Interchange Plus vs. Flat Rate vs. Tiered Pricing: Which Credit Card Processing Model Saves High-Risk Merchants the Most?

Interchange-plus pricing models separate the cost of the underlying cards from the processor’s markup. This allows merchants to see which portion of the pricing model goes to the card networks and which portion goes to the processor.

For merchants that process a high volume of transactions, this model usually provides the best pricing because it is easier for them to negotiate with the various card networks. It also gives them a clear view of the high costs of certain cards, such as rewards, international, keyed, card-not-present transactions, and downgrade cards from other networks.

The complexity of this model means merchants must review their statements carefully to understand the effective rate.

Flat-rate pricing involves merchants paying a percentage rate and a flat fee for every transaction. It is suitable for merchants who do not receive many transactions. It is appropriate for startups, retail businesses, or merchants who do not want to analyze interchange categories thoroughly.

The major disadvantage of using flat-rate pricing is that all transactions are grouped together. Regardless of transaction type, merchants must pay the same rate. If the merchant has many low-cost transactions, the flat rate can end up costing more money. Additionally, high-risk merchants may not be eligible for the same flat-rate pricing companies.

Flat rate is often the best option for merchants who want simplified merchant acquirer software. It is not often the best choice for merchants seeking the best transaction fees.

Tiered pricing places transactions into categories: qualified, mid-qualified, and non-qualified. The qualified rate may appear low, but many transactions may be downgraded to higher-cost tiers.

High-risk merchants may encounter problems with tiered pricing models, as different types of card transactions can alter the assigned rate. If the transaction is not clearly explained in terms of why it was placed into each tier within the software package, the merchant can become frustrated trying to understand why their transactions are being priced the way they are.

Tiered pricing is not inherently a bad model. However, there are considerations merchants must make regarding which types of transactions qualify for the lowest tier, what will lead to a downgrade, and how many of their transactions fall into each category overall.

For established merchants in high-risk industries, interchange plus or custom pricing usually offers the best long-term savings. However, the model must account for the merchant’s industry, chargebacks, gateways and funding options.

Small or emerging businesses might opt for a flat rate. However, a tiered rate plan only makes sense if the high-risk payment processor is clear about the different price tiers and offers competitive rates even after applying rate reductions to offset high chargeback rates.

Rather than focusing on the rate, add up the total cost for each plan. Consider the cost of all transactions, monthly fees, gateway fees, chargeback fees, PCI security fees and any impact on the merchant’s reserve account. Additionally, consider the cost of any hardware or software the business uses to accept payments.

Good merchant account services should help merchants understand pricing before they sign.

Ask:

• What is my effective rate after all fees?
• Is pricing interchange plus, flat rate, tiered or custom?
• What markup does the processor control?
• What fees apply to card-not-present transactions?
• What fees apply to keyed, international, rewards or business cards?
• Are there monthly minimums, PCI fees or gateway fees?
• Are chargeback fees separate?
• Will reserves or delayed funding apply?
• Can pricing be reviewed after three to six months?
• Can ACH reduce card-fee pressure for large invoices?
• Will statements show enough detail to audit costs?

High-risk merchants should also ask whether pricing can improve after stable volume, lower chargebacks and clean processing history.

The Visa Acquirer Monitoring Program (VAMP) is a program that Visa uses to monitor for fraud and disputes. The VAMP ratio is the number of fraud and non-fraud disputes divided by the number of settled Visa transactions. Visa’s TC40 measures the number of reports of fraud transactions, while TC15 is the number of Visa disputes.

VAMP does not define the processing costs for merchants, but does impact the risk associated with the costs. If there are issues with fraud, disputes, or refunds for a merchant, the processing company may increase the costs associated with that merchant.

Another component of VAMP is enumeration monitoring. Enumeration monitoring detects for enumeration attacks, which are bots performing test transactions on a merchant’s website. The enumeration ratio is the number of suspected enumeration attempts divided by the total number of attempted transactions.

For merchants with high-risk products, low processing costs depend on more than just negotiating a high markup on goods. Additionally, merchants must also have fraud monitoring, billing and refund processes in place to ensure that their account remains stable and eligible for better processing terms.

The biggest mistake is choosing the lowest rate advertised without calculating the effective rate. While a 2.9% flat rate sounds good, it may not be the most cost-effective solution for a merchant with high sales and a good card mix. Furthermore, a low rate for qualified cards may appear attractive, but the cost of mid- and non-qualified cards could be prohibitive.

Another mistake is focusing on the price without considering the approval rates. A low rate is helpful for a small business, but if the payment processor does not support the business model or cannot hold funds for rapid growth, the merchant will incur high costs from failed transactions.