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Interchange Pass Through vs. Tiered Pricing

Which is better? Interchange Pass Through Pricing or Tiered Pricing?

This is one of those mind-boggling questions that have confused merchants who want to introduce credit cards as a mode of payment to their customers. Those who wish to clear the confusion read on to find out what is the difference between the Interchange Pass Through Pricing and Tiered Pricing.

Interchange Pass Through Pricing (IPT)

IPT is the wholesale pricing (cost basis) method established and maintained solely by the associates ie: Visa, MasterCard, Discover and American Express for credit / debit / prepaid card transactions. Interchange basically serves as the benchmark / wholesale rate that all credit card processors must base their merchant pricing on. It is the rate that banks charge each other in order to process a credit card transaction.

If you have a merchant account that uses IPT method of pricing then the processing fee will be applied by adding a small percentage to the actual interchange rate (the wholesale rate) and all assessments and dues will be then passed down through directly at cost. The Interchange Pass Through pricing method ensures that you, the merchant, only pays the wholesale rate in addition to a small mark-up that goes to your merchant service provider.

It consists of different percentage and transaction fees that a Cardholder Bank charges an acquiring bank (Merchant’s bank) to process one of their cardholder’s credit cards.

So, in order to pay the lowest fees when processing plastic money (credit cards), a merchant’s goal is to make sure to pay as close to interchange as possible.

Interchange rates are based on 3 factors: type of business, card type and type of purchase.

Tiered Pricing (TP)

Tiered pricing method attempts at taking the interchange rate categories and narrowing them down into small clusters called tiers. In this method, only the tiers appear on your statement and you don’t have to go through hundreds of rate categories to see where your transactions are.

Where this method is designed to simplify mind numbing calculations and impossible to read merchant statements, is it actually that good? Well, probably not! Here’s why, most merchant account providers quote a rate as low as rate; this rate is usually what they call their qualified rate.

Now it is important to understand that majority of tiered merchant accounts have a base rate plus 2 additional tiers that carry a surcharge when the type of card does not fall into their qualified tier. Therefore in this method you the merchant are always paying above the interchange cost for all surcharged credit card transactions, which can be costly.

Tiered Pricing or Interchange Pass Through

As compared to the Tiered Pricing method, IPT is considered to be the most economical merchant account pricing in the industry at present. It is preferably offered to only the largest retailers but there are some merchant account service providers that offer IPT pricing method merchant account service to all types of merchants regardless of the size.

To sum up this debate, IPT is probably a better pricing method for merchants.