Why Restaurants Should Avoid Tiered Credit Card Processing Rates

In the past, we’ve covered how credit card processing works and the differences between Interchange Plus and Flat Rate credit card processing.

 In this article, we’ll take a look at tiered pricing, a third type of card processing with a reputation as one of the more expensive pricing models for restaurants and other businesses.

What is Tiered Pricing for Credit Card Processing?

The way tiered pricing works is by taking all card transactions and assessing them depending on what “type” of transaction they are. Transactions are often bucketed into one of three categories or tiers:

• Qualified: May apply to debit card, non-reward-based credit card, and swiped or chip-inserted transactions.

• Mid-Qualified: May apply to basic rewards cards or basic credit cards.

• Non-Qualified: May apply to business/corporate cards, high-value rewards cards, keyed or card-not-present transactions, or transactions missing required data elements (downgrades).

After assessing which category the transaction falls into, the payment provider then quotes a different two-part rate — for example, 2.0% + $0.10 per transaction — for each tier, resulting in three possible rates that a transaction can fall under. The qualified tier is often the least expensive, and the non-qualified tier is often the most expensive. Mid-qualified falls somewhere in the middle. According to Value Penguin, the rates can range from as low as 1.4% to 4%+.

Why Does Tiered Pricing Have a Bad Reputation?

While one could make a fair argument for any of the other card processing models, the debate around tiered pricing is pretty one-sided — light on pros and heavy on cons. The one benefit of tiered pricing is that its rates and fees seem to be structured in an easy-to-understand tiered system, but this system has many flaws and can be misleading.

Below, we break down the cons of tiered pricing and how it can be detrimental to restaurants.

Misleading Quotes

When card processing providers quote tiered rates to restaurants and businesses, they often only quote the low qualified rate, and sometimes even try to pass the pricing model off as a Flat Rate model, with one simple flat fee, to lure business owners in.

As a result, many business owners enter into a tiered pricing processing agreement believing that all card transactions are going to only have one (and conveniently, the lowest) rate.

But what these providers aren’t telling you is that this low rate will only apply to a small number of transactions that’ll take place in your restaurant. It can come as quite the shock that other, higher rates are involved in the pricing model, with only a small portion of cards being bucketed into the cheapest qualified rate.

Construct of Card Processing Providers

The entire tiered pricing model is a construct of credit card processing providers. It is not prescribed by card networks or others in the payments chain imposing or establishing processing costs (e.g. interchange). Therefore, the tiers are often opaque because they need not be rooted in underlying processing costs or other articulable, verifiable characteristics of a given card or transaction type.

Non-Disclosure of Tier Details

Companies offering tiered rate structures purposefully do not disclose which cards fall into each of the pricing tiers. This means that a debit card, which should theoretically be the least expensive class of card, can be arbitrarily placed within the non-qualified tier, the most expensive tier, which turns a cheap transaction processing fee into a highly expensive one.

Card processing providers design the tiers to ensure that most transactions will fall into the mid- and non-qualified tiers, resulting in high effective rates for business owners and inflated revenues for the provider.

With a tiered pricing processing model, how much a merchant pays to their card processing provider each month depends exclusively on card mix and how the provider defines each tier. Because the card mix can significantly fluctuate month to month, businesses on tiered pricing models often can’t accurately forecast processing costs.

If tiered processing didn’t seem confusing enough, the card processing provider may be able to change their fee criteria, depending on their agreement with you or other factors. Plus, processing rates and the fees associated with each tier change frequently. 

Why Restaurants Should Avoid Tiered Card Processing Rates

Changes like these aren’t driven by any fluctuations in the actual interchange rates; they’re completely and autonomously applied by the card processing provider alone.

Rates Fluctuate from Processor to Processor

Because the individual provider sets the rates and the criteria that determines which transactions fall into each pricing tier, tiers are inconsistent across different providers. As a result, it’s nearly impossible to compare rates from different card processing providers, particularly because these companies generally don’t disclose this information. A standard rewards credit card, for instance, might fall under the mid-qualified tier with one company but be categorized as -non-qualified with another.

Applying Tiered Pricing to a Real-World Example

To illustrate how inefficient the tiered pricing model can be, let’s apply its principles to an example: Tiered pricing model at a pizza restaurant.

You run a pizza restaurant and the majority of your transactions occur over the phone and online. The tiered rate structure your payments provider set for your business is as follows: When a customer makes an in-store purchase using a debit or consumer (non-rewards) credit card, the transaction will fall into the Qualified transaction tier. A transaction will fall into the Mid-Qualified transaction tier when a customer pays with a basic credit card in-store. If a customer pays with a rewards card, or pays over the phone (manually-keyed payment) or online from your website, with any card, the transaction will fall into the Non-Qualified transaction tier and incur the highest fees. 

In this example, let’s assume only 20% of the volume actually hit the Qualified rate. This illustrates how tiered pricing works — promises of low prices followed by expensive fees for the most common types of transactions your business accepts.

What Can You Do About Tiered Pricing?

Because tiered pricing is created and controlled by individual card processing providers, there’s little chance of improving the system. The best solution is to avoid the tiered pricing system entirely. Find a card processing provider that doesn’t operate on a tiered pricing model, and aim for one that uses clear flat rates.

Make sure that you do your own research to determine which rate structure and card processing provider is the best option for your restaurant. If you need a helping hand, a member of the Toast team will be happy to discuss card processing with you to ensure that you understand processing fees and how they impact your restaurant. Set up time with a restaurant technology expert at Toast to learn more.