The difference between interchange plus, tiered, and ERR pricing

Interchange Plus and Tiered pricing are two different pricing models that merchants can choose from when it comes to credit card processing.

Interchange Plus pricing, also known as “cost plus” or “pass-through” pricing, is a pricing model where the merchant is charged a fixed markup on top of the actual interchange rate, which is the wholesale rate set by the card networks (Visa, Mastercard, etc). The interchange rate changes depending on the type of card used, the type of transaction, and the risk level of the merchant.

For example, if the interchange rate is 1.5% and the merchant is charged a markup of 0.3%, the total rate the merchant would pay would be 1.8%.

Interchange Plus pricing provides a high level of transparency and can be more cost-effective for merchants because they are only paying for the exact cost of the card network fees plus a small markup. Additionally, because the interchange rate is set by the card networks, there is no incentive for the processor to steer merchants to accept higher-cost cards.

Tiered pricing, on the other hand, groups transactions into different “tiers” or categories, and charges a different rate for each tier. The tiers are usually defined by the card network (such as Qualified, Mid-Qualified, Non-Qualified) and can change based on the type of card used, the type of transaction, and other factors.

In the context of credit card processing, “qualified,” “mid-qualified,” and “non-qualified” refer to different pricing tiers that are used by some processors when using the tiered pricing model. These different tiers are based on various factors such as the type of card used, the type of transaction, and how the card is present.

  • Qualified” transactions are typically those that are considered to be the most standard and low-risk, such as swiped or inserted transactions where the card is physically present at the time of the transaction. These transactions generally have the lowest rates.
  • Mid-qualified” transactions are considered to be slightly higher risk than “qualified” transactions. These might include keyed-in transactions, where the card number is entered manually, and transactions where the customer is not present, such as mail-order or phone-order transactions. These transactions generally have higher rates than qualified transactions.
  • Non-qualified” transactions are considered to be the highest risk. These might include transactions that are made using a card that has been flagged as high-risk, or transactions that do not meet the requirements of the card network, such as using an incorrect terminal type or processing a card without a CVV code. These transactions typically have the highest rates.

The differentiation between these tiers are used to manage the risk that is associated with the different types of transactions, and it allows the card networks and the processors to charge different fees for the different types of transactions. In general, businesses that have a high volume of transactions, or that have a mix of transaction types, may be better off with Interchange Plus pricing as it could result in lower overall costs, especially if their transactions fall mainly into the non-qualified tier.

For example, a merchant may be charged a lower rate for “Qualified” transactions (such as swiped Visa or Mastercard credit card transactions) and a higher rate for “Non-Qualified” transactions (such as keyed-in Visa or Mastercard credit card transactions).

The problem with Tiered pricing is that it’s often less transparent, and can be more expensive for merchants. Because the rates are not directly tied to the interchange rates, it can be difficult for merchants to understand how much they are being charged and why. Additionally, processors may have incentives to steer merchants to accept higher-cost cards or transactions, as it would result in a higher profit margin for the processor.

ERR (Effective Revenue Rate) pricing with payments is a pricing model in which the seller charges a percentage of the transaction value, plus a fixed fee for each transaction. This model is often used for online payment processing, where the seller wants to charge a percentage of the sale in addition to a flat fee for each transaction. The ERR pricing model can be beneficial for sellers as it can help to cover the costs of processing payments and can also provide a predictable revenue stream.

ERR pricing is a pricing model in which the seller charges a percentage of the transaction value, plus a fixed fee for each transaction. This model is often used for online payment processing, where the seller wants to charge a percentage of the sale in addition to a flat fee for each transaction.

The main difference between these two pricing models is that ERR pricing is a pricing model where the seller charges a percentage of the transaction value, plus a fixed fee for each transaction, whereas Interchange Plus pricing is a pricing model where the merchant pays a percentage of the transaction amount (the “Interchange” rate) plus a fixed fee (the “Plus” rate) for each transaction.

Pros:

  1. Transparency: ERR pricing is known for its transparency. Merchants can clearly see the interchange fees set by the card networks and the processor’s markup. This makes it easier for businesses to understand their card processing costs.
  2. Cost Savings: In some cases, ERR pricing can be more cost-effective for businesses, especially if they process a significant volume of credit card transactions. The ability to negotiate a competitive markup with the processor can lead to lower overall processing costs.
  3. Predictable Costs: Since interchange fees are consistent and known in advance, merchants can predict their card processing costs more accurately. This can be particularly beneficial for businesses with tight budgets.
  4. Competitive Pricing: Merchants have the opportunity to shop around and negotiate the markup with different processors, potentially leading to competitive rates.
  5. Flexibility: ERR pricing can be customized to the specific needs and transaction volume of a business, allowing for flexibility in pricing structures.

Cons:

  1. Complexity: While ERR pricing offers transparency, it can also be more complex to understand compared to flat-rate pricing models. Merchants may need to decipher different interchange categories and calculate their effective rate.
  2. Higher Markup: Some processors may charge higher markups in ERR pricing models, which can offset the benefits of lower interchange fees. Merchants need to carefully compare and negotiate these markups to ensure they are competitive.
  3. Monthly Fees: Some ERR pricing models may include monthly fees in addition to the interchange fees and markup. These fees can add up and affect the overall cost of processing credit card transactions.
  4. Inconsistent Pricing: The markup charged by processors can vary widely, so businesses need to be diligent in negotiating favorable rates. Inconsistent pricing can make it challenging to compare offers from different providers.
  5. Not Ideal for Small Businesses: ERR pricing may not be the best choice for small businesses with low transaction volumes, as the complexity and potential for higher markups may not justify the benefits.

When choosing a pricing model, merchants should carefully consider their business needs, transaction volume, and long-term costs. In general, Interchange Plus pricing can be more transparent and cost-effective for merchants, but it requires a more detailed understanding of card network fees and interchange rates. Tiered pricing can be simpler to understand, but it can be more expensive and less transparent in the long run.

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