Merchant payment solutions are an integral component of any business, but also one of the most difficult to understand for the uninitiated. In a world filled with opaque and confusing monthly bills, the payment processing industry often manages to be one of the worst offenders.
To have any hope of deciphering a merchant solutions bill and make an informed decision about choosing a payment processing provider, it's important for business owners to understand how the various pricing systems actually work. Here's an overview of the three most common pricing models in the industry.
Also known as "flat fee," the enhanced rate recovery (ERR) model is typically used by small businesses with very infrequent payment activity. It promises a single fee for all types of transactions, but can be subject to different fee amounts once a charge has actually worked its way through the entire payment system. This makes it a decent choice for very small merchants, but since it provides no room for negotiation or exploration of alternate fee structures, it's a poor fit for more active businesses.
Before moving to the next two payment types, it's important to understand what the interchange rate is:
In short, the interchange rate is a percentage fee determined by the Credit Card Associations (Mastercard, Visa, etc.) in conjunction with card-issuing banks. It utilizes a hugely complex table of transaction-types to determine the relevant interchange rate, with more than 100 categories currently in place for Visa and Mastercard alone.
The key point for business owners to remember is this: While the Credit Card Associations create the interchange tables, the payment processing providers and other middlemen are the ones who get to decide how to categorize any given payment, and that choice is often what determines their profit margin.
The next two payment systems are the most common in the industry, and their separate approaches to assessing interchange rates have big consequences for merchants.
Also known as "bucket pricing," this model is the one most responsible for the industry's sometimes negative reputation. Tiered pricing purports to simplify the process by reducing the hundreds-long list of interchange rates to a smaller number of tiers or "buckets." In theory, this makes it easier for merchants to understand why they're being charged a certain rate for a given payment transaction. While this can be true, it requires a payment processor to be transparent about how and why it's assigning a tier to any given payment. That often isn't the case, making it all the more difficult for the merchant to figure out exactly what they're being charged for each payment, and why.
Many processing providers will entice a merchant by quoting them the rate from the most advantageous tier, but will then proceed to categorize most actual payments in other, more expensive tiers. Tiered pricing has the potential to be the simplest system for an active merchant to work with and understand, but that's entirely dependent on transparent and ethical billing practices from the payment processing provider.
In an interchange-plus system, each transaction is charged with the Credit Card Association's interchange rate, plus a set fee from the provider and middlemen. This avoids the potential for unfair pricing that can arise when payments are lumped together into tiers, and makes it crystal clear what additional fees are being assessed by the processor. It removes the processor's incentive to push payments into more expensive interchange rates, since doing so won't affect their clearly stated provider fee or increase their profit margin.
This makes an interchange-plus model the most transparent for the merchant, and the best choice when business owners want an accurate accounting of what they're being charged, and how they can make decisions based on that rate. It's also the best choice for merchants who want to pass the cost of the interchange rate on to customers, since--unlike tiered pricing--an interchange-plus bill makes it clear what the actual interchange rates are.
Ultimately, there's little reason for a merchant to choose tiered pricing over an interchange-plus system.