Here on Financially Legal we recently wrote about the three main ways payment processors rip lawyers off: tiered pricing, monthly fees, and limiting available payment methods. You can read that article for the higher-level discussion but, as we mentioned, tiered pricing deserves its own discussion. We dig in on that here.
Let's start with a definition: tiered pricing processors create different “tiers” of pricing for cards that law firms process. The processor then charges the firm based upon the applicable tier of a given card. This may sound harmless enough at first glance but dig just a bit deeper and you’ll see that processors can easily manipulate this system.
First, processors using tiered pricing can manipulate firms with marketing. Tiered pricing processors often offer what looks like a low rate, say 1.95%, for “Standard Cards.” This makes a lawyer or firm leader think “Well, most of my clients simply use standard cards. I mean, after all, they’re the standard. I’ll probably only pay 1.95% for processing. That’s cheap. My bank quoted me 3%!” This ends up being pretty manipulative because very few cards actually fall into the category of “Standard Cards.” Why? That leads pretty nicely to the next problem with tiered pricing: arbitrary tiers. (If you want a good example of this bait and switch check out the tiered payment processing from everyone's favorite discount retailer, Costco. The small print on that page is next level.)
Unfortunately, there’s no governing body determining credit or debit card “tiers.” Each processor determines the boundaries of the tiers that they offer. And, just like that low rate for “Standard Cards,” the processor has a significant incentive to manipulate those tiers to their advantage. They know that firms have very little control over the specific cards that their clients may have (in our companion piece we talked about how processors could but often don't help their firms offer lower-cost payment methods such as ACH) but processors know which cards are the most common - they process the cards! While there are likely very few manipulative processors that intentionally charge an excessive amount for common cards with hundreds of different kinds of cards out there, even more benign processors certainly manipulate tiered pricing systems to their advantage at the margins.
As one further example, take American Express. Many processors put AmEx in their most expensive tier or even create a specific standalone category for AmEx. It's true that historically AmEx was more expensive to process than many other cards. But things have changed. In recent years, AmEx rolled out their "Opt Blue" program which helped standardize and lower the cost of accepting American Express for many small businesses. Under Opt Blue it's often the case that it isn't that much more expensive to process an AmEx than a "higher-end" Visa or Mastercard. So what's happening with these tiered pricing processors who are still charging law firms more for AmEx? Best case, they may not have enough clout with American Express to get into Opt Blue. Worst case, they got into Opt Blue and haven't bothered to pass the savings on to their law firm clients. Tiered pricing strikes again.
But setting Opt Blue aside, there's still some unfairness here. Those tiered pricing processors shift a big risk to their law firm clients by manipulating which cards fall into the lower, less expensive tiers. Remember: processors know which cards consumers use and they can manipulate the tiers, or the cards within those tiers, accordingly. Why, then, when it comes to AmEx, should the processor shift all the risk of a client using an American Express to the law firm? The tiered pricing processor who charges more for AmEx gets to have their cake and eat it too.
Another way that processors manipulate firms with tiered pricing is by passing through card brand fees on top of the stated cost for the tier. This is particularly pernicious because, if you think about it, what exactly is the stated 1.95% cost for if not for the fees associated with processing!?!?!?! Passing these additional card brand fees on to firms as an additional cost is a classic way that processors rip firms off.
A final way that tiered pricing rips lawyers off is that tiered pricing makes it really hard for a firm to know what they're actually paying for processing, which makes shifting the processing fees to clients very difficult. We've recently written a bunch about shifting credit card fees to clients so go check out that content if you are interested but, in jurisdictions where it's permitted, if a law firm wants to shift these fees to a client they can't charge more to the client than they pay for processing. A law firm that has a tiered pricing arrangement with their processor and wants to shift the processing fees to clients must either get the tiers from the processor (which the processor is fairly unlikely to provide to a firm) or decipher the tiers themselves. And don't forget: the processor can change the tiers at any time. This means that a firm that is trying to surcharge on fees from a tiered pricing processor will have to constantly check that a processor hasn't moved a card from one tier to another. It's a mess. And, unfortunately, it's designed that way.
Tiered pricing is an inherently manipulative practice. But payment processing doesn't have to be manipulative. There are other ways that payment processors can charge law firms to process cards. Many processors offer a flat fee (like yours truly). Others offer an interchange-plus model (us again). Still, others simply charge a flat monthly fee (we don't do that). Some of these methods are more manipulative - or prone to manipulation - than others but firms will be hard-pressed to find one as bad as tiered pricing. It's a rip-off.