What is Bucket or Tiered Pricing?What is Bucket or Tiered Pricing?Tiered merchant account pricing is currently the most common form of pricingfor credit card processing. Tiered pricing is confusing, expensive, and gives theprocessor a mechanism to hide fees from the merchant. It is our belief thatTiered pricing is a main contributor to why the industry has received such a badreputation over the years. With processors pushing so many clients into Tieredpricing models to drive their profitability, frustrations with the industry havegrown exponentially. Fortunately, a more cost-effective, transparent alternativeto tiered merchant account pricing is available to businesses.Tiered pricing is a pricing model that credit card processors use to assesscharges to their merchant clients. Tiered pricing is also referred to as bucket orbundled pricing because it allows processors to group interchange (credit cards)into buckets of their choice. There is no exact criteria to how a processorselects which cards are grouped into which buckets. The processor doesnt tella merchant which cards are grouped into which bucket. Each processor hastheir own criteria for grouping cards, so there is no uniformity across the industryfor which cards fall into the various groups.Tiered pricing can be identified on a merchant statement in a couple of differentways. The easiest of which is to look for terminology such as “qualified”, “mid-qualified” and non-qualified”. Sometimes the terms "qualified," "mid-qualified"and "non-qualified" are abbreviated, so look for the variations "qual," "mqual"and "nqual," when reviewing a merchants statement. Sometimes the client willstate they have a “blended rate” of X%. This is also an indication they are on atiered pricing platform.In the absence of the terms "qualified," "mid-qualified" and "non-qualified," tieredpricing can also be identified by a consistent set of rates across all card brands.These rates will generally be in the area of 1.69% - 3.25%, but may be higher orlower depending on how many tiers a processor is using. As interchange isdifferent for all the various cards processed, a consistent rate (or set of 3 or 4consistent rates) is indicative of a tiered pricing model.How Tiered Pricing WorksHow Tiered Pricing WorksTiered pricing allows a credit card processor to group numerous interchangefees (cards) into three or four general pricing buckets of its choice. As
mentioned above, each processor has its own criteria for determining itsbuckets, so tiered pricing from one processor to another will not match. Someof the cards that fall into the “qualified” bucket of one processor will fall into the“non qualified” bucket of another and vice versa. Once a processor groupsthose cards into a bucket, instead of charging the client the posted interchangerate for that card, the processor will charge the merchant the assigned bucketrate.Qualified Interchange Bucket/Tiered RateCPS Small Ticket Debit 1.55%CPS Retail Debit 0.80%Merit III 1.58%Merit Debit 1.05% 1.78%Merit I Insurance 1.43%World Supermarket 1.58%Service Industries 1.15%Mid-QualifiedBusiness Level II 2.05%Business Retail 2.20%Commercial B2B 2.40%High Value Merit I 2.20% 2.55%Corporate Data Rate III 1.90%World Elite Merit I 2.20%Merit Elite Enhanced III 1.73%Non-QualifiedHigh Value T&E 2.75%High Value Standard 3.25%Business Level 4 2.81%Commercial Card Not Pr 2.65% 3.41%Signature Business Credit 2.95%Business Visa Debit 2.90%Corporate Data I 2.65%Interchange FeesInterchange FeesUnderstanding tiered pricing models requires a basic understanding of whatinterchange is. Interchange fees are the fees paid by the merchant to theissuing banks of the credit cards processed in a transaction for payment. Forexample, if a customer goes to the grocery store to purchase some bananas
and uses their Visa credit card issued by ABC Bank to pay for the bananas, thegrocery store will pay an interchange fee to ABC bank to process that credit cardfor payment. The rate paid would be public information and would be posted onVisas website. That rate paid to the issuing bank (ABC Bank) is calledInterchange.Going back to our tiered pricing example above, one would notice that theprocessor is charging the merchant a higher rate than the posted interchangerates for the cards processed. Although the processor charges a different ratethan interchange, the rate paid to the card issuer (bank) is ALWAYS the postedinterchange rate. So, if the bucket rate for a qualified card is 1.78% (asdepicted in the example above) and the interchange rate for for the CPS SmallTicket Debit is 1.55%, the amount paid back the the card issuer (bank) would be1.55%. The difference between 1.78% and 1.55% of 0.23% remain with theprocessor as additional profit. As you can see by this example, the interchangerates are substantially lower than the processor tiered rates, and the processorsmarkup varies widely depending on which tier the processor uses for eachinterchange category. Tiered pricing models are popular as it allows a processorto increase their