Flat Rate vs. Tiered vs. Interchange-Plus: Which Pricing Model Is Costing You?

Two businesses can process the same amount in card sales and pay very different fees. Often the difference isn't the rate they were quoted. It's the pricing model behind it.

Almost every merchant account in the U.S. is priced one of three ways: flat rate, tiered or interchange-plus. Each one packages the same underlying costs differently, and each one makes it easier or harder to see what you're really paying. Here's how they work in plain English, and how to tell which one is costing you the most.

First, what every card fee is made of

No matter which model you're on, every card transaction carries three costs:

• Interchange: paid to the bank that issued your customer's card. It's set by the card networks and varies by card type (debit, rewards, commercial) and how the card was accepted (tapped, keyed in, online).
• Network fees: small assessments paid to Visa, Mastercard, Discover and American Express.
• Processor markup: what your processor keeps.

Interchange and network fees are the same for everyone. The markup is where pricing models differ, and where most overpaying happens. If you want to see these layers on your own bill, our guide to reading your processing statement walks through it step by step.

Flat rate pricing

How it works: You pay one percentage (often plus a few cents) on every transaction, whether it's a basic debit card or a premium rewards card. Many app-based and all-in-one processors use this model.

The upside: It's simple and predictable. You know exactly what a $100 sale will cost. For very small or brand-new businesses, the simplicity and lack of monthly fees can make sense.

The downside: The flat rate has to cover the most expensive cards, so you overpay on the cheaper ones. Debit cards usually carry much lower interchange than rewards credit cards, but on flat rate pricing you pay the same rate for both. If a big share of your customers pay with debit, the gap adds up.

Best fit: Low-volume businesses, seasonal sellers and startups that value simplicity over the lowest possible cost.

Tiered pricing

How it works: The processor sorts your transactions into "buckets," usually qualified, mid-qualified and non-qualified, each with a different rate. You're typically quoted the low qualified rate when you sign up.

The upside: On paper, the qualified rate looks attractive.

The downside: The processor decides which transactions land in which tier. Rewards cards, keyed-in cards and online transactions often get pushed into the higher mid- or non-qualified tiers, so your real cost can be well above the rate you were sold. Tiered statements also make it very hard to see how much is interchange and how much is markup.

Best fit: Honestly, very few businesses. If you're on tiered pricing and a large share of your volume shows up as "non-qualified," that's a strong sign you're overpaying.

Interchange-plus pricing

How it works: You pay the actual interchange and network fees for each transaction, plus a fixed, disclosed markup (for example, a set percentage plus a set amount per transaction). It's sometimes called "cost-plus" pricing.

The upside: It's the most transparent model. You can see exactly what the card networks charged and exactly what your processor added. When a customer pays with a low-cost debit card, you get the benefit. And when interchange rates go down, the savings pass straight through to you.

The downside: Statements are longer and your total cost changes month to month with your card mix. Some providers add monthly fees on top of the markup, so compare the full picture.

Best fit: Most established businesses with steady card volume.

A simple comparison

Imagine a business processing $40,000 a month. These are illustrative numbers, not quotes:

• On a flat rate of 2.9%, fees are about $1,160, no matter the card mix.
• On tiered pricing, the quoted qualified rate might look lower, but if a large share of sales fall into mid- or non-qualified tiers, the total can easily match or exceed the flat rate.
• On interchange-plus, the bill depends on card mix. A business with lots of debit cards will usually pay less than on flat rate. A business with mostly premium rewards and commercial cards may see a smaller difference.

The only way to know for sure is to calculate your effective rate: total fees divided by total card volume, using a real statement.

Why your pricing model matters for the settlement

The pending Visa and Mastercard settlement would, if it receives final approval, reduce some credit card interchange rates. On interchange-plus pricing, lower interchange automatically means lower fees. On flat rate or tiered pricing, there's no guarantee those savings ever reach you. Your processor's rate may simply stay the same. That's one more reason to know which model you're on. Our breakdown of the settlement explains what it does and doesn't change.

The option none of these models offer

All three models answer the same question: how much of each card sale do you give up? None of them change the fact that the cost comes out of your margin.

That's why many businesses pair transparent pricing with a dual pricing program or a cash discount program. You show customers a cash price and a card price, clearly disclosed, and customers who pay by card cover the cost of card acceptance. Done correctly, it can eliminate processing fees from your bottom line. If the concept is new to you, start with what dual pricing is, then see how it compares to surcharging.

How to find out which model you're on

Pull your latest statement and look for these clues:

• One rate on everything? You're likely on flat rate.
• Words like "qualified," "mid-qual" or "non-qual"? That's tiered.
• Interchange listed by card type, with a separate markup line? That's interchange-plus.

Then calculate your effective rate and compare it to what you were promised.

Not sure what you're paying? Send us your most recent statement for a free savings analysis. We'll identify your pricing model, calculate your effective rate and show you what you'd pay with dual pricing, with no obligation.

This article is for general information and isn't legal or financial advice. Pricing terms vary by processor; review your merchant agreement and confirm details with your provider.