What Is A Tiered Pricing Structure?

Tiered pricing structure, sometimes referred to as bundled pricing, is a type of rate structure used by credit card processors. A tiered pricing structure usually has three levels of transactions: qualified, mid-qualified and non-qualified transactions and each processor set their own fees for each level. These fees are in addition to interchange rates which are the basis of all transaction fees.

There are hundreds of different interchange rates. Credit card processing providers came up with this tiered pricing structure so these hundreds of interchange rates can be sorted into manageable – and billable – categories. Because a tiered pricing structure is tied so closely to interchange rates, the myth is that the credit card associations set the standards for what is a qualified, mid-qualified or non-qualified transaction. But that’s not the case at all.

Interchange rates are fixed by the credit card associations. They’re the same for every merchant. It’s the credit card processors who came up with the terminology qualified, mid-qualified and non-qualified, and they determine where a merchant’s credit card transaction falls among these qualification tiers.

In other words, there’s no such thing as a qualified, mid-qualified or non-qualified interchange rate. There are only qualified, mid-qualified and non-qualified transactions. Likewise, there’s no such thing as a qualified, mid-qualified or non-qualified credit card type. That classification is also decided by each individual credit card processor.

So now you get the picture Credit card processors use a tiered pricing structure as a way to group together the dozens of interchange fees into manageable categories. The processor charges a different service rate for qualified, mid-qualified and non-qualified transactions. So although the credit card processors have no control over what interchange rate is charged for a transaction, they do have control of the pricing tier it’s assigned to, which determines the fee they add to the interchange rate for their services.

Tiered Pricing…Good For The Processor, Not So Good For You.

Because each credit card processor has control of what transaction goes into what qualification rate, it makes it difficult to do a price comparison between providers. One provider may choose to place a certain transaction in the qualified or lowest rate tier, while another processor has the option of placing that same transaction in the mid-qualified tier, which incurs a higher fee.

Most processors advertise their lowest or qualified rate. Their offer might look good on the surface, but they fail to tell you that 50% or less of your transactions will actually settle under their qualified rate. That’s why it is very important to look at the whole picture when reviewing quotes from credit card processors. One processor may have a lower qualified, but their mid-qualified and non-qualified rates may actually be higher. So you chose the processor with the lower rate, but they route more of your transactions into the mid- and non-qualified tiers and before you know it you are paying more for your credit card transactions than you might have if you had gone with the processor with the higher base rate, but more reasonable upper tier rates.

But even if you carefully compare all the rates in the different offers you receive the arbitrary way processors decide which transaction falls under which rate category makes it hard to know what process to sign with.

In fact, most industry experts believe that if your company is using a tiered pricing structure to process your credit card transactions you are paying too much. There are other rate structures, like Interchange Plus or a fixed monthly rate that can save you money on your processing fees. Take the time to review your credit card statement and if you are presently paying for tiered pricing you could probably cut your credit card processing cuts dramatically.