It’s not that tiered pricing is inherently “bad”. It’s just that tiered pricing models typically don’t disclose the underlying interchange rates – which incentivizes merchant service providers to overcharge their merchants. If you’re on tiered pricing, it doesn’t necessarily mean that you’re getting an unfair deal. It just means that it’s harder for you as the merchant to distinguish between who you’re paying. It also means that you simply can’t know your merchant service provider’s profit margin. Here at Dharma Merchant Services, that’s a big deal to us! We strongly believe that you should be able to see exactly how much you paid us. We don’t think it’s fair that merchants are left in the dark!
Here's an example...
Remember that sample transaction we used in the interchange-plus pricing example? Let’s use that same sample card and associated rate. If you didn’t click through, we used a Visa Rewards card, on a retail terminal. The underlying interchange rate was:
- 1.65% + $0.10
Now, for the sake of our example, we’ll select a typical tiered pricing model. Most providers will offer a very low “Qualified” rate, let’s choose 1.79% + $0.15. What they’re saying is that a certain number of card types will “qualify” for the low rate. What they’re also not saying is that most cards will not qualify for their advertised rate. There are numerous reasons for cards not to qualify. In addition, most cards will simply not qualify due to their underlying interchange rate. The provider who sets the qualified rate also chooses which cards qualify. There are no universal “qualified” or “non-qualified” cards. It’s entirely within the provider’s discretion.
So, hidden in the fine print will be a clause about the non-qualified rate. The non-qualified rate is typically much higher than the qualified rate. Most merchants will find that a vast majority of their transactions will process at the non-qualified rate, thus losing any potential benefit of promised savings from a low qualified rate. For this example, let’s assume that this provider set the non-qualified surcharge at 1.54% + $0.08 (that’s what’s added to the qualified rate).
Let's Do the Math
We’ll remember from the interchange-plus pricing example that Dharma’s total fees came out to $2.25 for this transaction, and interchange fees represented 78% of the total costs. Let’s find out what the numbers are for tiered pricing. Since this card is a Visa Rewards card, it would almost certainly be considered “non-qualified.” Card-brand fees (0.13% + $0.02) are still added on top, too:
- (1.79% + 1.54% + 0.13%) = 3.46%
- ($0.10 + $0.08 + $0.02) = $0.20
With our $100 transaction:
- ($100 x 3.46%) + $0.20 = $3.66 or 3.66%
As you can see – 3.66% is a lot higher than the 1.79% most merchants assumed they’d be paying.
Where is that Money going?
In this example, much of these fees are going back to the merchant service provider. In fact, 52% of the fees are paid back to the provider! That’s over double what would have been paid in the interchange-plus pricing example. Not to mention – unless the provider decided to share the underlying interchange rates with you, (they usually don’t) then you’d truly have no way of knowing their margin. You’d have no way of knowing what the true cost of their services were! Here at Dharma, we do things differently. You’ll know our margin up-front, and we operate with integrity and transparency every step of the way. Even if you don’t choose Dharma, we want you to get a good deal and keep our industry honest.