Understanding Payment Processing Pricing Structures

When selecting a payment processing partner, businesses have pricing options. Choices will depend upon the volume of monthly transactions, whether credit cards are processed with the card present or not, and the merchant’s financial risk rating or track record.

Factoring in Swipe Fees

The total cost charged to the merchant by the payment processor will vary. But it largely depends upon how much credit card companies charge as an interchange fee, or “swipe fee.” Merchants who process fewer transactions or have a higher risk rating are typically going to have a higher swipe fee, per transaction. Businesses that process a heavy volume of higher-dollar transactions and have an excellent rating are offered lower, more preferential swipe fees. While a swipe fee of 2.5 percent is the average, they range from over three percent to as low as half a percent. Payment processors factor in these variables when setting their prices.

The Most Common Pricing Structures

Swipe fees also vary depending upon what kind of credit card is used. So, there may be many different interchange rates applied to the monthly or yearly credit card transactions a business performs. The challenge for the payment processor is to somehow account for those variations when figuring out how much to charge merchants for processing. The payment processor can then bundle those interchange fee costs with their own additional fees for providing processing services. To simplify the math, processors generally offer three primary pricing models: 1) flat rate, 2) tiered, and 3) interchange-plus.

Flat Rate Pricing

The flat rate structure is widely used by payment facilitators like PayPal, Square, and Stripe. The rate applies to all transactions, regardless of the dollar amount transacted or the differences in swipe fees charged by various credit card companies. However, businesses that may otherwise be eligible for more preferential rates may wind up paying more than necessary if they opt to pay a flat rate. That’s because the one-size-fits-all flat rate structure doesn’t factor in more nuanced opportunities for merchants to save money on their processing costs.

Tiered Pricing

Tiered pricing represents the middle ground between fixed and interchange plus pricing models. There are usually three tiers, high, medium, and low. Businesses that do most of their transactions with cards that carry the lowest interchange rates can qualify for the lowest-price tier. When customers don’t typically use those particular cards that qualify for the lowest tier of pricing, merchants will pay payment processor fees in the more expensive tiers.

Interchange Plus Pricing

Interchange Plus is the most customized payment processing pricing structure. The business is only charged the actual cost of the particular swipe fees associated with its transactions. Whenever the specific transaction qualifies for a lower interchange fee, the merchant receives that cheaper rate. The payment processor adds its own transparent and consistently predictable fee on top of that.

The Bottom Line

Rates vary, based on such factors as whether the cardholder is present or not and what type of card is used. Determine which kinds of transactions are most common, and what the typical monthly volume or dollar amount is. Then select a payment processor that offers a pricing structure, funding options, and other features that are the most appropriate, accommodating, and affordable.