Traditionally, the most popular pricing structure for merchant accounts has been a tiered rate model. Under the common three-tiered system, merchant accounts have a base rate (referred to as a "qualified rate") and two subsequent tiers that determine a surcharge that is added to the base rate. These tiers are often labeled Qualified, Mid-Qualified, and Non-Qualified. Transactions charged at the Qualified rate will incur the lowest fees, while a Non-Qualified transaction will be subject to the highest surcharges.

This is not true of the largest, high-volume companies. Larger companies have long had access to accounts with interchange pricing models. Interchange fees are essentially the wholesale rates for various types of credit transactions. There are countless factors that determine the interchange fee for a given credit card transaction, and it's not important for the purposes of this article to understand them all. What is important is this: interchange pass-through pricing allows the merchant account provider to pass on the interchange fee to the merchant plus a flat surcharge, resulting in substantially cheaper rates for the merchant overall.

Since the profit margin on interchange merchant accounts are tighter, this pricing structure has previously been available only to very high-volume merchants, but recently there has been a trend towards making interchange pricing available for low-volume or even brand new merchants.

Reasons for the Mainstream Availability of Interchange Pricing

Increasing market competition and a tense economic playing field have been contributing factors to the increased availability of interchange pricing. Merchants also have access to a wider and better array of information online than ever before. The more merchants educate themselves, the less likely they are to agree to the more expensive tiered pricing structures. To keep their market edge, many merchant account providers have been forced to make pass-through pricing available to more merchants.

The Effects of Interchange Pass-through Pricing on Your Business

Interchange has always been the core factor in determining a merchant's processing fees, but the simplified three-tier structure has been built on top of this. Visa and MasterCard release interchange fee schedules twice yearly in April and October, listing hundreds of different qualification tiers. These are substantially more intimidating to understand than a simpler tiered model, but merchants who obtain pass-through pricing (especially those who take the time to understand it) stand to make considerable savings.

The exact savings a merchant can expect to see will depend on a variety of factors. The type of business and the specifics of their tiered pricing structure will strongly affect their savings. However, according to CardFellow.com, a comparison shopping site for merchant accounts, average savings are often around 20%, with some merchants reducing their expenses by over 40%.

Interchange Pass-through Pricing in the Days Ahead

For merchants, the switch to a more complicated (and currently less common) interchange pricing scheme might be daunting at first, but those who put in the effort are consistently rewarded with significantly lower processing expenses.

For account providers, it all boils down to competition. They've become accustomed to large margins, and they will surely be hesitant to let go of that extra revenue. Regardless, no business can ignore the changing tides of a free market, and as interchange pass-through pricing becomes more mainstream we'll only see an increase in the number of providers who begin to offer it.