profit margins.Frustrations with Tiered Pricing ModelsFrustrations with Tiered Pricing ModelsThe only positive to a tiered pricing model is that it presents rates and fees in asimple, easy to read format on their monthly statement. However, this simplicityprevents transparency with how a merchant is being charged fees. It is alsomore expensive than the other pricing models available, such as InterchangePlus pricing.A major frustration with tiered pricing concerns the statements which do notdisclose the actual cost of a transaction or which cards were processed thatmonth. Instead, only the processors “qualified”, “mid-qualified” and “non-qualified” rates are visible. By hiding the interchange rates, a business is nevershown the actual cost of their processing thereby allowing the processor tocharge markups that are often excessive. Unfortunately, this practice iscompletely legal, as all a processor is required to do is tell you what they arecharging the merchant... not what they actually paid towards the merchantsinterchange costs for the cards processed.Tiered pricing also makes it possible for a processor to increase a merchantsprocessing cost without increasing its rates. Processors accomplish this bybundling a greater number of interchange categories to the more expensive
“mid” and “non-qualified” pricing buckets. This results in the merchant payinghigher fees even though the processors rates have remained the same.In addition to this, there are frustrations with when a merchant credits acustomers credit card. When a merchant gives a refund to a customer to theircredit card, the merchant should receive a credit for the interchange fees paidon the original transactions. For example, if the merchant paid 2.20% ininterchange fees for the original transaction, typically there should be a credit tothe merchant account when the merchant refunds the customers account.Since interchange categories are bundled on tiered pricing models, interchangecredits are not credited back to business when a refund is granted to acustomer. Instead, the processors simply keeps the interchange credit asadditional revenue and profit.Tiered pricing also results in a different markup for virtually each individualinterchange category for every processor. The vast differences in markup andinconsistent criteria in assigning interchange categories into different bucketsmakes it impossible to compare tier pricing among processors. In addition tothis, because processors dont disclose the true processing cost (or how muchtheir markup was), its impossible to give a true comparison as you dont knowwhich cards where processed in that given month. Its safe to assume you areguaranteed to save a customer a significant amount of money moving them toan Interchange Plus pricing model just from eliminating the extra markup madeabove interchange on a monthly basis.Lost Durbin SavingsLost Durbin SavingsThe Durbin Amendment to the The Dodd-Frank Wall Street Reform andConsumer Protection Act that took effect on October, 1 2011 capped theinterchange fee that large banks could charge at just 0.05% plus $0.21. The lawcapped interchange fees at the card-issuer level, not at the processor level.This means that any business being billed via tiered pricing will pay itsprocessors qualified rate instead of the newly capped rate of just 0.05%. Theper-transaction loss is substantial when considering that qualified rates aretypically 1.65% or higher.
Interchange Plus Pricing/Interchange Pass ThroughInterchange Plus Pricing/Interchange Pass ThroughInterchange pricing is the most affordable pricing model for credit cardprocessing. It also is transparent and easy to reconcile for the merchant. Unliketiered pricing, interchange plus functions by billing interchange fees directly tomerchants. With interchange plus pricing, a processor makes money bycharging a fixed percentage over actual interchange rates regardless of the typeof card or how a transaction is processed. The result is a low consistent markupover actual cost. There is typically a per transaction cost billed to the merchantas well.An Interchange Plus statement is much longer than a Tiered Pricing statement.An Interchange Plus statement details every card processed, the interchangerate assessed, the dollar amount, and per transaction cost. The statement alsodetails out all the Card Association fees (Visa, MasterCard, Discover) and thefees assessed by the processor. The statement is conveniently broken out intodifferent sections, breaking out a special section just for interchange. There isalso a special section detailing all the batches and dates made throughout themonth for account reconciliation purposes. The Interchange Plus statementdiscloses every fee and how it was derived. If a merchant wanted to Googleeach of the credit cards on their statement, they could verify they were chargedthe actual interchange fee posted by Visa and MasterCard.In conclusion, Tiered pricing models are expensive and lack transparency withhow a processor charges fees to their customers.