as a simple and clear pricing system for merchants, but this couldn’t be further from the truth. In this pricing model, all transactions in a given month are charged a flat rate regardless of the interchange fee. In this respect, billback is similar to tiered pricing, which also lumps all transactions under a single flat rate. But, here is the difference, the processor will then look back to determine how many of the swiped cards carried an interchange rate above your qualified rate and will charge you the difference on the next months billing statement.  

Breaking it down:

Let’s say your processor charges you a flat rate of say 1.5% for all of your transactions each month. However, as you now know, all transactions are not equal. Because of the MasterCard and VISA interchange fees, some transactions will have a higher rate than others, even higher than the 1.5% fixed rate the processor is charging you. As an example, let’s say the cost of a MasterCard transaction is 1.75%, but the processor is only charging you the 1.5% fixed rate for that transaction. How does the processor recoup the difference?

In the first month, the processor will charge you the 1.5% fixed rate for every transaction that month, regardless of its interchange category. The following month, your processor will bill you for the difference owed for that transaction. So in this case, you would be charged an additional .25%. So April’s processing statement has BillBack charges for March’s processing. Which means you essentially need two months of statements to figure out your true cost for a particular month.

Enhanced Billback

An additional pricing model was spawned from the Billback principle to create even more profit for the processor, which is known as Enhanced Billback pricing. The only difference is the processor adds an additional fixed percentage markup, hence the reason why they call it “enhanced.” In addition to paying more than promised, you’re also paying a markup just because your processor can easily add it into complex statements. Card processors that use these tactics bank on you not knowing how this works so that you think you’re paying one rate for all transactions you take. Don’t be fooled. Being on the Billback pricing model does not benefit any type of business.

 

Tiered Rate

Tiered rate credit card pricing is one of the worst and most unfair credit card processing options for businesses offered by merchant service providers. With the Tired Pricing Model, processing rates are simplified and more predictable, like flat-rate, but instead of paying a single flat rate, your transactions will be categorized as either qualified, non-qualified,  or mid-qualified with an assigned discount rate. Each tier and the corresponding discount rate will often be based on qualifications or rate buckets predetermined by the credit card processing company. This model allows credit card processors the ability to set rate buckets, based on spending trends and data models, to ensure they consistently get downgraded transactions (higher rates per transaction) from businesses. This most often means that you are guaranteed to get downgraded as often as possible so the processor’s profit per transaction will produce optimal yield.

Tiered Pricing is strategically structured to guarantee that the processing company makes a profit regardless of the actual interchange rate, which means you’ll often end up paying a hefty markup fee. On top of that, the fees are blended into one number on your statement, making it impossible to distinguish how much of a cut the processor is taking on your transactions. If you’re currently in a tiered credit card pricing structure, you need to consider making a change immediately. As a business owner, you can save thousands of dollars on fees by switching to an interchange plus pricing model.

 

Let Us Know How We Can Help

With this high-level overview of credit card rate types, we hope it’s easier for you to understand how each pricing model works and which structure is the best solution for your business. Every processing company may sing a different tune, but our goal is to provide educational content that not only empowers you to understand the industry but leads you to make better decisions for your company’s future. If you’re having a hard time wrapping your head around this, let us know how we can help. At the end of the day, helping your business grow is at the root of everything we do!

 

To take a deeper dive in each of these pricing models, see some of our other articles here:

What is Billback Pricing?
What is Flat-Rate Credit Card Processing?
A Beginner’s Guide to Interchange Fees
What is Tiered Rate Credit Card Pricing?

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