How do credit card processing rates actually work?

Here is the truth about credit card processing rates.

Visa & MasterCard have several dozen rate categories known as Interchange, which determines the rate a merchant must pay for a particular transaction. The applicable rate is determined by various circumstances, such as the card being swiped, keyed‐in with(out) without AVS, called in, the type of card (business, corporate or reward), and whether it was batched out within 24 hours. So any given business will hit multiple interchange categories within the processing month, depending on the card type and how it is accepted.

The standard method of pricing that 90% of all merchants pay is known as 3 Tier Pricing. This consists of three separate prices called Qualified, Mid‐Qualified & Non‐Qualified. The Qualified discount rate is the base percentage you pay on all transactions and only covers a few Interchange rates. When a merchant processes a transaction that goes through one of the more expensive Interchange rates, providers add the Mid‐Qualified or Non‐Qualified rate to the merchant’s Qualified rate. There is no industry standard pricing, but an additional 1% for the Mid and 1.60% for the Non is quite common. To elaborate, when a merchant is setup under a 3‐tier pricing schedule, they will pay one of the following three rates on each transaction:

1. Qualified Discount Rate

2. Qualified + Mid‐qualified

3. Qualified + Non‐Qualified

For retail merchants, the non‐qualified will apply to any keyed‐in transactions. For Internet & Mail/Phone order merchants, the mid‐qualified generally only applies to rewards cards.

Another way of talking about these rate structures is simply, Card Present or Card Not Present. Essentially this translates as Qualified or Non-Qualified.

Lastly, if you want the most transparent pricing plan possible, then you want what is referred to asOver Interchange or Interchange Plus Cost. These pricing plans take the actual Interchangecategory costs & tack on a small percentage. An industry average can range from 0.50% – 0.30% over Interchange, depending on your volume and business type.

How is Interchange Plus Cost different from 3-Tier? With 3-Tier the payment processor tries to estimate what Interchange Categories you will hit, then comes up with a fixed pricing structure above that average. So the processor may lose on some transactions and win on others. With an Interchange Plus Cost pricing plan, the processor will always make they’re margin and you will always know your exact processing fees. However, while you will definitely save money over time, it is much more difficult to accurately budget your exact processing fees on an Interchange Plus Cost rate structure.


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