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June 14, 2024

Tiered Pricing for Payment Processing: What You Should Know

Delaney Mann

Written by:

Delaney Mann

Tiered Pricing for Payment Processing: What You Should Know

In the U.S., consumers use debit or credit card-based payment methods for 88% of in-store payments. [1] As such, if you don’t yet accept debit or credit cards at your place of business, you’re likely missing out on many potential sales. Consumers are also more likely to spend more per transaction when using a debit or credit card instead of using cash. [2]

However, accepting debit and credit cards adds fees that cash payments wouldn’t accrue, causing many business owners to pause the idea. But generally, it’s possible to build those costs into your price to get the upside of bigger sales without forking over a percentage of your profit margin. You’ll also want to keep your payment processing costs low to do this well. Now, it's time to determine if the tiered pricing structure for payment processing is right for you. 

This article will discuss the pros and cons of tiered pricing for payment processing so you can make an informed decision for your business. Let’s dive in.

What Is Tiered Pricing in Payment Processing?

Tiered pricing in payment processing is exactly what it sounds like. It’s a pricing structure centered around rate tiers.

These tiers can be considered “buckets” that group transactions based on transaction quality, card type, and entry method. There are typically three tiers in a tiered pricing structure:

  • Qualified: The lowest-priced tier typically includes debit and basic consumer credit cards processed in person.
  • Mid-qualified: The mid-priced tier usually includes basic rewards credit cards.
  • Non-qualified: The highest-priced tier typically includes business debit and credit cards, high-end rewards cards, interchange downgrades, transactions made online or over the phone, transactions with a skipped prompt/incomplete or incorrect data entry, etc.

We’ll discuss the specifics of these tiers in the next section. In the meantime, tiered pricing is one of several available pricing structures on which your merchant account can be based.

How Does A Tiered Pricing Structure Work?

Each transaction falls into one of the aforementioned tiers after you process it. However, to fully explain how a tiered pricing structure works, it’s helpful to back up and explain how the industry works. That’s because there are three main parties that assess fees, and much of the costs are equal regardless of the payment processor or pricing structure you choose.

When you process any debit or credit card transaction, you can expect to pay:

  • Interchange fees to the card issuing bank (i.e., your customer's bank attached to their card)
  • Association fees to the card brands (i.e., Visa, MasterCard, and Discover)
  • Processing fees to your payment processor

Interchange and association fees are universal. The card-issuing banks and card brands set the rates, with potential revisions twice yearly (in April and October). So, the only piece of the fee puzzle that varies between payment processors is processing fees.

In other words, each pricing structure has the same base costs but bundles them differently to assess the processor markup. Out of that markup, your payment processor covers operating expenses, general processing costs (like network usage per authorization and PCI, for example), and profit.

So, in many ways, a tiered pricing structure is simply a way to bundle the interchange fees to hide the total amount that comprises the processor markup, making it a better deal for them and a worse one for you. But we’ll dive into that in more detail in the “pros and cons” section.

Tier 1: Qualified discount rate

As we discussed, the qualified rate is the lowest-priced rate a transaction could qualify for. As such, it can be a relatively selective bucket. 

Generally, consumer debit cards and basic consumer credit cards processed in person fall under this rate. 

In practice, this means the transaction not only came from a specific type of card but also that it processed correctly. This means:

  • No prompts were skipped
  • The transaction happened in person
  • The card was present and swiped, tapped, or dipped
  • You settled the transaction quickly

If a transaction fails any of these for any reason, it can be downgraded or fall into another tier.

Tier 2: Mid-qualified rate

In my experience, the mid-qualified rate has the smallest number of possible transaction types. (We’ll explain why I say “in my experience” in a later section).

Mid-qualified transactions typically require a perfectly executed transaction technique processed on a basic rewards card, such as a Capital One Venture Card or any other type of low-percentage reward card.

Tier 3: Non-qualified transactions

The non-qualified tier is a bit of a catch-all. This tier is made up of card types like:

  • High-end rewards cards
  • Corporate cards (potentially both debit and credit)
  • Government cards, etc

As well as transactions that don’t process correctly, such as:

  • Transactions that took too long to settle
  • Anything that is processed with missing information or skipped prompts (like missing zip codes, customer codes, etc.)
  • Manually entered card numbers for a card-present transaction, etc

Also, in many cases, transactions that are processed online or over the phone (i.e., card-not-present transactions) are non-qualified.

