It's best to begin this blog by first becoming well-versed in the different processing fees a merchant provider could charge. Give this blog a read. Once you're finished, we’re ready to compare all 4 payment processing pricing models, some more complicated than others, and some much fairer than others. However, it’s important to point out that every processor charges different rates, regardless of pricing models, so we’re going to use common examples and apply them to a $100 transaction. Let’s dive right in and take a look.
Enhanced Interchange (Cost-Plus or Pass-Through) Pricing
This is by far the most transparent model and is quite easy to understand. The merchant pays the interchange rate of the card plus the processor’s markup, which is almost always a fixed percentage (0.20% or 20 basis points). Then you simply add the authorization fee and the assessment fee, which, in a true cost-plus pricing model, is always at cost.
You, the merchant, pay the non-negotiable transactional fees, plus the payment provider’s markup; no fluff, no hidden fees, simple. However, while this model gives you full transparency into the breakdown of your rates, some processor’s bills can be difficult to understand. That’s where your payment processor should come in.
+ Each fee is clearly outlined
+ No hidden fees
+ All costs are transparent including the markup
- Bills are sometimes difficult to understand
- Never paying the exact same amount each month; can be difficult to forecast
Fixed Rate (Flat Rate) Pricing
This pricing model is simple and easy to understand. A higher fixed percentage is charged on all transactions, regardless of the type of card used and it covers all the fees mentioned above.
The rate is almost always much higher than a cost-plus pricing model to help protect the payment processor. This pricing model is used by most aggregators, such as Paypal and square.
+ Other pricing models can be difficult to understand, this is simple and easy
+ Most beneficial for very small businesses
- The cost is almost always higher
- Can’t take advantage of lower costing basic cards that come through your business
Discount Rate (Interchange Differential or Base Rate) Pricing
This is the most common pricing model among payment processors and acquirers in Canada. This model involves 4 areas in which merchants can be overcharged with hidden fees. The merchant pays the qualified rate (discount rate), the non-qualified rate, the assessment fee, and the interchange differential fee.
Some payment processors set their own discount rate, posing as having a rate much lower than the basic interchange fee (which is not possible) in order to attract merchants and, in turn, will charge hidden fees to still remain profitable.
+ If you’re aware of all the different card types and their interchange rates, and if the majority of your customer base uses basic credit cards (roughly only 10% of Canadian consumers), then this model will work for you
- Bill statements are extremely difficult to read
- Fees are hard to break down and show the true cost
- Almost always associated with hidden fees, and unnecessary fixed and situational fees are charged on top
This pricing model is by far the most difficult statement to decipher because no tiered pricing processor has the same criteria or rates as another. Processors usually group all transactions and their corresponding interchange rates into 3 categories: qualified, mid-qualified, and non-qualified. However, some processors could have many more tiers, or they could group different rates into each of their categories, making this complicated to grasp.
Qualified rates are the least expensive but are only associated with transactions in which a basic credit card is used and only when these transactions are batched that same day. If this is not the case, the transaction would fall into another tier at a higher rate. Midqualified rates have another strict criterion that must be met, and so on and so forth. To put it simply, you pay the rate based on the tier that the transaction falls into.
+ Easy to reconcile fees
+ Predefined tiers
+ Easy to understand what you’re paying
- Processors advertise the lowest tier to draw you in when most transactions will fall into the middle tier
- Fees are bundled in each tier making it hard to break down the true cost of each fee