Flat Rate vs. Interchange Plus vs. Tiered Pricing Schemes

Unless you are a payment expert, it’s often challenging to understand your monthly credit card statements and associated processing fees, depending on your plan.   There are lots of unfamiliar terms, multiple parties involved and layers of charges and assessments that are difficult to decipher.  In evaluating whether you are paying too much for your payment processing, it’s also important to understand what pricing plan you have and how it works.  The three most popular payment processing plans are flat rate, interchange plus, and tiered pricing plans.

In this article, we will provide a primer on key terms and explain the difference between these pricing models.

Overview of Credit Card Processing

Before discussing pricing plans, we wanted to provide a brief summary of the different entities involved in processing a payment.

Here are the primary parties involved in a typical credit card transaction:

Cardholder – Someone who obtains a payment card (credit or debit) from a card issuing bank and uses it to buy stuff.  In other words, your store customer.

Issuing Bank – Financial organizations that market and issue credit cards to Cardholders. Issuing Banks underwrite the risk of new accounts, issue the payment cards, pay the Acquiring Bank for purchases made by its Cardholders, collect payments from Cardholders for purchases made, and maintain relationships with the Cardholders.  Issuing Banks are members of the Card Brand’s Association.  Examples include Chase, Citi and Capital One.

Merchant – A retailer or business that maintains a merchant account enabling it to accept credit or debit cards as payment from customers for goods or services provided.  In other words, the store owner.

Acquiror or Acquiring Bank – Commonly referred to as a processor, but also referred to as a Merchant Bank.  Acquirors provide Merchants with payment terminals to accept cards and provide support to Merchants. The Acquiror also deposits funds from credit card sales into a Merchant’s bank account.   Acquiring Banks are members of the Card Brand Associations.  Examples include Fiserv, FIS, TSYS and Global Payments.

ISO or MSP – Merchant service providers (MSPs) or Independent Sales Organizations (ISOs) are agents or partners of Acquiring Banks and sell and service merchant accounts to businesses on behalf of the Acquiror.  Some Acquirors sell Merchant Accounts directly, but most have some sort of network of partners selling their merchant services.  This can get confusing as acquirors may white label their service – so the processing service is sold under the brand of the ISO or MSP.  Examples of MSPs and ISOs could include your local bank, a local processing rep or sales organizations that sell merchant accounts and processing services of an Acquiring Bank.

Card Brands – This is a small group of entities that set rules for the ‘association’ of entities involved in payment processing.  The Card Brands also maintain the networks used to connect and exchange data between the different entities involved in the Association.  Card Brands examples include Visa, Mastercard and Discover.

 How it Works – When a customer swipes or dips a card, it starts a complex chain of communications between the Merchant Bank, Card Brands and Issuing Bank.  The transaction is sent from the terminal via the Acquiring Bank to the Issuing Bank. The Issuing Bank then approves or declines the transaction and then transmits funds that are deposited into the Merchant’s bank account by the Acquiring Bank. The networks of the Card Brands provide the technology and communication infrastructure that facilitates electronic payments between the Issuing and Acquiring Bank.

Credit Card Processing Fees

Now that we have summarized the players, let’s discuss the different processing fees and who charges these fees.  As shown below, many fees are unavoidable and cannot be negotiated down – such as Interchange fees.  However, many other fees are discretionary and can be negotiated down or eliminated.

Interchange (aka Wholesale Rate)

This percentage fee (usually a per transaction percentage) is agreed upon by the Issuing Bank, the Merchant Bank and the Card Brands based on the type of card accepted and the method used to accept the card.  Interchange is impacted by:

  • Swipe vs manual/keyed entry – EMV cards dipped into a terminal have lower fraud risk than cards taken over the phone and manually keyed into the terminal. As a result, transactions with keyed card numbers have higher Interchange.
  • Credit vs debit vs pin debit – Debit and particularly pin debit cards have lower risk to the Merchant Bank as the money is instantly deducted from the Cardholders account. As a result, debit cards have lower Interchange.
  • Rewards associated with cards – credit cards with generous loyalty rewards for the cardholder tend to have high interchange fees, as this is how the issuing bank funds the reward programs.
  • Place of business – The US tends to have higher Interchange than other countries. For example, Interchange in European Countries is about half of US Interchange.