How Much Does a Typical Tiered Rate Cost?

The tiered rate your business may be subject to will depend on the agreement you sent with your processor. Generally, however, you can expect each tier to fall into the following ranges:

  • Qualified tier: 1.4%-2.0%
  • Mid-qualified tier: 2.0%-2.8%
  • Non-qualified tier: 2.8%-4.0%

However, any rate for a tier that falls between 1.0% and 5.0% is possible.

Pros and Cons of Tiered Pricing

Next, let’s explore tiered pricing for your business. Why would you want tiered pricing, what are the downsides, and is it the right pricing structure for you? Let’s talk about it.

Pros of tiered pricing

The main benefit of tiered pricing is the ease of understanding. It’s easy to look at your monthly statement from your payment processor and understand what you’re paying for processing and why.

However, this “ease of understanding” may be overrated because there are both easier-to-understand and better cost pricing structures out there (more on this next).

Cons of tiered pricing

Next, let’s discuss the cons, as this pricing structure has many cons — it’s not a highly recommended plan for many reasons.

Those reasons include inconsistency, lack of transparency, and the overall cost. 


The first, and probably largest, con of tiered pricing is that it is completely inconsistent from one payment processor to the next. 

Believe it or not, each processor gets to choose what falls under each tier. This is why I stated earlier in this article that the mid-qualified tier has the smallest number of possible transaction types “in my experience.” Because each processor could choose to lay it out differently, my experience may differ from yours, and yours could be different from your neighbor’s. 

Even still, your tiered rates could be comprised of different elements even from someone else who uses the same processor you do. Each processor could customize this pricing structure for each merchant account if it chose to (though most don’t).

This level of inconsistency, paired with the lack of transparency (more on that next), is one of the largest cons of the tiered pricing structure.

Lack of transparency

Now let’s dive into the lack of transparency aspect. As we just touched on, this pricing structure is subjective by the payment processor. In addition, the rates that fall under each tier can be subject to change at any time, meaning your payment processor can effectively raise your costs on this pricing structure without raising your rates (meaning they don’t have to notify you) by adjusting which rates qualify for the more expensive tiers.

Additionally, since the costs get bundled together, it’s impossible to know exactly which interchange rates your processing activity is actually subject to. This means there is no way to determine what your processor profits from you each month. There are many more transparent pricing structures available.


Even if the lack of transparency and inconsistency were not true problems (they are), this pricing structure is also one of the most expensive. This is generally because the tiers and transaction fees cover the interchange rates, but the association fees are generally charged on top. This contrasts with a flat rate, which is generally bundled together, including the processor markup. This makes evaluating your overall cost for each transaction (i.e., your effective rate) is harder.

We’ll discuss other pricing structures in a later section so you can compare this one to the others.

Why Do Banks Use Tiered Pricing?

The main reasons a bank would use a tiered pricing structure are either that they think you won’t question it because we tend to assume most of our transactions will fall under the qualified tier or that they want to ensure a certain profit margin on your account.

Either way, neither of these reasons are in your best interest.

Alternatives To Tiered Billing

As we’ve touched on, there are many pricing structure alternatives. Tiered pricing is not your only option. P.S. - anyone who tells you otherwise is not being truthful.

Here are some examples:

  • Flat rate: A flat rate pricing structure has become quite common thanks to platforms like Square and Stripe. This pricing structure is notorious for its easy-to-understand and predictable nature.

    A typical flat rate will be anywhere from 2% to 4%, including interchange fees, association fees, and processor markup bundled into one rate. This is a truly non-transparent pricing structure, but it offers the redeeming quality of being quite predictable so that you can anticipate your paid fees.

  • Interchange Plus: Interchange Plus is by far the most affordable pricing structure. It is characterized by its pass-through costs.

    All three types of merchant account fees (interchange, association, and processor fees) get passed through to you and broken down line by line. You can see exactly how each transaction qualifies, what you’re paying for, and what your processor makes off of your account each month. For that reason, this is our most highly recommended pricing structure.

