Accepting credit cards and debit cards can be a significant cost for any business. Transaction fees, such as interchange and assessments, are a major driver of payment processing costs. Processor fees, also known as “markup,” are another significant component. The pricing models that processors provide to merchants determine how these fees combine to produce the monthly cost of payment processing.
Payment processing fees are the costs incurred by business owners when processing customer payments. A merchant’s payment fees are determined by a number of variables, including the transaction’s level of risk, the type of card used (reward, business, corporate, etc.), and the pricing structure chosen by a given payment processor.
Flat-rate fees are payment plans in which the payment processor charges the same fee for all transactions, regardless of the type of card used, the brand used, or whether the purchase was made in-store or online. Flat-rate fees are calculated as a percentage of the transaction value or as a percentage of the purchase value plus a fixed fee.
New businesses that do not handle a large volume of transactions prefer flat-rate fees because they can negotiate a fee with the payment processor. Additionally, the company is aware of the fees that will be charged each time a payment is processed.
In a tiered pricing model, the processor divides the interchange fees into three categories based on the transaction’s risk level. Payments are divided into three rate categories: qualified, mid-qualified, and non-qualified. The processor assigns transactions to each category based on criteria established by the processor.
Qualified Rate: Transactions swiped in person at a physical terminal with a standard credit card fall into this category, carrying the lowest risk and the lowest rates.
Mid-Qualified Rate: Businesses pay a higher rate to cover the high risk of fraud in keyed-in transactions such as phone and direct mail orders where the credit card is not physically available.
Non-Qualified Rate: Non-qualified rates apply to transactions that do not qualify for the qualified or mid-qualified tiers. The non-qualified tier has the most expensive fees.
In simplified terms, interchange plus pricing divides the merchant service charge (the rate paid) into two parts. The interchange is the fee charged by the issuing bank to the card network, and the plus, or markup, is the fee charged by the card network to you. If the interchange fee rate on a card is changed by a card network, that component of the merchant service charge is automatically updated.
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