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Three Tier vs Interchange Plus: Merchant Processing Explained





"It takes money to make money" - Sol Luckman


As an accountant and small business owner, I am all too familiar with this old adage. Any company that accepts checks or credit card payments from their clients knows that it will cost them money, to accept the money they made.  While merchant processing fees are difficult to avoid completely, a little extra knowledge can go a long way and save you a lot of money!


Three Tier vs Interchange Plus


Before selecting a merchant processing company it is important to understand the different fee calculations and how they would impact your business.


Three Tier merchant processing:

A large majority of the merchant processing companies, including bank provided merchant services, like to boil down the charges per card into three rate categories


1: Qualified = ATM/DEBIT Card Purchases 

2: Mid Qualified = Standard Credit Cards

3: Non-Qualified = Rewards Based Cards



4: American Express & Discover Cards


Three Tiers.png




This grouping or tier approach is very common among most of the leading cloud-based solutions. (Intuit Merchant Processing, Stripe, Square, VEEM)


Interchange Plus

While merchant processing companies would like to make you believe that there are only 3-5 rate categories, in all actuality there are 60+ individual rates defined by Visa and Mastercard


Merchant processors that work on the Interchange Plus model add a flat markup (basis points) on top of each rate and provide a more transparent solution.   Even Interchange Plus requires the business owner to do their homework to get the best deal.  When approached with an Interchange Plus solution, ask them to provide you an “Effective Rate Analysis”


Sage Payments is an example of an Interchange Company that offers merchant solutions that works very well with QuickBooks Desktop and QuickBooks Online. 


Which to Choose:


The answer to this question is heavily dependent on the volume of sales that you run through your merchant account.  If you run a restaurant, a retail or an e-commerce store, the number of transactions you process is likely to be much higher making the Interchange Plus option the less expensive solution.


The key to successfully navigating the merchant fee gauntlet is to only provide ACH payments by default and make a client request to pay by credit card.  If they do request to pay by credit card, pass the 3% charge to the client. (Note: This practice is not legal in all states, be sure to confirm with local agencies what the best practices are)


On the surface the Interchange Plus method would always appear to be the most cost-effective solution, but there is another variable that must be considered as well, time.


How much time does it take your customer to pay you and more importantly how much time does it take you or your accountant to match up the received payments to the customer invoices?  What good does it do you to save 50 bucks a month on your merchant processing if you just loose it again in bookkeeping fees?


In Conclusion:

When you factor the cost of time into the equation, Parkway believes that Intuit Merchant Solutions provides the best service offering for most of our clients.  Admittedly their tiered approach is not my favorite on the market, the ability to invoice and receive payments online have reduced the DSO (days outstanding) rates for many of our clients which ultimately improves their cash flow.


Quick Shout Out to  SarahGonzales for asking her question QUESTION: Which Payment Processor Do You Prefer? . Merchant Processing is a hot button of mine that she triggered and motivated me to share my experiences. If anyone has additional questions, please feel free to ask them below or reach our via private message!

1 Comment
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Three Tier vs Interchange Plus: Merchant Processing Explained



Good article, thanks for demystifying parts of the merchant processing process. 


If I were a small company just starting out, not accepting a ton of payments every day, would you recommend starting off with the system that will have the fewest potential legacy issues going forward (i.e. roadblocks to changing or upgrading systems) or opening with whatever has the lowest negative impact on my bottom-line?


Btw, this article is featured now on the front page ><. 

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