Tiered Pricing in Payment Processing & Why to Avoid It [2023]

Our expert explains how tiered pricing works. Discover alternative pricing models so you can avoid getting overcharged and maximize your profits.

The tiered pricing model segments debit and credit card transaction fees into three tiers. It’s one of the most common pricing models merchant service providers offer. Unfortunately, it’s also the most expensive, and sometimes it can even be deceptive.

In this post, I’ll explain how tiered pricing works and give you an understanding of its disadvantages. I’ll also share alternative pricing models and tips on what to look for when choosing a merchant service provider.


What Is Tiered Pricing in Payment Processing?

Tiered pricing groups similar card transactions into rate tiers: qualified, mid-qualified, and non-qualified. Merchant service providers determine the rate of each tier and which transactions qualify for which tier. 

How Does Tiered Pricing Work?

To understand the tiered pricing model, let’s first take a look at how merchant service provider fees work in general. Your merchant service provider charges you a transaction fee every time a customer makes a credit or debit card payment. This transaction fee comprises two main parts: interchange fees and service fees. 

Interchange fees are fees charged by credit card associations to cover the costs of handling credit and debit card payments. They’re calculated per transaction, based on various factors, like card type and transaction size. Each card association also sets its own interchange fees, which makes things even more complicated.

That’s where tiered pricing comes into play. The tiered pricing model condenses and simplifies all the interchange fees by grouping them into three tiers and charging a flat rate for each tier.

Let’s take a look at the different tiers.

Tier 1: Qualified transactions

Merchant service providers generally consider debit card transactions made in person (card-present) as qualified transactions. These transactions occur primarily in brick-and-mortar businesses and come with the lowest fees, due to lower risk.

Tier 2: Mid-qualified transactions

Mid-qualified transactions primarily apply to transactions made with a credit card, including reward and loyalty credit cards and keyed-in credit card payments. Because such transactions have elevated security risks, they usually come with higher fees than those in tier 1.

Tier 3: Non-qualified transactions

This tier is for card-not-present transactions made with high-risk cards such as foreign cards or transactions with missing data. Tier 3 is the least desirable from a merchant’s perspective, as fees are the highest.

The Pros and Cons of Tiered Pricing

There are no real advantages to the tiered pricing model besides the monthly fee statements being shorter and easier to understand. But this simplicity comes with a heavy price.

For starters, tiered pricing is vague and opaque. All transactions fall into tiers with a flat rate that conceals the actual interchange fees charged by the credit associations. 

Beyond this lack of transparency, tiered pricing is also expensive due to overcharging. Providers can set high base rates for each tier and make rules that result in more transactions classified into the highest rate tiers. 

Fees are also inconsistent and unpredictable. Some providers change their rates and transaction classifications regularly, making it challenging to predict monthly processing costs. 

The final disadvantage is more of a warning. Tiered pricing is sometimes deceptively advertised. Some providers will promote the qualified tier with the lowest fees without mentioning the higher fee tiers transactions could fall into. Watch out for this!

Alternatives to Tiered Pricing

There are three main alternatives to tiered pricing. Let's take a look at each one so you can get a better understanding of all your options.

Flat Rate

Flat-rate pricing is the standard pricing model, typically used by large providers like Pay.com.

As the name suggests, you’re charged a flat rate for all card transactions, regardless of card or transaction type (e.g., card present, card-not-present, etc.). It’s simple to understand and offers greater predictability in terms of transaction costs. 

Membership-Based (Subscription)

The membership or subscription pricing model charges a monthly or annual fixed fee plus the wholesale interchange fee for each transaction. It’s a transparent and cost-effective option, but there is one minor drawback. 

Each membership package only allows processing up to a certain number of card transactions. If your business hits the monthly transaction limit, you’ll need to upgrade to a more expensive membership.


Interchange-plus is the cheapest and most transparent pricing model. In this pricing structure, the provider passes on the wholesale interchange fee the credit card association charges plus an agreed-upon markup for their services. 

