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Shaw Merchant Group
Tiered Rate Processing
 Tiered Rate Processing 
Tuesday, November 21 2023

Today’s modern business owners require robust credit and debit card processing to manage everything from in-person retail sales to e-commerce solutions with scalable customer demand. Most businesses are already aware they need a powerful payment gateway to manage and accept these transactions but may be unfamiliar that many of the best payment processors on the market offer a variety of pricing models. This is to ensure clients receive the best possible fees, interchange plus pricing, flat rate credit card processing, and more.

While the goal of any reasonable payment processor is to also have a lucrative business, there is a balance that can be struck so owners and clients grow in a fair and balanced way. One of the better pricing models that is available to ensure this support is through a 3-tiered rate structure.

At Shaw Merchant Group, we always do our best to keep our clients informed about any decision they need to make concerning service providers. That is why we thought it a good idea to go into more detail about how tiered rate pricing can benefit your business model. By the end of this service page, you should have an excellent understanding of how this structure works, the potential benefits it provides to your business operations, and the possible pitfalls if not managed correctly. So let’s dive in, and don’t forget, if you have any questions, send us a note, and our team will respond as soon as possible.

What is Tiered Pricing Structure for Card Processing?

While most businesses are used to interchange plus pricing and flat rate credit card processing, tired rate structures offer a lucrative alternative. This is a pricing model utilized by payment processes that charge merchants based on certain categories or criteria. That could be the type of card used, method of payment, or risk level of the transaction.

Each tier is given a rate or fee, which is charged to the merchant based on the transaction category. In most cases, these structures have three tiers:

  • Qualified – lowest rate and often includes in-person swipes of a card.
  • Mid-Qualified – tends to cover transactions that do not meet qualified criteria, like cards being keyed instead of swiped.
  • Non-Qualified – highest rate and applies to higher risk transactions like corporate cards or reward cards.

There is some variance in the industry between what criteria are used for each tier, and that can cause some confusion for merchants and clients. That is why you see some providers sticking to flat-rate credit card processing, but at North American Bancard, we like to provide more robust solutions that meet the induvial needs of all our clients.

How Does Tiered Pricing Work in Practice?

Anytime your business allows a credit or debit card as a payment method for services or products, you have to pay a processing fee to the provider or payment gateway. These fees are usually calculated by taking a percentage of the transaction as well as a fixed amount agreed upon before allowing card payments.

For example, at Shaw Merchant Group, we start with a tiered rate structure of 1.39% of the transaction amount plus an additional $0.10 cents. This is easy to remember and low enough to make our services highly competitive in today’s modern marketplace. Those fees fluctuate based on the tier of each transaction. So if you plan on having frequent debit card purchases in-person, you save money by using a tiered rate pricing model as compared to a flat rate model.

Still confused? It’s okay. This involves a lot of the nitty-gritty details of business finance and how to maximize each of your transactions, so you minimize risk and increase potential revenue. Let’s get a little more in detail about each tier so you can make a well-informed decision about whether or not it is suitable for your business operations.

Tier 1 – Qualified Transactions

The first tier we need to cover concerns those regular transactions that tend to happen in person or with cards that offer as little risk as possible. This tier provides the lowest rates because it is the most reliable. Payment processors don’t have as much risk to consider because the customer shoppers are physically there, can be confirmed through pins or signatures, and use debit cards more than credit cards associated with corporations and rewards. That continuity leads to more predictability and, thus, lower rates.

Tier 2 – Mid-Qualified Transactions

Mid-Qualified transactions are a tier meant for a little more risk. These may be rewards or loyalty cards that offer cashback bonuses or other features. Most of the time, this includes credit cards on the consumer marketplace or keyed-in payments. Any other transactions that are processed in a 24-hour time period for authorization may also end up in this tier because they require more authentication. While this tier does have a higher rate than the first, it is lower than the next tier, which covers higher-risk transactions.