Please keep in mind that Interchange Fees are set by both the Issuing and Merchant Banks and the Card Brands.   It’s not possible to negotiate this rate. It’s the same for all merchants.

How much is Interchange? To provide some reference, here are interchange costs of credit cards on the major card networks:

Visa: 1.4%-2.5%

American Express: 2.5%-3.5%

Mastercard:  1.25%-2.5%
Debit card interchange fees are usually lower than credit card fees.

Card Brand Assessments

In addition to Interchange fees, the Issuing Bank and Merchant Bank also can add additional assessments for costs associated with their network.  These tend to be much smaller than Interchange fees.  Like Interchange, it’s not possible to negotiate these assessments.

Processor Markup

These are the fees that the Issuing Bank and/or ISO-MSP add to your statements to cover their sales and marketing, technology and support costs and to generate a profit. This is typically a percentage fee of the amounts processed and a per transaction fee.  The transaction fee usually ranges from $0.05 to $0.15 per transaction and the percentage fee can be 40bp to 120bp (in addition to Interchange).

Because these fees are set by the processor, there may be some room for negotiation. If you transact at a high volume, you can also often negotiate a lower markup.

These fees can appear on the statement in a variety of ways and places.  And this is where it gets tricky.  Some processors like to name these fees similar to the Card Brands fees or co-mingle them with the fees of the Card Brands.  While in some of this is unintentional, other processors purposely try to disguise the fees that they add to statements.

Miscellaneous fees

In addition to the processor mark-up, there may be some additional fees on your merchant statement.  These fees can cover additional services provided by the processor – or could be junk fees added to the statement to boost the profit of the processor.

Examples of these fees include:

  • annual fees
  • monthly fees
  • statement fees
  • credit card terminal rental fees
  • value added services (such as fraud prevention or analytics)
  • security fees (such as PCI compliance fees).

Some of these fees are legitimate charges for services you actually want.  But others are nuance fees charged to extract additional revenue from you. Worse, some processors like to ‘opt in’ customers to a new service, so it will be automatically added to your account unless you ‘opt out’.  So, it’s important to review your statement monthly.

Flat Rate Pricing

Flat rate pricing is straight forward. When you sign up for a flat rate pricing plan, all your transactions are charged the same flat rate. This flat rate is inclusive of interchange rate, assessments and all the processor’s mark-up and miscellaneous fees.

Most payment providers will offer slightly different rates for card-present (swiped/dipped) transactions vs. card-not-present (keyed or online) transactions. ​​ This reflects the higher risk and Interchange of card-not-present transactions.

An example of a flat rate plan would be:

Card Present: 2.2% – 2.6% plus 10 cents per transaction
Card Not Present: 2.8% – 3.2% plus 20 cents per transaction
Other Fees: None

Pros of flat rate plans

  • Easy to understand. Credit card processing fees and statements can be complicated. Flat rate processing removes this uncertainty – you pay the same amount for every transaction.
  • More predictable. With a flat rate plan, it’s easier to predict your processing expenses month to month.
  • Accept high rewards cards at lower costs. Accept high rewards/elite cards without extra cost. You will no longer have to turn away high costs business cards and American Express cards that charge higher rates.

 Cons of flat rate plans

  • A lack of transparency. The simplicity of flat rate monthly statements can make it hard to see the types of cards that you are accepting, as you will no longer see Interchange detail on the statement.

 Is a flat rate best for me?

Flat rate pricing is a very popular method, but the type of business you have may impact whether this is the best plan for you.  If you are busy and prefer not to worry about reviewing your statements each month, then a flat rate plan is for you.  If you want more predictability in your monthly processing fees, then the flat rate plan is for you.  If you accept a lot of high rewards elite credit cards, then the flat rate plan is for you.  Even if you take a lot of debit cards, then perhaps you can negotiate a lower flat rate plan than a standard flat rate plan.

High-volume businesses usually can negotiate better rates with payment providers than available via a ‘one size fits all’ flat rate plan. This could result in you paying lower per-transaction fees than the standard advertised plan.

Interchange Plus Pricing

An interchange plus plan is an alternative to flat rate processing.  The name is descriptive of the plan structure.  You pay the applicable interchange rate on each specific transaction plus some sort of processor markup. Your monthly credit card statement will be more complex than a flat rate plan, but you will be able to see the fees for each type of card accepted.