The major downside of this pricing model is that it is generally only offered to merchants with high transaction volumes. Another minor disadvantage is that monthly transaction statements can become long and complicated. If you’re interested in interchange-plus pricing, you can contact Pay.com to see if your business qualifies.

How Do You Choose a Merchant Service Provider? 

As a merchant, you obviously want the best rates you can get – but rates are just one of many considerations when choosing a provider. 

For starters, using a provider that allows easy integration into your current site is critical and should not be overlooked. This is especially true if your budget and technological know-how are limited. 

There are also security and compliance considerations. The provider you choose must be PCI-compliant and have strong anti-fraud capabilities like tokenization and encryption to protect against ever-increasing fraud-related threats.

Pay.com lets you get set up in minutes. It offers a wide range of payment options, and comes with advanced security features to protect you from fraudulent transactions.

Another important consideration is the quality and availability of customer support. Ideally, your provider should offer 24/7 technical support. When you’re accepting payments online, issues can happen at any time and you’ll need quick solutions to avoid losing sales. 

Of course, your customers’ checkout experience should also be first-class. Your provider should enable you to offer a smooth and customizable checkout experience. It should also allow for the quick integration of various local payment methods. 

Last but certainly not least, remember to always read the fine print because every provider will offer different fee structures, terms, and conditions. Reputable providers will have transparent contracts, but it’s ultimately up to you to understand how everything works. 

Make sure you understand all the costs, including setup fees, recurring service fees, transaction fees, cancellation fees, and chargeback fees. Check for transaction volume requirements, both minimums, and caps.

Here’s a quick checklist of what to look for in a merchant service provider:

  • Quick and easy integration
  • Security and compliance (PCI, 3D Secure, tokenization, etc.)
  • Transparent pricing and fees
  • Customizable checkout page 
  • Global payment methods
  • 24/7 customer support
  • Business analytics and reports
  • Reliability (Processing uptime)

The Bottom Line: Why You Should Avoid Tiered Pricing

Some merchants don’t understand the pricing models merchant service providers offer and end up overpaying thousands of dollars in fees. You can avoid this by taking the time to clearly identify your provider's pricing model and ensuring you know exactly how it works before you sign any agreement. 

If a provider pushes the tiered pricing model, it's most profitable for them. Using this pricing model is not in your best interest and will almost certainly result in you getting overcharged. 

Pay.com offers a quick, easy, and convenient way to accept payments, and we’re completely transparent about our fees. We go the extra mile by helping you easily track all your payments and expenses, so you can know exactly where your money is going and spend less on fees. Click here to find out more.


What is tiered pricing in credit card processing?

Tiered pricing is a merchant service provider pricing model that groups similar credit and debit card transactions into tiers. The three tiers are qualified, mid-qualified, and non-qualified. Providers determine the rate of each tier and which transactions qualify for which tier.

What is an example of the tiered pricing method?

Let’s say you own a brick-and-mortar clothing shop with an online store. When a customer makes an in-store purchase using a debit card, the transaction will fall into tier one as a qualified transaction.  A transaction will fall into the second tier if a customer uses a credit card and manually types in the card information.  If a customer purchases an item using a credit card on your online store, the transaction will qualify for tier three and incur the highest fees

What are the three tiers in credit card processing?

The three tiers in credit card processing include qualified, mid-qualified, and non-qualified. The qualified tier has the lowest fees and generally includes card-present transactions made with a debit card. Mid-qualified transactions mainly apply to rewards, loyalty, and cashback credit cards. Non-qualified transactions include card-not-present transactions made with high-risk cards and incur the highest fee.

Why is tiered pricing bad?

Tiered pricing is bad because it conceals the actual interchange fees charged by credit associations from merchants. It is also expensive because providers set high base rates for each tier, resulting in merchants paying inflated fees on most transactions.

Meet the author
Anthony Back
Anthony is an experienced fintech analyst, content marketer, and copywriter based in Tel Aviv, Israel. With a deep understanding of payment technologies, he has worked with leading financial institutions and fintech companies worldwide.
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