  • Enhanced recovery reduced ERR: The only pricing structure that could potentially be less beneficial for you than tiered is the ERR or R.R. structure. It’s similar in many ways to tiered pricing, except it adds a penalty fee for each transaction that falls under the non-qualified category.

    That surcharge requires an algebraic formula to calculate, making it the most confusing pricing structure and one of the most expensive (if not the most expensive).

For all the pros and cons listed, interchange plus stands out as the clear winner for the most transparent and affordable pricing structure. Secure an interchange pricing structure for your merchant account and payment processing activity whenever possible.

Final Thoughts on 3-Tiered Pricing

For many of the aforementioned reasons, the three-tiered pricing structure has long fallen out of favor in the payments industry. As the industry becomes increasingly competitive, processors are rightfully calling each other out for using outdated, non-transparent, and unnecessarily expensive pricing structures in 2024. Ultimately, you should choose a pricing structure that feels right to you (and for you, that may be the tiered structure).



If your account were priced on a tiered pricing structure processing $10,000.00 a month, here’s what that could look like:

Total month-end processing volume: $10,000.00
Processing volume that fell under the qualified rate: $2,000.00
Processing volume that fell under the mid-qualified rate: $1,500.00
Processing volume that fell under the non-qualified rate: $6,500.00

  • Qualified percentage rate: 1.8%
  • Mid-qualified percentage rate: 2.4%
  • Non-qualified percentage rate: 3.2%

Free breakdown:

  • Qualified: 1.8% x $2,000.00 = $36.00
  • Mid-Qualified: 2.4% x $1,500.00 = $36.00
  • Non-Qualified: 3.2% x $6,500.00 = $208.00

+ Association fees (generally hovers around 20% of your overall fees) = $56.00

Total Fees = $36.00 + $36.00 + $208.00 + $56.00 = $336.00

To calculate your average cost per transaction, add the total fees ($336.00) to the total processed volume ($10,000.00), and you’ll see that you pay an average of 3.36% to process credit cards.

*This is a speculative example using a lot of estimations and generalizations based on prior experience, so, of course, actual results will vary. 

Overall, any business could be affected by tiered pricing. However, if your business is taking a lot of corporate credit cards or high-end rewards cards, it could cost you more. Any additional fees cut into the business profit margin, which negatively affects any business that has not accounted for processing costs in its customer prices. To ensure your business is less affected by processing costs, be sure to build in around 3% of additional margin/buffer room to the customer-facing price of your goods and services.

There are many differences between interchange plus and tiered pricing. Some of the main ones include:

  • Overall cost: The overall cost of the tiered pricing structure is generally much higher than that of the interchange pricing structure.
  • Transparency: Interchange Plus, also known as the pass-through pricing structure, passes through all fees at cost and adds a disclosed payment processor markup on top of it to cover the payment processing costs and operating expenses. The tiered pricing structure, in contrast, is notorious for its lack of transparency. It instead shows you three buckets that could contain any type of transaction at the payment processor's discretion for varying rates.
  • Consistency: As we touched on earlier in the article, every processor pays the same base costs to card-issuing banks and card brands. This means the base cost for every transaction is exactly the same, regardless of the payment processor. As such, the pass-through interchange pricing structure is consistent from one processor to the next.

    The tiered pricing structure, on the other hand, can be levied at the payment processor's discretion. This means, in practice, that one processor can qualify transactions differently than another, meaning some processors are more fair and others are less fair, but there’s no way to compare them apples to apples due to the aforementioned lack of transparency.

Both tiered pricing and volume-based pricing are leveraged on your account based on the total volume processed. However, volume-based pricing typically leverages charges at the same rate across all volumes, also known as a flat-rate pricing structure. Tiered pricing, on the other hand, splits the volume into various tiers and assesses a different rate for each tier.


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[Footnote]NerdWallet. “Credit Cards Can Make You Spend More, but It's Not the Full Story - NerdWallet.” Accessed On. [/Footnote] [Footnote]Capital One Shopping. “Cash vs Credit Card Spending Statistics (2023): Latest Trends.” Accessed On.[/Footnote]

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Are you opening your doors soon?

Don't wait until the last minute to accept payments.

Request a Consultation