If there was an award for the most convoluted industry on the planet, payment processing would probably win by a landslide.
And if we had to choose the most needlessly complex aspect of our industry, it would have to be how processors choose to charge for their services.
Whether they’re using interchange plus pricing, tiered pricing, or flat-rate processing, typically, payment processors aren’t making things any easier for their customers to understand.
What’s more, business owners don’t seem to have any idea what these various fee structures are, how they work, or which one is going to give them the best deal.
As a result of all this confusion, it seems many businesses are just picking a processor at random without even bothering to look into their pricing.
For instance, a Canadian Federation of Independent Business (CFIB) survey found that 54% of respondents have difficulty understanding the contract they have with their payment processor, and 41% are unsure about their pricing model.
The survey also found that credit card processing fees are unaffordable for 78% of respondents.
However, many business owners are unwittingly choosing to partner with processors whose pricing is deceptively expensive, and the reality is they don’t need to be paying this much.
But given the abject lack of clarity in this industry, it’s no surprise that business owners are getting bamboozled like this.
With that in mind, this article will explain the most common pricing models for payment processing, including interchange plus pricing, tiered pricing, and flat-rate processing.
We’ll break down everything in no uncertain terms, exploring the various types of pricing, comparing them, and explaining why interchange plus pricing is your most affordable option.
If you’re new to this topic, and you’re not sure what the term interchange means in this context, you should start by reading our article, What You Need to Know About Interchange Rates in Canada.
And if you’d like a bit of a refresher on how interchange fees are calculated, you should check out our article, What Determines the Cost of Interchange Fees?
Why Is Interchange Plus Pricing the Best Way to Pay for Processing?
This seems like an easy question to answer, but as you may already suspect, it’s not as simple as you might think.
If you want to understand why interchange plus pricing is your best option, first you’ve got to understand the most common methods of paying for payment processing and compare them.
With that in mind, let’s explore the three most common ways to pay for payment processing, so you can understand why your best option is interchange plus.
Tiered Pricing
Tiered pricing is a pricing model where transactions are categorized into different tiers, each with its own interchange rate. The tiers include these three rates:
Qualified Rate: This is the lowest rate, applied to the most standard and secure transactions, such as swiped or chip-inserted debit or credit card payments.
Mid-Qualified Rate: A higher rate than the qualified rate, applied to transactions that pose a slightly higher risk, such as those involving rewards cards or manually entered card information.
Non-Qualified Rate: This is the highest rate, applied to the riskiest transactions, such as those made with corporate or international cards, or transactions that don’t meet certain security criteria.
This model allows payment processors to charge different rates based on the risk and processing requirements of each transaction.
If you’re being charged based on tiered pricing, that means you’ll have to pay a set qualified rate on every transaction, plus a mid- or non-qualified rate that applies to any transaction that doesn’t meet the requirements of the qualified rate.
So, for example, if a customer is paying with a qualified Visa and actually inserting their card into a physical machine, you’ll probably get a rate of around 1.45%.
Then for every transaction that’s mid- or non-qualified, that corresponding rate will get stacked on top of the qualified rate.
In theory, this model could offer some pretty decent pricing if the company gives you a good deal, but unfortunately, that’s rare.
Typically, providers will set their mid- and non-qualified rates high enough to ensure they’ll make the most profit they can, so you’re not likely to get a very good price.
In these situations, businesses will end up paying something like 0.85% on a non-qualified card, plus the qualified rate, which means they’ll be paying a total of 2.30% (1.45% + 0.85%).
But compared to what you’d be charged based on interchange plus pricing, this is a higher rate than what you’d pay for almost any card that’s available to consumers today.
So, as you can see, not only is this pricing model difficult to understand, but it’s also going to cost you more, as well.
Flat-Rate Pricing
One of the most common complaints we hear from potential customers is that they never know how much they’re going to pay in interchange fees each month.
