- American Express & Discover Card
- CISP Certification
- Discount Rates
- Electronic Checks
- Fraud Screening
- High Risk Merchant Accounts
- How Transactions are Processed
- Keyed Transactions
- Merchant Account Fees
- Offshore Merchant Account
- Payment Gateways
- Reasons for a Merchant Account
- Select a Merchant Account Provider
- Terminated Merchant File
- Third Party Processing
- Types of Merchant Accounts
- Understanding AVS
- Understanding Chargebacks
- What is a Merchant Account
Understanding Discount Rates
As it relates to merchant accounts, the discount rate is the percentage of each transaction dollar which the merchant is charged in order to process the transaction. The rates charged will vary according to many different factors, including the volume of business, the type of business, and whether the card is swiped through a point of sale terminal or is a ‘no-card-present’ transaction.
With various types of transactions and various types of cards, there are about 130 different categories of fees for most credit cards. Generally, a business credit card costs more than does a consumer credit card and a consumer credit card is more expensive than a check card. Varying costs to process has the most impact on which category of transaction will be applied to a charge against a card.
Most of the transaction based fees are grouped into either three or six tiers. The three tier system is used for swiped cards. The six tier system has three tiers for swiped cards and three tiers for card not present transactions which is the bulk of ecommerce business accounts.
The lowest rate which a merchant will receive for transaction processing is the “qualified rate”. This is also the rate which the merchant will be quoted when asking for an estimate of the discount rate levels. The qualified rate is also different for the internet commerce merchant than for the retail merchant. The qualified rate for an ecommerce merchant is the rate charged for “card-not-present” transactions which would be the majority of transactions which this type of merchant incurs. The qualified rate for a retail merchant is that which is charged for a transaction where the card is swiped through a terminal.
A mid-qualified rate is usually anywhere from 1.5% to 2.5% higher than the qualified rate. The mid-qualified rate comprises about 15% to 40% of transactions. The mid-qualified rate is the one used when there is anything out of the ordinary about the card transaction. For example, a retail merchant who keys in the information on the card instead of swiping it will receive a mid-qualified rate for the transaction. Rewards cards and similar cards are considered mid-qualified transactions and thus are more expensive.
The third tier of discount rates is the non-qualified rates. They are usually about 2-2.5% above the qualified rates and result from such situations as keying in the numbers instead of swiping the card and not performing address verification. Another reason for the non-qualified rate is using a special card and not completing information for all the fields.
Merchant account providers make the most income from the mid-qualified discount rates, because although the rate charged is increased by 1.5% to 2.5%, the increased processing fee is only .3% to .5% higher than for that of the qualified rate transactions.
Six-tier accounts have the same base rate structure as the three-tier systems, but three additional tiers are added which distinguish between debit cards and credit card. So, the qualified, mid-qualified and non-qualified rates are each divided into two sections, the Debit tiers and the Credit tiers—resulting in six tiers in total.