Understanding the fees, rates, and payment structures of a merchant service agreement can feel like a monumental task. For small business owners spinning a dozen plates at once, why even bother? The answer is simple: the merchant account pricing model you choose can make a huge difference in your business’s bottom line. Choosing an antiquated model might see your business paying unnecessary fees. On the other hand, working with a reputable merchant service provider to select the correct pricing model can save you money in the short and long term.
With all of this in mind, why is it that tiered pricing models are going the way of the dodo? We will review why tiered pricing models for payment processing, more often than not, are the most expensive option for small businesses.
Merchant Account Pricing Models 101
There are four primary payment processing pricing models:
Tiered pricing model: one of the older pricing models available, tiered pricing relies on tiers of transactions, all of which have accompanying rates. This is a very common payment processing model because it is also the one with which most merchant service providers and business owners are familiar.
Flat-rate pricing model: unlike tiered pricing, flat-rate is exactly that: flat. There are no categories of transactions that carry different rates. Instead, there is one rate which is charged regardless of the volume or value of transactions.
Interchange-plus pricing model: the most detailed of all of the pricing options is the interchange-plus model. This breaks down every single fee, rate, markup, and everything in between on the payment processing statement. This allows business owners to fully understand exactly how much they are being charged for what (which often results in lower rates overall).
Subscription/membership pricing model: for fans of simplicity, some merchant service agreements are done on a membership basis. Instead of cost per transaction, this pricing model relies on a regular membership fee. This can be an attractive option for high volume businesses that process lower dollar amounts per transaction.
What are Tiered Pricing Models for Merchant Service Accounts?
To understand why tiered pricing models can be so expensive, let’s take a deeper dive into how they work. Tiered pricing relies on a few key concepts:
Every transaction is placed into a tier or a “bundle”. Depending on the specifics of your agreement, each transaction will be automatically placed into a tier, or a bundle, based on a set of criteria. Common examples might include qualified, mid-qualified, and non-qualified transactions.
Each tier or bundle has a different rate/fee structure. The “advantage” of tiered pricing is that certain tiers have more favorable rates and fees. Of course, the opposite is true as well where less favorable tiers carry higher rates and fees. This trade-off can be difficult to calculate for small businesses, ultimately leading to higher rates.
Each tier/bundle aligns with different interchange fee categories. A layer of complexity we have not yet explored is how each credit card company handles different interchange categories. For example, a qualified transaction with MasterCard might carry a different rate than a qualified transaction with Visa and so forth.
The Problems with Tiered Payment Processing
Tiered Pricing is frequently the most expensive option
According to the CEO of Crediful, Chase Steiner, “Card processors derive the biggest benefits as they don’t disclose their costs and tiered pricing is more expensive…using tiered pricing, a processor can actually charge a merchant more without increasing their rates.” In this way, the main detriment of tiered pricing is also the main benefit of interchange-plus pricing. Tiered pricing is incredibly difficult to understand and read from the perspective of a business. Interchange-plus solves this problem in spades.
Tiered payment processing models hide key information
Just to drive this point home, we should reiterate that it isn’t just that tiered pricing structures are difficult to understand, they actively conceal key information from merchant account statements. So even if you are well versed in payment processing jargon, it will be impossible for you, as a business owner/manager, to view all of the relevant details.
Processors can pocket refunds, increase costs, and more
As a final point, payment processors are actually able to keep refund credits for themselves. Processors can also essentially keep payment processing rates the same while also increasing the costs incurred to the small business. All of these factors in tandem create a reality where tiered pricing models are often more expensive for businesses.
True Merchant Offers Honest, Straightforward Pricing Options for Payment Processing
The payment processing professionals of True Merchant understand that overpaying for merchant services can not only be frustrating but also damaging to small businesses. That is why we are proud to offer transparent, fair pricing models that fit a wide range of business types and sizes. Feel free to call or fill out a brief form to learn about how True Merchant can help your small business grow.
Whether you are looking for credit card processing, online payment solutions, business funding, mobile payment solutions, or any other payment processing service, let True Merchant go to work for your business today!
