What is Bucket/Tiered Pricing?

1. What is Bucket or Tiered Pricing?What is Bucket or Tiered Pricing?
Tiered merchant account pricing is currently the most common form of pricing
for credit card processing. Tiered pricing is confusing, expensive, and gives the
processor a mechanism to hide fees from the merchant. It is our belief that
Tiered pricing is a main contributor to why the industry has received such a bad
reputation over the years. With processors pushing so many clients into Tiered
pricing models to drive their profitability, frustrations with the industry have
grown exponentially. Fortunately, a more cost-effective, transparent alternative
to tiered merchant account pricing is available to businesses.
Tiered pricing is a pricing model that credit card processors use to assess
charges to their merchant clients. Tiered pricing is also referred to as bucket or
bundled pricing because it allows processors to group interchange (credit cards)
into buckets of their choice. There is no exact criteria to how a processor
selects which cards are grouped into which buckets. The processor doesn't tell
a merchant which cards are grouped into which bucket. Each processor has
their own criteria for grouping cards, so there is no uniformity across the industry
for which cards fall into the various groups.
Tiered pricing can be identified on a merchant statement in a couple of different
ways. The easiest of which is to look for terminology such as “qualified”, “mid-
qualified” and non-qualified”. Sometimes the terms "qualified," "mid-qualified"
and "non-qualified" are abbreviated, so look for the variations "qual," "mqual"
and "nqual," when reviewing a merchant's statement. Sometimes the client will
state they have a “blended rate” of X%. This is also an indication they are on a
tiered pricing platform.
In the absence of the terms "qualified," "mid-qualified" and "non-qualified," tiered
pricing can also be identified by a consistent set of rates across all card brands.
These rates will generally be in the area of 1.69% - 3.25%, but may be higher or
lower depending on how many tiers a processor is using. As interchange is
different for all the various cards processed, a consistent rate (or set of 3 or 4
consistent rates) is indicative of a tiered pricing model.
How Tiered Pricing WorksHow Tiered Pricing Works
Tiered pricing allows a credit card processor to group numerous interchange
fees (cards) into three or four general pricing buckets of its choice. As

2. mentioned above, each processor has its own criteria for determining its
buckets, so tiered pricing from one processor to another will not match. Some
of the cards that fall into the “qualified” bucket of one processor will fall into the
“non qualified” bucket of another and vice versa. Once a processor groups
those cards into a bucket, instead of charging the client the posted interchange
rate for that card, the processor will charge the merchant the assigned bucket
rate.
Qualified Interchange Bucket/Tiered Rate
CPS Small Ticket Debit 1.55%
CPS Retail Debit 0.80%
Merit III 1.58%
Merit Debit 1.05% 1.78%
Merit I Insurance 1.43%
World Supermarket 1.58%
Service Industries 1.15%
Mid-Qualified
Business Level II 2.05%
Business Retail 2.20%
Commercial B2B 2.40%
High Value Merit I 2.20% 2.55%
Corporate Data Rate III 1.90%
World Elite Merit I 2.20%
Merit Elite Enhanced III 1.73%
Non-Qualified
High Value T&E 2.75%
High Value Standard 3.25%
Business Level 4 2.81%
Commercial Card Not Pr 2.65% 3.41%
Signature Business Credit 2.95%
Business Visa Debit 2.90%
Corporate Data I 2.65%
Interchange FeesInterchange Fees
Understanding tiered pricing models requires a basic understanding of what
interchange is. Interchange fees are the fees paid by the merchant to the
issuing banks of the credit cards processed in a transaction for payment. For
example, if a customer goes to the grocery store to purchase some bananas