Tier 3 – Non-Qualified Transactions

A non-qualified transaction is exactly what you think. These are cards that have a bit higher risk when processing. You can consider corporate cards, international cards, or any payments made with a CNP (card not present) type of transaction. As you can imagine, these types of payments carry a much higher risk of fraud and authorization. As such, they are subject to higher fees than the other tiered rate structure options because the processor is also assuming that risk.

What is the Cost of Tiered Rate Pricing?

Remember that every payment processing service is going to be unique based on the banks and stakeholders backing their operations. That being said, there is no “one-stop” unified solution to tiered rate structures. Every processor will calculate how much risk, what they need for profits, and how to remain competitive in the market to develop their own pricing model for fees.

This idea of a case-by-case basis extends to manipulating the tiers. Many processors may blur the lines between Tier 1 and Tier 2 concerning corporate cards or systems like Apple Pay, where a card is not required to be present. Your best bet is to ask questions upfront, read through the terms and services, and get to know your payment processor. We at North American Bancard always encourage our clients to ask any questions they want ahead of time, so our relationship remains as easy and smooth as possible.

It may help to cover what types of rates you can expect from the industry. This will help put the tiered rate structure in perspective and give you a better idea of what you need to account for concerning taking payments for your business.

Interchange Fees

Every single credit card network requires an interchange fee. Visa, Mastercard, American Express, and Discover all ask for a fee for every transaction that is processed through their networks. These tend to be small fees and fixed as these provider networks know they are in tough competition with one another and want your business. You will most likely never see these fees as they are paid by the banks issuing the cards and not the merchants themselves.

All these interchange fees are automatically subtracted from the transaction funds. Yes, that does mean you receive less in your merchant account than the price your clients have paid, but it also means you don’t have to handle the fees outside of the transaction. That saves you time in the long run.

There are also interchange plus pricing models that list all fees handled on a monthly statement. This will include any wholesale fees determined by the issuing banks and credit cards, as well as any markup fees determined by a processor. You can expect most interchange fees to hover around 1.15% and 3.25%, with a possible potential small flat rate as well.

Pros of Tiered Rate Pricing:

  • Transparency for merchant records.
  • Flexibility in the marketplace based on your needs.
  • Cost-effective solution for businesses with low-risk transactions.
  • Easy to manage risk based on the style of business you are running.
  • Incentives for you and your customers to use more reliable payments.

Cons of Tiered Rate Pricing:

  • It is more complex than flat-rate credit card processing. 
  • May have higher costs if you experience a lot of non-qualified transactions. 
  • It can be a bit more unpredictable, depending on your payment policies. 

Is there a Downside to Tiered Rate Structures?

At Shaw Merchant Group, we always want to be transparent with our clients to ensure we maintain the quality trust and customer relationships we have spent years cultivating. In that spirit, we should review some of the disadvantages merchants may see with the tiered rate pricing model.

Unpredictable Rates

Some providers may change the pricing model occasionally based on market demand, current economic stressors, or other situations that may lead to lower profits. This inconsistency can be costly if the rates for subsequent tiers shift without notice. Or, if the processor changes what criteria determine what tiers. Good communication between you and your processor is critical to avoid this type of situation.

Pricing Opaqueness

Unlike our team, there are providers out there who will mask or hide the fees of higher-risk tiers. That can lead to drastically high risk when it comes time to issue payment for the services rendered. Even when such processors advertise low rates with attractive fee schedules, you always want to read the fine print. That way, you avoid paying out more than you need to when the bill is due.

The Risk of High Costs

If you want a business to succeed, you need to mitigate expenses. Using a tiered rate pricing model can lead to a much more cost-effective solution for your business. However, if you have a great deal of mid to non-qualified transactions, those solutions become much more expensive quickly. This is why we always encourage clients, especially in the e-commerce realm, to look closely at the tiered structure. You wouldn’t want all your transactions to be non-qualified while thinking you are paying the lower rate.