As a result, many business owners choose to partner with a processor that offers flat-rate pricing, as this type of pricing tends to be advertised in a way that makes it seem like it’s more convenient and easier to understand.
But despite the clever marketing, the truth is that this is the most expensive pricing in our industry.
Providers who offer flat-rate payment processing will typically charge a highly inflated rate to make sure that they’re able to turn a profit on most transactions.
For instance, the average flat rate offered in our industry is currently 2.4%, with some processors charging up to 2.65% or even more.
So, while it may sound great to know exactly what you’re going to pay on every transaction, in reality, what this means is that for the lower-end cards and less risky transactions, you’ll have to pay double what you’d pay with interchange plus pricing, or even more.
To give you an idea of how much more expensive this kind of pricing can be, below, you’ll see Visa’s current interchange rates for consumer cards in Canada.
As you can see, only two of the dozens of cards on this list have an interchange rate of 2.4% or higher. And if you look at Mastercard’s rates below, you’ll see that the list looks very similar.
Again, only two of the cards on this list have an interchange rate of 2.4% or more.
Judging by these numbers, if you’re paying a flat fee that’s anywhere above 2%, you could be costing yourself hundreds of dollars per month in extra fees, depending on your volume of sales.
Truth be told, there are only a couple of different card types that cost more than 2.2%, so no matter how you slice it, paying these higher flat rates will cost you more money.
Interchange Plus Pricing
Hands down, this is easily the best pricing in our industry.
You’re welcome to try, but we can guarantee you’re not going to find anything cheaper.
We use interchange plus pricing because it keeps us competitive, it’s transparent and easier to understand, and it aligns with our mission of putting our customers first and always acting in the best interests of business owners.
That being said, rather than having to charge a high enough flat rate to profit on all cards or creating a convoluted tier system, interchange plus pricing allows us to offer you the exact interchange rate set by credit card companies like Visa and Mastercard, plus a small markup (usually 0.20% – 0.40%), which is how we make our money.
This means if your customer pays with a qualified Visa, you’ll pay 1.25% plus a markup of no more than 0.40%. That adds up to 1.65% or less, which is considerably lower than the average flat-rate pricing in our industry.
And that’s it. It’s really that simple.
With interchange plus pricing, you’ll pay whatever the interchange rate is on the card your customer is using, plus our markup.
This allows you to not only save money but also have greater clarity and peace of mind when it comes to your payment processing.
Another great thing about interchange plus pricing is that when credit card companies like Visa and Mastercard lower their interchange rates, this will immediately be reflected on your bill, which isn’t the case with many providers.
But with Lucid Payments, you won’t have to call in to try and get a better deal, or make sure these savings will be reflected on your statement.
The savings will simply be passed on to you the second that rates are lowered.
Interchange plus is also much more transparent, as well, because you’ll be able to see on your statement which cards you processed, what the interchange rates were on those cards, and what our markup is.
Time to Compare
Using the three different types of pricing we’ve covered today, let’s run a scenario to see which one will offer the better deal.
Let’s say your customers purchased $5,000 worth of products this month, and they all paid with a Visa Infinite card, which has an interchange rate of 1.57%.
For the tiered pricing, you’d be paying 1.57% plus 0.85%, so each one of those transactions would cost you 2.42%.
If you were being charged based on interchange plus pricing, you would’ve paid that same 1.57% interchange rate plus our markup of at least 0.20%, which would cost you 1.77%.
And for flat-rate pricing, you would’ve paid at least 2.4% on each transaction, regardless of what the interchange rate is on the card the customer is using.
So, if we do the math here, the flat-rate pricing would cost you $120 in fees for those $5,000 in sales, and the tiered pricing would cost you $115, but the interchange plus pricing would only cost $88.50.
As you can see from this example, clearly, interchange plus is much cheaper.
And if you’re with a processor who charges you anything but interchange plus, you are simply paying too much.
Want to learn how much you can save with Lucid Payments? Book a Rate Reduction Review or contact us today to find out how we can help.
