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Card Payments

In part one, you learned a lot about payment processing costs and how to calculate a net effective rate. In part 2 of this two part series, we look at credit card fees and merchant margins.

Part 2

Check to See if You Are Getting A Good Deal

Now, you can use that newly calculated effective rates to compare what you’re paying your current payment processor to other payment processors to see if you are getting a good deal. Knowing the effective rate for different payment processors is the easiest, most straightforward way to compare the rates.

A Word of Caution – Many payment processors advertise their lowest rates available, then add in fees behind the scenes — and unsuspecting merchants often end up paying more in total processing costs due to the hidden fees. Others offer alluring flat rate pricing for all transactions, even debit transactions which have a lower processing cost.

A Word about Payment Processors Rates

So, before continuing, we need to understand how effective rates are set. The most commonly used pricing models are tiered, interchange plus, flat rate, or fixed-rate pricing. Knowing the differences between the three pricing models will help you accurately compare effective rates among payment processors.

Tiered Pricing

Tiered pricing is where processors classify interchange rates into a tiered structure of qualified, mid-qualified and non-qualified rates. Qualified rates are the lowest rates. Please note, there is no such thing as a non-qualified credit card; there are only non-qualified transactions, and credit card processors decide which transactions are considered non-qualified based on the classification of interchange rates using their specific tiered pricing model.

Since payment processors set the tiers, the rates can change without notice. Tiered pricing permits processors to lower a business’s qualified rate while still increasing the business’s gross processing fees by re-classifying more interchange rates into the business’s mid and non-qualified rates.

Qualifying for a Qualifying Rate

First, only basic credit cards and certain debit card transactions meet the qualifications for a qualified processing rate. Second, if the first requirement is met, then the transaction must:

– Be an in-person or card-present transaction

– Have the customer’s signature on the sales receipt

– Have the correct date and authorized transaction amount

– Be batched and settled within a fixed time frame

Third, the business must qualify as a low-risk business.

Mid-qualified rates

For retail businesses, processors typically route card-present (swiped/dipped/tapped) reward and keyed-in (manually entering the card details) consumer and debit card transactions to the mid-qualified rate tier.

For e-commerce and card-not-present businesses, transactions involving a consumer’s non-premium reward card make up the bulk of mid-qualified transactions.

Non-qualified rate

Processors typically route all commercial and premium reward card transactions to the non-qualified pricing tier. In addition, keyed-in or e-commerce transactions without the customer’s billing address are also often processed at a non-qualified rate.

Interchange Plus Pricing

The Interchange-plus pricing model has two components — the interchange fee determined by the card brands and a markup set by the payment processor. As you will recall from part 1 of this series, interchange rates vary by card type and where and how it is used.

Basic or traditional credit cards have lower interchange fees; premium cards like Mastercard’s World Elite have the highest fees when used for online purchases. While interchange-plus pricing makes the monthly merchant statement more complicated, it often offers merchants the lowest effective rate. Finally, the transparent nature of Interchange-plus pricing makes it the fairest and most balanced pricing model for the merchant.

Flat-Rate or Fixed Rate Pricing

As the name implies, the merchant is charged the same amount per transaction regardless of the card type or where it is used. While flat rate pricing seems attractive, the merchant pays the same fee on a debit card transaction with an interchange fee of 0.8% plus $0.15 as a reward credit card that is 100% + more expensive. Finally, the overall flat rate is often higher than the fee the merchant would have paid per transaction under an Interchange plus pricing model.

Beyond pricing, merchants need a payment strategy. As a hedge against further margin erosion, industry experts recommend merchants consider a fee-based component.

Add a Fee

Likely, your customers have no clue that you are paying for the perks they receive, assuming the card issuer is paying for the airline miles or cashback they receive.

The question for you, the merchant, then becomes: “Why am I paying for someone else’s perks, primarily when they use a credit card for the rewards?”

The answer: You shouldn’t. It is not uncommon or illegal to pass a fee on to the customer. Many businesses already do. Traveling by plane, you pay a baggage fee, order groceries or food online, pay a fee or a higher price, and customers who choose to use credit at the pump pay a higher price.

By adding a flat or percentage fee, the customer pays for your processing costs when they choose a credit card.

Not a D-I-Y Project

Adding a cardholder fee is not as easy as adding sales tax. Some fee options like a surcharge fee can only be added to credit card purchases, not debit or ACH transactions. Other options allow fees to be added to all card types and transactions but are limited by the card brands that merchants can offer them.

Still, other options permit fees to be added if the payment is made through an alternate payment channel. Card brand rules and legal regulations can determine the type of fee your business could add and how you add it.

How IntelliPay fits in

Leveraging over 100 years of combined payment industry experience, with expertise in the public and private sectors, IntelliPay helps merchants with fee-based strategies that reduce or eliminate credit card processing costs while improving the payments experience for both customers and staff.

IntelliPay goes beyond attractive net effective rates and API integration into existing systems to help clients solve operational, technical, and financial challenges. IntelliPay delivers an automated end-to-end payment solution that simplifies payment acceptance, automatically ensures compliance, and reduces PCI scope so that you can focus less on payments and more on running your business.


Processing costs will continue to rise for the foreseeable future. Interchange plus pricing is the fairest and most transparent option for merchants of the three pricing models. Passing payment processing costs along to cardholders is acceptable and legal. However, adding fees requires expertise and software to compliantly add a fee to transactions using pricey rewards cards for the perks.