Why Do Banks Choose the Tiered Rate Structure?

Most of the time, banks choose tiered rates because of risk mitigation. Banks assume the liability that the end customer making the transaction will pay their bills. There is some fraud to be worried about here. Things like chargebacks or stolen identity can lead to high bank expenses.

To lower the risk they experience, banks prefer a tiered structure where that liability is shared among all stakeholders instead of squarely on their shoulders. Think of this as a type of insurance policy for the bank to prevent paying out higher expenses in the long run.

What About Alternatives to Tiered Rate Pricing?

There are absolutely alternatives to tiered processing that are available. We’ve discussed a couple already, but let’s do a quick review:

  • Interchange plus pricing: This will include a percentage-based fee for each transaction plus an additional fixed fee. For example, a 1.29% fee on the total transaction value plus $0.10 on end. This is slightly more reliable and transparent than tiered pricing because you know what to expect regardless of the payment type.
  • Flat Rate Credit Card Processing: This is the most straightforward alternative where every transaction is given a flat rate fee. That can mean less money changing hands and lower expenses to the bank and merchant, but it doesn’t account for risk.
  • Membership-Based Fees: As the name suggests, this is when you agree to a subscription or membership with a processor based on a monthly fee for a certain number of transactions. That typically doesn’t include any interchange or network fees from the cards, but it does give you a lot of predictability.

Wrapping Up Tiered Rate Structure Models

While there are some disadvantages you need to overcome that mean the tiered rate pricing model is not suitable for your business structure, it does offer a ton of flexibility for other organizations.

At Shaw Merchant Group we take the time to get to know your business and operations. Our team can offer the best solutions fit to your specific needs. Whether that is using a tiered rate structure, interchange plus pricing model, or flat rate credit card processing, rely on our experts to get you up and running and receiving customer payments. So give us a call today, and let’s find a cost-effective solution for your needs!Q

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Applying for a Merchant Account for Small Businesses

If you are a merchant, then you will undoubtedly need a merchant account. Merchant accounts are accounts that your business holds with a payment processor or merchant services provider that give you access to the critical tools that your business needs to succeed and accept payments. Without a merchant account, your business will be unable to complete the most important part of any transaction--the receipt of the funds for the goods or services that were rendered. If you want to get a merchant account for your business, then the first thing you need to know is how to apply for a merchant account and what is involved in the process of the application. This insight will give you the knowledge and information that you need to be successful in the merchant account application process and provide you with a competitive edge when applying for your merchant account.

Information needed for applying for a merchant account

If you’re hoping to have success in the merchant account application process, then one of the first things that you will need to know is about the requirements for applying and gaining approval for a merchant account. There are several pieces of information and documentation that you will need if you’re going to have success in your application. Providing these pieces of documentation and information will greatly increase your chances of being successful, but that’s not all that matters. You will also need to display several traits and factors that prove yourself to be a reliable and trustworthy merchant.
 
Here are the pieces of information that you will need when applying for a merchant account:

  • At least 3 months of bank statements
  • At least 3 months of processing statements, if applicable
  • Valid identification
  • EIN or SSN for the account
  • A functioning website that has information about your business

Before you apply for a merchant account, you should be sure to have each of these pieces of information available and ready to send with your application. The absence of any of these pieces of information could prevent you from getting a merchant account or getting good rates if you are granted a merchant account. This could delay the process and make getting a merchant account take that much longer.

Getting approval for a merchant account: factors explained

When you are applying for a merchant account, one of the most important concepts that you should understand beforehand is that there are a variety of factors that go into your approval or rejection as a merchant for a merchant account. Being familiar with these factors can increase your chances of success when applying for a merchant account because it will enable you to optimize your application and make it much more attractive to the merchant services that you hope to work with. Here are some of the most important factors in getting approved for a merchant services account and why they are considered to be important.