3. and uses their Visa credit card issued by ABC Bank to pay for the bananas, the
grocery store will pay an interchange fee to ABC bank to process that credit card
for payment. The rate paid would be public information and would be posted on
Visa's website. That rate paid to the issuing bank (ABC Bank) is called
Interchange.
Going back to our tiered pricing example above, one would notice that the
processor is charging the merchant a higher rate than the posted interchange
rates for the cards processed. Although the processor charges a different rate
than interchange, the rate paid to the card issuer (bank) is ALWAYS the posted
interchange rate. So, if the bucket rate for a qualified card is 1.78% (as
depicted in the example above) and the interchange rate for for the CPS Small
Ticket Debit is 1.55%, the amount paid back the the card issuer (bank) would be
1.55%. The difference between 1.78% and 1.55% of 0.23% remain with the
processor as additional profit. As you can see by this example, the interchange
rates are substantially lower than the processor tiered rates, and the processor's
markup varies widely depending on which tier the processor uses for each
interchange category. Tiered pricing models are popular as it allows a processor
to increase their profit margins.
Frustrations with Tiered Pricing ModelsFrustrations with Tiered Pricing Models
The only positive to a tiered pricing model is that it presents rates and fees in a
simple, easy to read format on their monthly statement. However, this simplicity
prevents transparency with how a merchant is being charged fees. It is also
more expensive than the other pricing models available, such as Interchange
Plus pricing.
A major frustration with tiered pricing concerns the statements which do not
disclose the actual cost of a transaction or which cards were processed that
month. Instead, only the processor's “qualified”, “mid-qualified” and “non-
qualified” rates are visible. By hiding the interchange rates, a business is never
shown the actual cost of their processing thereby allowing the processor to
charge markups that are often excessive. Unfortunately, this practice is
completely legal, as all a processor is required to do is tell you what they are
charging the merchant... not what they actually paid towards the merchant's
interchange costs for the cards processed.
Tiered pricing also makes it possible for a processor to increase a merchant's
processing cost without increasing its rates. Processors accomplish this by
bundling a greater number of interchange categories to the more expensive

4. “mid” and “non-qualified” pricing buckets. This results in the merchant paying
higher fees even though the processor's rates have remained the same.
In addition to this, there are frustrations with when a merchant credits a
customer's credit card. When a merchant gives a refund to a customer to their
credit card, the merchant should receive a credit for the interchange fees paid
on the original transactions. For example, if the merchant paid 2.20% in
interchange fees for the original transaction, typically there should be a credit to
the merchant account when the merchant refunds the customer's account.
Since interchange categories are bundled on tiered pricing models, interchange
credits are not credited back to business when a refund is granted to a
customer. Instead, the processors simply keeps the interchange credit as
additional revenue and profit.
Tiered pricing also results in a different markup for virtually each individual
interchange category for every processor. The vast differences in markup and
inconsistent criteria in assigning interchange categories into different buckets
makes it impossible to compare tier pricing among processors. In addition to
this, because processors don't disclose the true processing cost (or how much
their markup was), it's impossible to give a true comparison as you don't know
which cards where processed in that given month. It's safe to assume you are
guaranteed to save a customer a significant amount of money moving them to
an Interchange Plus pricing model just from eliminating the extra markup made
above interchange on a monthly basis.
Lost Durbin SavingsLost Durbin Savings
The Durbin Amendment to the The Dodd-Frank Wall Street Reform and
Consumer Protection Act that took effect on October, 1 2011 capped the
interchange fee that large banks could charge at just 0.05% plus $0.21. The law
capped interchange fees at the card-issuer level, not at the processor level.
This means that any business being billed via tiered pricing will pay its
processor's qualified rate instead of the newly capped rate of just 0.05%. The
per-transaction loss is substantial when considering that qualified rates are
typically 1.65% or higher.

5. Interchange Plus Pricing/Interchange Pass ThroughInterchange Plus Pricing/Interchange Pass Through
Interchange pricing is the most affordable pricing model for credit card
processing. It also is transparent and easy to reconcile for the merchant. Unlike
tiered pricing, interchange plus functions by billing interchange fees directly to
merchants. With interchange plus pricing, a processor makes money by
charging a fixed percentage over actual interchange rates regardless of the type
of card or how a transaction is processed. The result is a low consistent markup
over actual cost. There is typically a per transaction cost billed to the merchant
as well.
An Interchange Plus statement is much longer than a Tiered Pricing statement.
An Interchange Plus statement details every card processed, the interchange
rate assessed, the dollar amount, and per transaction cost. The statement also
details out all the Card Association fees (Visa, MasterCard, Discover) and the
fees assessed by the processor. The statement is conveniently broken out into
different sections, breaking out a special section just for interchange. There is
also a special section detailing all the batches and dates made throughout the
month for account reconciliation purposes. The Interchange Plus statement
discloses every fee and how it was derived. If a merchant wanted to Google
each of the credit cards on their statement, they could verify they were charged
the actual interchange fee posted by Visa and MasterCard.
In conclusion, Tiered pricing models are expensive and lack transparency with
how a processor charges fees to their customers.