Credit Card Processing Fees: 3-Tiered VS. Interchange Plus

Posted by: Curtis Stevens on March 16th, 2010

The battle is on, which credit card processing pricing plan should your business be using?  3-Tiered pricing or Interchange plus?  This is the question many larger merchants may be asking themselves, including merchants that process $10,000+ a month in volume.  Before we go into the details, here are the basics: Visa & MasterCard have several dozen rates known as Interchange that determines the rate a merchant must pay for a particular transaction. The applicable Interchange rate is determined by various circumstances, such as was the card swiped, keyed-in with(out) AVS, is a business, corporate or reward cards.

3-Tiered Pricing VS. Interchange Plus Pricing

Under the 3-tiered pricing plan, you pay one of three rates called Qualified, Mid-Qualified & Non-Qualified. The rate you pay for each transaction is determined by the applicable Interchange rate. Under the Interchange plus pricing plan, we simply pass along actual Interchange cost and add a set markup to every transaction.

The chart below should demonstrate the concept and make things clearer.

Are you currently paying 3-tiered credit card processing rates and want to know how to compare this to the more cost effective Interchange plus plan? The following example should make things clearer. Lets say you decided to go to the grocery store and purchase 3 oranges. The prices for all of the available oranges are listed below. The ones you selected are Orange 1, Orange 5 & Orange 8.
The Orange prices below represents Visa & MasterCard Interchange cost.
Orange 1 costs $0.01
Orange 2 costs $0.02
Orange 3 costs $0.03
Orange 4 costs $0.04
Orange 5 costs $0.05
Orange 6 costs $0.06
Orange 7 costs $0.07
Orange 8 costs $0.08
Orange 9 costs $0.09
Orange 10 costs $0.10

In this example under a 3 tiered pricing plan you would have paid a total of 30¢ with the following credit card processing rates: (5¢ qualified, 10¢ mid-qualified & 15¢ non-qualified). This is calculated as follow: Orange 1 would be qualified at 5¢, Orange 5 mid-qualified at 10¢ and Orange 8 non-qualified at 15¢.

Lets assume’s markup in this example is 5¢. Under the Interchange plus pricing plan, you would have paid 19¢ total. This is calculated as follow: Orange 1 at 1¢ + Orange 5 at 5¢ + Orange 8 at 8¢ = 14¢ + our 5¢ markup, making a grand total of 19¢.

What is’s Offer?’s markup under the Interchange plus program varies based on your business type, average monthly volume and transaction size. Please call or email us for a rate quote and let us know you are interested in the Interchange plus pricing program.

Did this post make things clearer for you?  Please leave your comments and let us know.

Stand your ground & you may lower your fees

Posted by: Curtis Stevens on November 30th, 2009

A Sydney company sees itself as winning a battle against Amex about the costs associated with accepting their card.  This company has 9 of the city’s most popular restaurants & bars and were seeing their biggest spending customers pay with Amex to earn points and other types of rewards.  Because of  some rules imposed in Australia, V/MC credit card processing are a fraction of what Amex are.  And because Amex isn’t issued by a bank, they were not subject to the new rules.  The company then became creative.  They started surcharging Amex users a percentage to use their card, but V/MC users did not have one.  I think this was a risky move, but only a few complained and most used a V/MC instead.  Amex then started steering its cardholders to other establishments.  Amex finally gave in and reduce their fees & the merchant removed the surcharge.  Amex then started promoting the merchant’s restaurants to cardholders with triple bonuses to make up for all the damage that had been done.

Credit card processing & batch fees

Posted by: Curtis Stevens on November 21st, 2009

I recently read an article by someone named Evan and I would like to evaluate a few things they said.  The whole article was about the batch fee credit card processors charge.  As he explained, a batch is simply a collection of credit card transactions that are submitted for settlement at the end of the end of the day.  It is true, that most providers charge a batch fee.  Honestly, this is a revenue source for providers, but they also have a cost as well.  When you submit the batch, you are accessing the network to submit the data.   It really doesn’t matter where a provider makes it’s profit, as long as the bottom line is profitable and reasonable. He talked about Elavon having some great rates with no batch fees.  I advise the merchant to simply look at the whole picture before making that decision about any particular company.  He did mention that the credit card processing rate merchants pay include taxes, which is simply not true. He also mentioned merchants pay 3 to 5%, which I think is a very high average. Interchange tops out at around 3%, so if merchant is paying 4 or 5%, then they obviously didn’t shop around much or haven’t done so in a very long time.

