If you have ever compared two merchant-services quotes and ended up more confused than when you started, the reason is almost always pricing model. The same business can be quoted very different rates depending on whether the processor is using interchange-plus or tiered pricing. Once you understand the difference, comparing offers gets a lot easier.
Where the cost actually comes from
Every credit card transaction has a wholesale cost the processor pays - mostly interchange (paid to the card-issuing bank) plus small card-brand assessments. That wholesale cost is the same for every processor. Visa and Mastercard publish the interchange rates and nobody gets a discount.
What varies between processors is the markup on top. Pricing models are just different ways of expressing that markup.
Interchange-plus (also called "pass-through" or "cost-plus")
With interchange-plus, the processor passes through the actual interchange and assessments at cost, then adds a stated markup. Your statement shows it as two numbers: a percentage (basis points) plus a fixed per-transaction fee.
For example: "interchange + 0.30% + $0.10". You pay whatever interchange happens to be on each card type, plus exactly 30 basis points and a dime. The processor's margin is the same on every transaction and you can see it.
This is what AdvoCharge uses for every client. It is the transparent option. The trade-off is that your monthly bill varies with the mix of card types your customers actually use - rewards cards have higher interchange than debit cards, for example. But the variance is predictable and it is not because the processor is taking more.
Tiered pricing (also called "bundled")
With tiered pricing, the processor groups all transactions into two or three buckets. The buckets are named "qualified," "mid-qualified," and "non-qualified" (sometimes just "qual" and "non-qual"). Each bucket has its own rate. The qualified rate is what shows up on the first line of every sales pitch.
The catch is which transactions actually qualify. The processor decides. Cards that you might think are normal - rewards cards, business cards, anything keyed instead of swiped, anything online - often land in mid-qual or non-qual, which carry rates 1-2 percentage points higher than the qualified rate.
Tiered pricing is profitable for processors because the spread between the qualified rate they quote and the non-qual rate they collect is essentially pure margin. It is also designed so that the merchant cannot easily reverse- engineer the markup from the statement.
How to tell which one you are on
Pull a recent monthly statement and look at the fee breakdown.
- If you see line items labeled interchange, plus a separate small fixed markup, you are on interchange-plus.
- If you see rates labeled qualified, mid-qualified, non-qualified (or qual, mid-qual, non-qual) with no visible interchange line, you are on tiered pricing.
- If you see "enhanced bill-back" or "ERR", you are on a hybrid that bills back the difference after the fact. Same opacity problem as tiered.
Which one you should be on
Interchange-plus, in almost every case. The only argument for tiered is simplicity - a single percentage rate that is easy to forecast - but the simplicity comes at a steep premium and the rate is not actually fixed since most volume slips into the more expensive tiers.
The exception is very low-volume seasonal businesses (well under $5K monthly) where the math difference is small and the predictable monthly bill is worth the markup. For everyone above that threshold, interchange-plus is almost always less expensive.
Switching is the easy part
The biggest reason merchants stay on tiered pricing is not loyalty - it is inertia. Moving from tiered to interchange-plus typically requires no change to your terminals, no change to your gateway, no downtime, and no fees on your existing account. The new processor handles the application; the old account can be left to lapse or formally closed.
If you want us to look at your current statement and show you what the same volume would cost on interchange-plus, send it over. The review is free and we will tell you whether the difference is worth doing.