Pricing models in online payments refer to the various models used by payment service providers to charge merchants for processing their transactions. Payment gateways attract customers through varied pricing models. Businesses of different sizes have specific needs, which can be addressed by choosing an appropriate pricing model. These models cater to businesses of varying sizes, transaction volumes, and customer preferences. Understanding the nuances of each model helps businesses optimize costs while enhancing their payment processes.

There are many pricing models in use in the online payment industry, including interchange-plus pricing, tiered pricing, flat-fee pricing, flat rate subscription pricing, billback pricing, and more. This article will help you understand the key details of some of these prominent pricing models.

Pricing models in the online payments industry

Interchange-plus pricing

Interchange-plus pricing involves two major components: interchange fees and the processor markup. Interchange fees are set by card networks, and the markup is usually a percentage of the transaction processing fee, along with a flat fee charged as a fixed amount per transaction. All pricing elements are clearly defined, and can be easily identified by breaking down the statement. Interchange-plus pricing offers a clear view of costs and opportunities to negotiate lower processor markups as your transaction volume grows.

Large retailers or businesses with high transaction volumes may opt for interchange-plus pricing because it provides cost efficiency. It can be particularly useful for merchants processing variable transaction types or values, as the fees directly reflect the cost of each transaction type.

However, this model can be complex to navigate, with interchange rates varying by card type, region, and payment method. Smaller businesses may find it challenging to manage these variables and might prefer simpler alternatives.

Tiered pricing

Tiered pricing organizes transactions into three categories:

• Qualified

• Mid-qualified

• Non-qualified

Qualified transactions include standard debit or credit card payments and incur the lowest fees. Mid-qualified transactions include rewards cards or those made without physical card swipes, while non-qualified transactions—such as international or corporate card payments—attract the highest rates.

This model simplifies fee structures for merchants unfamiliar with interchange rates, making it an attractive option for small to medium-sized businesses. For instance, a local travel agency handling various payment methods might find tiered pricing more manageable than deciphering interchange fees. However, the lack of transparency is a significant drawback. Classification of certain transactions into higher-cost tiers may not be straightforward, and the unpredictable costs of non-qualified transactions may disturb profitability.

Despite these limitations, tiered pricing’s flexibility in accommodating diverse transaction types makes it a viable choice for merchants with mixed payment profiles. Businesses handling different types of transactions can use this model to balance simplicity and functionality.

Flat-fee pricing

Flat-fee pricing charges a fixed amount per transaction, regardless of its value or payment method. For example, a business might pay $0.30 or 3 rupees per transaction. This model can be advantageous for merchants with high-ticket sales, as the fixed fee avoids the compounding costs of percentage-based models. It can also benefit businesses with low-average tickets. This is because the fixed flat fee may add up to a lower amount than the interchange rate and the processor markup combined.

A few examples of companies offering flat-fee pricing include Stripe and Cashfree. While it’s not a one-size-fits-all solution, this model’s predictability makes it appealing for merchants prioritizing cost control and consistency. It is simple, and allows for easier estimation of monthly costs involved in payment processing. However, there are risks of overpaying involved, as interchange fees vary across different cards.

Other models

Some other popular pricing models include flat-rate subscriptions and billbacking.

Flat-rate subscription pricing involves a fixed periodic, recurring fee for payment processing, accompanied by the interchange and network fees. This model is useful for businesses starting out or growing businesses with lower sales.

Billback pricing involves a fixed rate for all card transactions for the entire month. At the end of the month, if the provider has paid additional charges in the form of interchange fees or any other processing fees, the difference is added to the next monthly bill. This is useful when consolidating all bills under a single charge, but may also be challenging when breaking down individual bills to understand if certain transactions have been charged additionally.

Zoho Payments follows a structured pricing model, with no hidden costs. There are no set-up fees or maintenance fees. There is a fee charged per transaction, according to the payment method used. In India, merchants can accept payments made through UPI, credit and debit cards, corporate cards, and Netbanking. In the US, merchants can accept payments made through domestic and international cards, and ACH.

How to choose the right pricing model for your business?

Selecting the ideal pricing model depends on a merchant’s transaction volume, business size, and customer preferences. Interchange-plus pricing offers increased transparency and a breakdown of payment processing costs, while tiered pricing accommodates diverse transaction types. Flat-fee and flat-rate subscription models provide simplicity and predictability, and billback pricing can address the needs of dynamic, seasonal businesses. Understanding these pricing models helps merchants align their payment strategies with operational goals and optimize costs.