Although there are a lot of pricing models in the merchant service industry, there are two basic pricing models used: tiered and interchange plus. Let’s examine those models and see if one favors your practices’ bottom lines more than the other.

Tiered pricing typically sets up buckets or tiers for the different transaction categories to be placed in. There are usually 2 to 7 tiers. These tiers must accommodate (at my last count) about 300 charge types covered by interchange (1) for the various card brands.

At its core, tiered pricing is intended to give a clean and uncluttered presentation of the fees. And, although a tiered statement does lend itself to a simple presentation, trying to stuff 300 categories into 7 or less tiers means that a lot of estimation is done by the processor to determine how much it will cost to process the cards in a given category.

For example, let’s assume we have a tier with only two card types in it. Type one has an interchange cost of 1.00% and type two a cost of 2.00%. As you can see, the costs for processing the cards in that tier will range between 1.00% and 2.00%. The tier is priced by the processor so that they have minimal chance of losing money when you process mostly type two cards, and by default they make out very well when you process mostly type one cards. For this reason, merchants often pay more than they would if they had interchange plus pricing.

One final note on the dark side of tiered pricing. The tier that a card category is assigned to is left to the discretion of the processor. In most instances, this is fine. But, it means that there is the potential for abuse should the processor move lower cost transactions categories to higher priced tiers. And with tiered pricing there is no real way to determine if this is taking place.

Interchange plus pricing is at the opposite end of the spectrum from tiered pricing. The statements are cluttered. The cards’ costs on a per card type are charged and presented on the statement. The processor doesn’t have to guess what price to charge to ensure that a profit is made. The chance that a processor is up charging a category is slim because everyone can reference interchange (1). The margins for the processor are slimmer because they don’t have to concern themselves with hedging against losses if the mix of cards changes. These factors ensure that the practice owner pays less than with tiered pricing. Overall, I find this type of pricing more transparent and beneficial to the merchant than tiered pricing.

My recommendation is that if you aren’t currently on interchange plus pricing you should make steps towards getting that type of pricing. In the long run, you will save yourself money and worry.

For a list of just Visa’s interchange categories, please visit https://usa.visa.com/content/dam/VCOM/download/merchants/visa-usa-interchange-reimbursement-fees.pdf