Bank history

The bank history is one of the required pieces of information for your business if you hope to get a merchant services account. The merchant services provider that you apply with will ask for at least documentation of 3 months of bank history. The reason that merchant services providers ask for this information is pretty obvious--they want to ensure that your business is reputable and is in good standing with your bank. Without this verification, they might not be able to establish confidence that you are a trustworthy financial partner to work with. Merchant services companies want to verify that you are a legitimate business with a verifiably good relationship with your banking provider. By verifying this, they can guess that you will be a good partner to them, as well. Always provide the most comprehensive statement information that you can and be sure to not just provide the bare minimum, if possible. Applications will ask for at least 3 months, but if you are comfortable you should supply up to 6 months of statements.

Processing history

Another thing that will factor heavily into the decision that is made regarding your merchant services account status is the processing history documentation that you are able to provide. When you apply for a merchant processing account, the company that you apply with will very likely want to see at least 3 months of processing history. Again, the more information that you can provide, the better. Those that are able to provide up to 6 months of documentation will likely have more success. The reason that merchant services companies request this information is also clear--because they want to know that you will be a good partner to them in your merchant services and credit card processing relationship. Being involved with a company to provide credit card transactions is no small matter, and the companies that you work with want to protect themselves just as much as you do. When you provide this information, they will look into your past success, chargeback ratios, and any concerns that have arisen in your past relationships with processing companies.
 
It is possible that you are not able to provide this information, in the event that you are a new business. Still, you should answer as many questions as they have and provide them with answers to the questions that you are able to such as what your expected volume will be. Going the extra mile to provide this information could certainly be the difference between denial and acceptance for your merchant services account.

Credit score

When evaluating your application for a merchant services account, your merchant services partner will very likely want to see your credit score. This is a piece of information that you will likely not have to provide yourself, as many merchant services companies have a way to check this. Your business credit score will tell the underwriter, the person who approves and denies processing accounts, about your financial history and whether there are any red flags. If there are blips on your credit score, that doesn’t mean that you will not be eligible to get a merchant services account. However, it might mean that there are more hoops to jump through or that you don’t get as good of a processing rate that you were hoping for. The best way to handle a poor credit score as a business is to apply to a merchant services program that approves businesses that are in a similar situation and works with businesses to overcome challenges that they might have struggled with in the past.

Industry

Even though you might not have given much thought to it in the past, one of the most relevant factors in your approval or rejection for a merchant services account is the industry that your business is in. It is very important to consider the industry that your business is in because some businesses are at higher risk than others for chargebacks and fraud. If you are in a very normal and ordinary industry, then you probably don’t need to worry that much about the specifics. However, if you are in a high-risk industry that is known for chargebacks and fraud, then you likely want to start looking at ways to bolster your application and show that you can stand out above the rest as a merchant that will not cost the services provider money in the long run.

How long does it take to get approval for a merchant account?

One of the most common questions that is asked when applying for a merchant services account is how long the process takes. The answer is not so straightforward, as there are dozens of factors that go into the decision-making process of either approving or rejecting a merchant for a merchant account. If nothing goes wrong in the process and the underwriters don’t need any more information, then it’s possible that you receive an answer within 24-48 hours, when working with the right merchant account provider. However, this is not always the case. Oftentimes, your merchant account provider will require additional information including clarification on the business plan, more documentation, or just general questions about your business. You can help to reduce the amount of time that it takes to get approved by being upfront with all of the information that you will need for the application and having it on-hand for clarification if needed.

Be selective in who you choose for a provider

One thing that you should know if you want to get the most out of your merchant account is that merchant processing is a serious business. There is a lot of money at stake, and that is why merchant account providers are so selective in who they approve for a merchant services account. You should be equally as selective when choosing a provider. Make sure that you know what you are looking for in a merchant services provider because they are going to have a large impact on your business and what you are able to achieve with your merchant solutions.

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