How to Read a Merchant Statement – Tier Pricing

In this episode, I’m discussing how to read a merchant processing statement that’s on tier pricing.  Identifying whether a statement is tier pricing is relatively simple.  Look for these words:  “qualified,” “mid-qualified,” and “non-qualified.”  Usually those words will be abbreviated on the statement.  “qual” represents “qualified.”  “m-qual” represents “mid-qualified.”  And “n-qual” represents “non-qualified.”

Before explaining how to tell if the fees are competitive, I’ll define tier pricing.  In our industry there are about four or five hundred different rates for a transaction.  These are called interchange rates.  I’ll talk a little bit more in depth about that in the next episode.  Rather than passing all those costs on to a merchant statement as a huge table of different costs, processing companies tried to simplify by placing transactions into different “buckets.”  Each bucket has a flat rate.  So, tier pricing is similar to flat rate pricing, but there are three to six different rates.  Depending on the type of transaction, it goes into one of these tiers or buckets or rates – qualified, mid-qualified, or non-qualified.  That’s tier pricing.

Now, the next question is, how can you tell if the rates are competitive?  The biggest mistake people make when seeking the answer is to look first at the rates.  Although rates would seem to be the determining factor, those are actually not the most important thing in finding your fees.  No, what’s actually going to determine your fees more than your rate is your card mix.  In other words, what percentage of transactions are “qualified” versus “mid-qualified” versus “non-qualified?”

There are no industry rules or regulations about which transactions go at the lower rate versus the higher rate.  Therefore, many credit card processing companies will offer a great qualified rate (which is the lowest rate), but they will put most transactions into the non-qualified bucket (which is the highest rate.) You need to be aware of this situation. 

There are a couple of ways to know if your card mix is a bit screwed up.  The easiest way is this:  If you’re a physical location business, such as a retailer, restaurant, or auto repair shop, 60% to 70% of your transactions should be qualified.  The other transactions should be split fairly evenly between non-qualified and mid-qualified.  Mid-qualified is the middle one.  Non-qualified is the highest rate.  If not split this way, odds are you probably have some potential for savings.  There are not many reasons why the majority of a physical location business’ transactions shouldn’t be qualified.

The second way to determine if rates are competitive is to understand why a transaction should go into qualified, mid-qualified, or non-qualified.  Although there is no hard, fast rule across the industry, qualified transactions should be transactions with regular card types that are swiped through the terminal.  If you see on a statement that 60% of transactions are mid-qualified, perhaps it is for a pizza shop.  Many of their orders are phone orders, so the card is not swiped.  The qualified transactions would be credit cards and debit cards, not corporate rewards cards or platinum cards.  Credit cards and debit cards are swiped or insert the chip into the terminal, physically processed at the terminal.  Those should be qualified transactions.

The next tier is “mid-qualified.”  The method of entry is one determining factor.  Perhaps there’s an online shopping cart or phone orders.  The card is not swiped through the terminal.  Those should be mid-qualified transactions if they’re standard card types.  Also, some of the lower cost rewards cards will be in this category.  The type of card really determines the interchange costs or the underlying cost of running that transaction for the processor.  If the cost is really high for a transaction, the processor is going to put it into the highest bucket.  Thus, rewards cards that don’t have a really high cost are going to be in the mid-qualified bucket.

For high cost rewards cards, corporate cards, a large ticket merchant or one doing a lot of business-to-business transactions, transactions are probably all going into the “non-qualified” bucket.  That is the highest cost bucket.

So, the first thing to consider is card mix.  Make sure the statement adds up, based on the way that the business is actually processing transactions.  Next, consider the rates.  This explanation doesn’t apply for “mid-qualified” and “non-qualified;” there’s another way to figure that.  However for “qualified,” there is a determining factor.

Notice whether a particular statement is on 3-tier or 4-tier pricing.  Four-tier pricing means there are actually two different qualified rates.  One qualified rate is for debit cards and check cards.  A separate qualified rate is for credit cards.  If that’s the case, usually those costs will be a little bit lower than a blended qualified rate.  I always recommend changing the statement to 4-tier pricing if possible.  That lower qualified rate for check cards and debit cards is much less expensive.  Often just making that change can create a lot of savings.

Now, maybe at some point in this episode, I lost you.  You’re saying, “James, I’m sorry.  I don’t know what you’re talking about anymore.”  That’s totally fine.  Since I’ve seen literally thousands of statements, I can more easily talk about and understand them.  But I’ve created a website for you: examplemerchantquote.com.  You don’t need to sign in, or log in, or have an account.  Just go there; select a business type on the statement; and put in the total volume and fees from the statement.  (If you have questions about where to find those, refer to the last episode I published on the effective rate.)  Enter that information and create a quote.  Right off the bat, you’re going to see everything.  We’ll email you a PDF version of the quote.  You can just see it right there.

Why do we do that?  Because we have a great quote tool.  Our instant quote tool is used for agents and ISOs in this industry who want to provide accurate quotes.  You could send a statement for the instant quote tool full side-by-side statement analysis.  Or the tool could just do a really quick, down and dirty, approximate estimate based on the huge database of statements we have.