Comparison of Flat Rate, Tiered Rate and Pass-Through (Cost Plus) Pricing?

We will show two examples of the difference in cost just based on the pricing model that is chosen. You will be able to clearly see that one model is better than the others.

Example 1

The customer is making a purchase of $100 using a Visa Rewards 1 card. (Which has an Interchange Rate of 1.65% + $0.10, this would be a mid-qualified transaction for Tiered/Bundled pricing.)

Pass-Through* Tiered/Bundled** Flat Rate***
Interchange (1.65% + $0.10) $1.75 $1.75 $1.75
Dues & Assessments (0.13%) $0.13 $0.13 $0.13
Markup $0.55* ? ?
Cost of Transaction $2.43 $2.70** $3.00***
Effective Rate 2.43% 2.70% 3.00%
Unknown Mark Up 0 $0.82 $1.12

* Pass-Through pricing would be the cost of the transaction plus 0.30% + $0.25.
** Tiered/Bundled pricing of 1.69% + $0.25 for qualified, 2.45% + $0.25 for mid-qualified, and 2.99% + $0.25 for non-qualified.
*** Flat Rate pricing would be 2.75% + $0.25.

The mark up for the Pass-Through pricing is known, 0.30% + $0.25. That means that your processor made $0.55 on the transaction. However, with the other two you never see the actual cost of the transaction you only know the rate that you are charged. This means you never know what they actual made on each transaction. In this example you would never know that the Tiered/Bundled processor made $0.82 and the Flat Rate processor made $1.12 on this transaction.

In the Tiered/Bundled model savings are passed down to the customer only if the card is put into a lower tier, which is completely at the processors discretion. With the Flat Rate model savings are never passed on to the customer when a lower interchange rate is applied. Let’s look at another example.

Example 2

The customer is making a purchase of $100 using a Regulated Debit Card. (Which has an Interchange Rate of 0.05% + $0.22, this would be a qualified transaction for Tiered/Bundled pricing.)

Pass-Through* Tiered/Bundled** Flat Rate***
Interchange (0.05% + $0.22) $0.27 $0.27 $0.27
Dues & Assessments (0.13%) $0.13 $0.13 $0.13
Markup $0.55* ? ?
Cost of Transaction $0.95 $1.94** $3.00***
Effective Rate 0.95% 1.94% 3.00%
Unknown Mark Up 0 $1.54 $2.60

* Pass-Through pricing would be the cost of the transaction plus 0.30% + $0.25.
** Tiered/Bundled pricing of 1.69% + $0.25 for qualified, 2.45% + $0.25 for mid-qualified, and 2.99% + $0.25 for non-qualified.
*** Flat Rate pricing would be 2.75% + $0.25.

This demonstrates that with the lower cost Interchange the markup of the Pass-Through model remined constant at $0.55. However, with the Tiered/Bundled model you see that even with the lower cost, their mark up went from $0.82 to $1.54. And the Flat Rate model was even worse. It’s mark up went from $1.12 to $2.60.

Pass-Through pricing

When the cost of the transaction decreased so did the cost to the customer. The mark up was transparent and calculable. The customer paid $0.55 to the processor regardless of the cost.

Tiered/Bundled pricing

When the cost of the transaction decreased the cost to the customer went down as well but only by an amount determined by the processor. The market didn’t dictate the price. The customer paid a lower rate but a higher mark up. Most of the savings with the lower cost is passed on to the processor as profit instead of the customer.

Flat Rate pricing

When the cost of the transaction decreased the cost to the customer remained constant. No savings were passed on to the customer. 100% of the savings were passed on to the processor in greater profits.

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