He also mentioned a few hundred dollars for an “online terminal”, which he is probably referring to an Internet gateway service. I believe this isn’t very reasonable as well. As I said, look at the whole picture before determining if a company is competitive. Lastly, he mentioned they fund him the same day, which simply isn’t true. No processor does same day funding. It technically takes about 48 business hours to move from the card issuer through the federal reserve to the merchant provider’s account. If you have 24 hour funding, you are essentially receiving the money before they do.

Will waiters & waitresses face credit cards fees

Posted by: Curtis Stevens on November 20th, 2009

Some employers have changed their practices when it comes to the credit card processing fees they pay. Laws were introduced early in 2009 that prevents restaurant owners from keeping customer tips. The rules state employers are no longer allowed to use the money they receive from tips as part of their minimum wage. However, it was also revealed that some owners are charging waitresses an admin fee for any tips they receive that are charged to a credit card. This is can totally understand, but the owner should NOT make any profit off of this. They should only charge an amount they had to pay to their merchant provider. The other controversy is how much you should tip. Oprah recently said on her show that 10% is adequate during these tough times. I think everyone’s opinion will be different. What I find crazy is how this industry over the years went from someone tipping someone because they did a good job to restaurants getting away with paying minimum wage and expect consumer’s tips to make up the difference. This has evolved over the years because most consumers tip when they receive good service. Restaurants have been able to get away with passing some of their cost to the consumers. I think it should go back to the way it was.

Should higher risk merchants pay more than lower risk

Posted by: Curtis Stevens on November 20th, 2009

I recent discussion on an industry forum was about another credit card processing competitor had a furniture store merchant that was considering switching companies.  He currently processes $300k a month.  He is currently paying Interchange plus 0.15% and some other provider quoted him 0.05%.  The sales agent went onto to mention this client has been with him for four years and he tried to explain to the merchant about the great service he has received during that time.  The question comes down to is that sufficient profit for any ISO to take the account.  That is only $150 total profit on the account, which the ISO will share with the agent.  I personally do not think that is enough profit for an account like that.  Furniture stores are very risky.  I have seen ISO’s take huge losses on furniture stores because of the way they are setup and how they buy/sell the products.  They could run $300k in charges and close their shop before the merchandise gets delivered, which would result in mostly chargebacks creating a huge loss for the ISO.

The question is, how much is a reasonable amount for the risk assumed?  0.50%, 1.00%?  I’m not sure what the correct answer is, but I know $150 is too low, even to service that type of account.  If you were to remove any associated risk, how much should you make to simply provide that merchant great service?  Take care of any needs they have when they call and really hold their hand.  All of this comes at a price.  I have merchants that make us a lot more than that each month with a fraction of the volume  and risk.  We take care of the merchant and everyone is happy.

Merchant’s complain in Utah about processing fees

Posted by: Curtis Stevens on November 20th, 2009

I recently heard a talk show that aired in Utah recently where the announcer talked about the fees merchants are paying for credit card processing. One of the complaints was merchants were claiming they can’t negotiate their rate. This isn’t true. They can up to the cost of Interchange. You can’t go below Interchange as it is the same for all companies, regardless of who your merchant account provider is. I can understand some merchants may be upset with the amount of money they are paying as there are some that do not have very competitive fees. However, there is a point when all of this starts to become too much and all the whining needs to end.

Take the recent 7Eleven that collected millions of signatures. They flat out admitted if Interchange was reduced, they are not going to reduce their prices. It is like everything else in business. We all want to cut costs so we increase our profits and unfortunately, Interchange is easy to single out because it is something that merchants pay on every credit card transaction. My advise to the merchant would be this. If you currently have $20,000 in credit card charges each month, how much of that would still be true if credit cards didn’t exist at all? You would only have cash and checks. Because of the way consumers use credit cards and live beyond their means, merchant’s sales are higher overall as a result of it. If credit cards didn’t exist, consumers would definitely be spending a whole lot less!

