One of the most important considerations when selecting a payment processor for your business is which pricing structure they offer, or simply, how they bill you for your processing.
It's important to understand what the different pricing structures are and how they will affect your monthly statement so you can select the billing arrangement that works best for your business. We will break down how the rates and fees are divided up so you can understand how much your credit card processor is making off each transaction. Taking the time to understand how your processor determines its rates can help you avoid sticker shock when you get your first statement.
At Helcim, we offer interchange plus pricing to all of our merchants and we, along with many others who are in the know, believe that this pricing structure is one of the best ways to avoid overpaying for credit card processing, so we'll start there.
Interchange Plus Pricing
Often considered the most honest and affordable pricing model in the industry, interchange plus pricing creates a very transparent relationship between a merchant and their processor. With this pricing model, the processor margin will be a set percentage for each transaction, while the interchange fee, which fluctuates depending on which type of transaction is being processed, will dictate the final cost of a given transaction. This means that whenever you process a transaction that is eligible for a lower interchange fee, you will save money compared to if the transaction was completed using a flat rate.
The graph shows how interchange plus pricing keeps costs down by only charging a consistent margin on top of whatever the interchange rate is for a transaction.
While interchange plus pricing may seem more complicated to begin with because of the many different interchange rates out there, it can result in significant savings for your business.
Flat Rate Pricing
If your payment processor charges a flat rate pricing structure, then they have taken the interchange fee, the card brand fee, and their margin fee to determine one single rate that will be applied to all the transactions that your business processes as a flat fee.
The graph shows how flat rate pricing will always keep rates consistent, but simplicity can come at the cost of transparency and savings.
Because this is a flat pricing structure, you pay 2.9% on all of your transactions, even if the actual interchange rate varies between the different transactions. Depending on your business and the volume you are processing each month, this may mean that your business is paying more than it needs to for payment processing.
Many merchants are lured by the simple nature of flat-rate pricing and only having to be aware of a single fee for all transactions but may eventually realize their business has outgrown this model or could have been saving money with another processor all along. So, while this pricing model may seem simple or easier to understand, it's important to compare it with other pricing models to ensure you are, in fact, getting the best deal possible for your business.
Tiered pricing usually consists of having a lower "qualified" rate for certain transactions and higher "mid" and "non-qualified" rates for others. This is the most common pricing method in the US. The common drawback is that merchants are enticed with a low "qualified" rate, which usually only applies to very select few types of cards, but nearly all transactions end up in the higher "mid" and "non-qualified" tiers. If you're considering signing a contract with a merchant who offers tiered pricing, make sure you have a good grasp on which cards qualify for the lower rates and which cards your customers are currently using for transactions.
The graph shows how tiered pricing splits rates into "qualified" and "non-qualified" rates based on different cards.
While less common in the US, Interchange Differential is common for Canadian processors.
Similar to tiered pricing, "qualified" and "non-qualified" fees are charged, but merchants are also charged "interchange differential fees" for credit cards, which further pads the processor's margins. This results in merchants paying multiple fees on the same transaction, essentially being double billed.
The graph shows how compounded fees can inflate transaction fees with differential pricing.
Understanding how each of these different pricing structures work will help you evaluate your payment processing options.