Why You Shoud Avoid the Tiered Merchant Account Pricing Model

Do you have any idea what I mean when mentioning the tiered merchant account pricing model? If not, it’s time to learn, because chances are your ecommerce business is being taken advantage of with unnecessary costs from your credit card processor. The tiered pricing model is expensive and useful for credit card processors to hide fees in their statements.

As an online business owner, you will eventually receive one of these statements and wonder what the heck is going on. It’s not that all credit card processors are trying to confuse you, but it does have several benefits for them in turning higher profits.

The point of this article is to explain to you how the tiered merchant account pricing model works and why it’s generally not the best way for you to keep costs low for your business. That said, keep reading to learn about the model and see which other options are available for you.

What is the Tiered Merchant Account Pricing Model?

You know those charges that go through your site when customers buy things from you? Those are all being processed by your payment processor and sent to your merchant account. The complicated part is where the credit card processors come into play.

The processors work with something called interchange fees, which are the fees paid between banks to process certain credit card payments that go through your site. You get caught in the middle, and most of the costs get sent back to you for making the sale.

When a customer makes a purchase on your site, the credit card processors charge you a fee for that transaction. These fees are grouped into categories called interchange fees. However, with the tiered merchant account pricing model, the interchange fees are hidden and categorized differently, into bundles.

In short, the tiered merchant account pricing model is a rate structure that the processors use to pass those fees to you. In a sense, it’s simply the way they portray the fees to you – and it’s rather frustrating.

The best way to describe the structure is by talking about bundles. The processors bundle your interchange fees into vague tiers, and most of these tiers are chosen by them.

What are the most common tiers you’ll see on your statement?

  • Qualified
  • Mid-qualified
  • Non-qualified

To clarify, the merchant (you) doesn’t pay individual interchange fees. So, the individual transaction fees are not being paid by you directly. Instead, the processor bundles all of the interchanges and forces you to pay in a few large sums, which cover up additional fees they may implement. In turn, the processor turns around and pays the merchant interchange fees for them. Therefore, they may end up with a little profit since the individual interchange fees usually add up to less than what the bundled fees were.

Since there are more than 125 interchange fees (your individual transaction fees narrowed down into specific categories,) this tiered format narrows it down even further to make it less intimidating when seeing your statement.

What are the Main Components to Remember with a Tiered Model?

If you’re still a little confused about how this pricing system works, let’s go over some of the main takeaways when working with the tiered merchant account pricing model.

  • When accepting transactions, those transactions incur fees from the credit card processors.
  • The industry categorizes these transactions into over 125 different categories called interchange rates.
  • Your credit card processor organizes these 125 interchange categories into just three or four bundles. You can actually see up to around 12 bundles on your statements.
  • They then report these bundled prices to you.
  • Each bundle has a varying rate, based on a scale that goes from best to worst.
  • You credit card processor is in complete control when deciding what rates should be charged for each of the bundles.
  • Making it even worse, each processor is different in how they decide on these rates. So, one processor could be completely different from another.
  • It all depends on the system put in place by your processor, so the different interchange rates may qualify for different bundles, and some of these bundles have junkier rates for you.
  • Once you start charging credit cards, some of these transactions might be classified into a bundle that charges you way too much money. However, you will never know this, because the bundle aren’t transparent at all.

What’s the Problem? How is this Hurting You as a Merchant?

On the surface, the tiered merchant account pricing model looks like it might just be an attempt to keep statements clean and uncluttered. After all, I’m certain plenty of merchants would complain if they got a list of 125 different interchange rates.

With this method the bundles take the place of those interchange rates, but you are in the dark as to how your credit card processor is placing the interchange rates into the bundles.

In short, this model results in a terrible deal for most merchants, since the processors can designate which rates to charge based on the bundles they put together. What’s worse, you don’t even know when your rates are going up.

What are the main problems with the tiered merchant account pricing model?

  1. Comparing is tough – You most likely want to look into which credit processors offer the best rates, but since each company creates their own bundles and tier designations, you really have no way of truly understanding which is less expensive.
  2. Less transparency – Business owners are always trying to lower credit card fees, but you can’t figure that out when the fees are hidden into bundles.
  3. Processors can manipulate you – Since the transparency is low, it opens up opportunities for credit card processors to move interchange fees to bundles that charge you more money. In a sense, they are free to do whatever they want to boost profits.
  4. Finances become more difficult for you – Imagine trying to project your costs when you have no idea when new fees are going to pop up? Not only that, but the tiered merchant account pricing model keeps you from finding a solid argument to refute some of the charges that come up on your statements.

What Other Models are Available?

Is there any hope when running an online business, or are you stuck with the tiered merchant account pricing model?

You have two options, each of which leave you better off:

  • The interchange plus pricing model – This model is a wonderfully transparent option that itemizes all of your fees in a clear format. It will make your statement larger, and more intimidating, but at least you can understand the charges.
  • The subscription/membership pricing model – This is similar to interchange plus, except you don’t pay a percentage markup. Instead you pay a small fee for all transactions, which is wonderful for online stores with pricey items, since you don’t have to rely on a percentage fee.

Therefore, it’s essential for you to figure out if your credit card processor is using the tiered merchant account pricing model. If so, try to get out of it or turn to another processor that provides something like the interchange plus model. That said, leave a comment in the section below if you have any questions.

Featured image curtsey of Dmitri Litvinov

Catalin Zorzini

I'm a web design blogger and started this project after spending a few weeks struggling to find out which is the best ecommerce platform for myself. Check out my current top 10 ecommerce site builders.