All I want for Christmas is my credit card fees to be capped says the merchant

Posted by: Curtis Stevens on November 19th, 2009

A local owner of a furniture store is saying all the credit card processing fees he is paying can be burdensome.  With the holidays around the corner, issuers may increase Interchange shortly, which will add to their costs.   The owner said they simply want to keep the rates at a reasonable level, which is acceptable.  The issue is where do you draw that line of being not reasonable?  Many merchants claim that they must pass down these costs to the consumers.  My question for them is how do you calculate every other business expense?  Nothing else is as set as compared to credit card fees as they are charged on a per transaction bases.  Take your utilities, rent, insurance, etc.  What about all those fees, are you not theoretically passing those fees along?  Business is just that.  Businesses must make a profit and regardless of what their total overall cost are to run their business, they will price their products accordingly.  It doesn’t matter where all the expenses come from.  It is simply easy to single out Interchange as it is the only expense that is occurred on almost every dollar brought in.

How to make a micro-payment business work online

Posted by: Curtis Stevens on November 18th, 2009

Micro payments are becoming big business for online merchants.  Simply take a look at what Apple has done with MP3 downloads for a dollar.  When a merchant sells something and is only charging a dollar, there is very little wiggle room to cover your expenses.  One big expense can be the credit card processing fees.  A buck isn’t much to work with.  Even if you are dealing with Interchange only, you are looking at a minimum of 10 to 16 cents per transaction plus 2 to 3% of the transaction, which the % doesn’t amount to more than 3 pennies.

When getting a merchant account, the per transaction fee would be most important.  You will incur a transaction fee from them plus the gateway service, which I assume you will be using to collect the credit card data through a web site.  The hard cost per transaction with most gateways is 5 cents.  You are now looking at a transaction fee from your merchant provider.  They must cover their costs from the processor and have a little left over for their own profit.  Because technology keeps improving and overall costs continues to go down, processor’s fees for authorization and settlement have continued to decline over the years.  It is very well possible to get a transaction fee of 10 cents or less including AVS.  Depending upon your volume, it could be several pennies less.  One thing a merchant can do to help alleviate this expense is to have the customer prepay for so many units, downloads or whatever it is you are selling.  For example, if you are selling MP3 downloads, then sell them in groups of 25 for $25 instead of 25 individual $1 transactions.


Posted by: Curtis Stevens on November 18th, 2009

Today, I will be talking about an ecommerce merchant  The web site was launched in 2000, almost a decade ago.  As you can tell by the name, it is a Christmas store.  When they started the site, they were thinking it would actually be a beginning to opening a retail location but that never worked out as the ecommerce site keeps them busy enough.  I would say the size of this company is still small.  They have around 2,500 SKUs and very seasonal, but can be a very profitable business.  They are expecting to hit $500,000 this year.  Personally, I’m surprised by this as I do not think the web site is very professional.  I also wonder if they had someone redesigned their site, would their sales double or even triple?  They started off using Yahoo as their shopping cart system and still use them today.  The big downside to Yahoo is they are only compatible with one particular credit card processing platform, First Data Nashville. This limits the merchant’s choices when it comes to selecting a merchant account provider. One good thing is they do not outsource their ordering management system. They do it themselves and use Quickbooks to manage their finances.

Merchants are turning to cash advances

Posted by: Curtis Stevens on November 18th, 2009

Many small businesses are turning to cash advances to satisfy their funding needs.  Many small businesses are unable to get loans from banks for the funding needs they have,  such as expanding, covering holiday inventory purchases, etc.  Banks are even more stringent with their money with the tight economy.  Therefore, a lot of merchants are turning to cash advances from their credit card processing provider.   The way it works is a merchant is advanced a certain amount of cash that is then repaid back through their credit card charges & deposits.  For example, a recent restaurant owner needed money to expand his building by a 100 sq ft.  He was able to get a $100,000 cash advance from his processor, EVO.  Typical advances range from the low 10,000 to the high 80′s.  The maximum that most cash advance companies will do is $250,000.

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