Tiered pricing explained: qualified, mid-qualified and non-qualified rates

Part of Fees and pricing models. Start with the main guide: Interchange plus vs blended vs flat rate: which pricing model costs less?

Tiered pricing is common in the United States and still found elsewhere. It looks simple: three rates on a price list. In practice it is one of the hardest models for a business to check, because the provider, not the card networks, decides which rate each payment gets.

This guide explains how the three tiers work, why payments move between them, what a typical month costs under tiered pricing compared with interchange plus, and what to look for on a statement. The amounts in the examples are illustrative, so check them against your own price list.

How do the pricing tiers work?

Under tiered pricing the provider groups real-world interchange categories into a few buckets and gives each bucket a rate.

The three rates are set by the provider. The classification rules are also set by the provider, and they are usually in the small print of the agreement rather than on the front page. A price list might say "1.59% qualified" while a large share of the business's payments are charged at the higher tiers.

Why does a payment get downgraded?

A payment can fall to a higher tier for several reasons. The exact rules differ by provider, so check your own agreement. Common triggers include:

• Keyed-in payments. A card number typed in by hand rather than read by the terminal.
• Card-not-present payments. Online, phone and mail order, which carry more fraud risk.
• Rewards and premium cards. These cards cost more in interchange, so they land in a higher tier.
• Business, corporate and commercial cards. These often sit in the most expensive tier.
• International cards. Cross-border payments usually cost more.
• Late settlement. Not closing the day's batch within the time allowed by the provider.
• Missing data. Payments sent without the address check or other details a provider requires.

Because these triggers depend on what customers pay with and how staff take payment, the mix of tiers changes from month to month.

A worked example

A US business takes $50,000 of card payments in a month across 1,000 transactions. The provider's tiered rates are 1.59% qualified, 2.19% mid-qualified and 3.29% non-qualified. These are illustrative figures. The share of each tier in this month is:

• 60% qualified: $30,000
• 25% mid-qualified: $12,500
• 15% non-qualified: $7,500

The effective rate is 997.50 ÷ 50,000 = 1.995%, which rounds to 2.00%. That is about 0.41 percentage points above the headline qualified rate of 1.59%.

The business was quoted 1.59% and paid 2.00%. The 15% of sales in the non-qualified tier brought in $246.75 of fees on only 15% of the turnover.

What does the same month cost on interchange plus?

Suppose the same $50,000 month, with the same payments, were priced as interchange plus. The illustrative figures:

• Interchange and assessments averaging 1.50% on the mix: $750.00
• Provider markup of 0.20%: $100.00
• A per-transaction fee of 8 cents on 1,000 payments: $80.00
• Monthly fee: $20.00
• Total: $950.00, an effective rate of 1.90%

That is $47.50 less than the tiered month, about $570 a year. The saving is not huge in this example, but two features stand out. First, you can see where every dollar goes. Second, the cost of a business card or a keyed-in payment does not jump by a margin the provider decides. It rises by the real interchange difference only. See interchange plus, blended and flat rate for the full comparison.

What do providers gain from tiered pricing?

If you want to see where a tiered payment would sit in other models, our guide to interchange fees shows the real costs behind each card type, and the effective rate guide shows how to put every fee into one number.

When the provider decides the tiers, it also decides how much margin to keep on each. Imagine a payment whose real interchange and fees come to 1.60%. Under interchange plus, the merchant pays 1.60% plus a markup of 0.20%, so 1.80%. Under tiered pricing, if the payment is placed in the mid-qualified tier at 2.19%, the merchant pays 2.19% and the provider keeps 0.59%. The more payments in the higher tiers, the more margin.

This does not mean every tiered provider is unfair. Many price tiers competitively, and some businesses find the predictability useful. It does mean you cannot tell from a statement how much of what you pay is margin. That requires comparing against interchange plus on the same payments.

How do you check a tiered statement?

1. Find the three rates in the agreement or on the statement.
2. Find the turnover in each tier. A statement should show how much was processed at each rate.
3. Multiply and add up. Check each tier's fee against rate times turnover. Our guide to working out a missing rate, turnover or fee shows how.
4. Add extra fees. Include any downgrade lines, statement fees, batch fees and monthly charges.
5. Calculate the effective rate. Divide the total by the total turnover.
6. Compare it with the qualified rate. The gap shows how much the higher tiers cost you.

If you cannot find how much turnover sits in each tier, ask the provider. A statement that does not show it is hard to audit.

What should you ask a tiered provider?

• What exactly makes a payment qualified, mid-qualified or non-qualified?
• What share of my payments fell into each tier in the last three months?
• Is there a separate downgrade or surcharge fee?
• Can I see the same month priced as interchange plus?
• Do keyed-in payments, business cards or late batches change the tier?
• What are the per-transaction, batch, statement and monthly fees?

If a provider cannot or will not answer these, consider that when you decide whether to stay.

How can you reduce downgrades?

Whichever model you are on, a few habits keep payments in the cheaper tier.

• Use the card reader for every payment, not manual entry, wherever possible.
• Close the day's batch at the same time each day.
• Collect the address or postal code check on online and phone payments if your provider asks for it.
• Pass receipts and extra details where required.
• Ask the provider for a regular report showing the share of payments in each tier.

None of these will remove the higher tiers entirely, because the card mix is out of your control. They can reduce avoidable downgrades.

Tiered pricing outside the United States

Tiered pricing is most closely associated with the US market. In the UK and much of Europe, the common models are interchange plus, blended and flat rate. If you see something that looks like a tiered structure with a "standard" and a "non-standard" rate, it is usually a blended model. The principle is the same: ask what decides which rate applies, and compare on the effective rate.

The checkmyrates calculator lets you enter each tier's turnover and rate, so you can see the effective rate and compare it with an interchange plus offer in the same layout.

Frequently asked questions

What does qualified mean in credit card processing?

A qualified payment is one that meets the provider's criteria for its cheapest tier, typically a standard consumer card taken in person. The provider defines the criteria, so they differ between providers.

What is a non-qualified transaction?

It is a payment that falls outside the cheaper tiers and is charged at the provider's highest rate. Business cards, keyed-in payments and international cards are common examples.

Is tiered pricing more expensive than interchange plus?

Often, but not always. Tiered pricing hides the real interchange cost, so the provider keeps the margin when a payment costs less than its tier. A like-for-like comparison on your own month shows the answer.

Why is my effective rate higher than the rate I was quoted?

Because the quoted rate is usually the qualified one. Payments in the higher tiers, plus monthly and per-transaction fees, push the effective rate up.

Can I find out how much of my turnover is in each tier?

Yes. Your statement should show turnover by tier. If it does not, ask your provider for a tier breakdown for the last three months.

How do I avoid non-qualified fees?

You cannot avoid them completely, since card mix is not in your control. You can reduce avoidable downgrades by using the reader rather than manual entry, closing batches on time and supplying the data your provider requires.

Figures in this guide are examples to show the method. Fees, rules and rates change, so check your own statement, contract and current rules before you decide. This is general information, not financial or legal advice.