The markup is typically a percentage of the charge amount.  In addition, processors also typically charge a per transaction fee.  Interchange plus plans can contain all the miscellaneous fees of traditional processing plans (monthly fees, statement fees, PCI fees, etc).  Interchange plus statements are generally multiple pages, as they need to show all the different types of Interchange as well as all the Card Brands and processor fees and assessments.

An example of an interchange plus plan would be:

Interchange plus 0.65% plus 15 cents a transaction
Other fees: Yes, may include all standard fees and assessments.

Pros of interchange plus pricing

  • While an interchange plus statement will be more complex, the benefit is that you should see the fees you’re paying for each transaction. This normalized payment processing costs and makes it easier to compare costs based on actual cards accepted.

Cons of interchange plus pricing

  • More complex. Because each transaction has a different price associated with it, and you can’t predict the exact number and type of transactions you’ll get each month, your costs become harder to predict.
  • High rewards cards are more expensive – As mentioned above, some cards tendered by your customers are more expensive to process. Many high reward or elite cards have high interchange rates associated with them. When processor fees are added to those high rates, the resulting fee might be more expensive than a flat rate pricing model.
  • Can include all standard processor fees and assessments (monthly fees, annual fees, statement fees, PCI fees, etc.)

Is Interchange Plus best for me?

Interchange Plus plans work best for retailers seeking more visibility into credit card costs or retailers with a high percentage of high rewards credit cards.

On the flip side, interchange plans have more volatility than flat rate plans, as your costs each month are based on volume and the types of cards being accepted.  Interchange plus plans can include all the traditional processor and miscellaneous fees, so you may end up paying more than you expected.  Finally, if you are too busy to analyze your statements frequently, then you may prefer the simplicity of a flat rate plan.


Tiered pricing

Tiered pricing consists of a per transaction fee and a percentage-based processing fee based on the card accepted.  Transactions are separated into three categories: qualified, mid-qualified or non-qualified based on the card type and the processing method. The fixed percentage rate varies based on the tier or category that the transaction falls under.

Processors who use tiered pricing usually do not disclose the criteria on how the different transactions will be categorized.  Merchants generally do not how their transactions are categorized.

An example of a tiered pricing plan would be:

Qualified: 2.2% plus 10 cents per transaction
Mid-Qualified: 2.6% plus 20 cents per transaction
Unqualified: 3.2% plus 30 cents per transaction
Other fees: Yes, may include all standard fees and assessments.

Traditional processors love this type of plan.  They get to decide the rules on what transactions fall into which tier.  This plan also allows them to add all the standard processor fees (monthly fees, statement fees, PCI fees).

Tiered pricing models are generally the least transparent type of payments provider.  You do not get the simplicity of a flat rate plan nor the visibility of an Interchange Plus plan.

For example, a sale rep at a processor may offer you a very attractive ‘qualified’ rate of 2.2%.  However, it may turn out that based on the classification rules set by the processor, very few of your transactions will fall into the ‘qualified’ bucket and that most transactions will be charged to the much higher ‘non-qualified’ rate.  So while you will be expecting rates around 2.2%, you could end up with much higher rates.

Be sure to watch out for tiered pricing contracts with onerous cancellation fees.  Merchants generally cannot tell which transactions fall into which tier until they start processing.  At that point it will be too late to cancel without paying high cancellation fees.

 Is Tiered Pricing best for me?

The opaque nature of tiered pricing plans makes these plans a poor option for most business owners.  If you do consider a tiered pricing model, we recommend that you get some sort of assurance on how your transactions will be categorized and a contract that can be cancelled at any time with no penalties.

Which plan is right for your business?

In general, we do not recommend tiered pricing payment processing plans.  These are much less transparent than flat rate and interchange plus plans, and there is a real chance that you’ll end up paying more than you expect.

Most modern processors today have moved to a flat rate model because it’s generally simpler for all involved parties.

Things to consider when deciding on a plan include:

  • Transaction volume
  • Types of cards processed
  • Transaction size
  • Desire for simplicity vs visibility

MicroBiz does not offer just one set flat rate pricing plan.  MicroBiz Payments considers the transaction volume and the types of cards processed before proposing a flat rate plan.


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If you have any questions on how to recieve a quote from MicroBiz Payments. Our technical sales reps can answer any questions that you may have on our features and functions as well as how you convert your processing plan to  MicroBiz.

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