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Merchant Account Services Discount Rates | Credit Card Processing Fees

confusedAre you confused by merchant account services terminology?

You’re not alone.

When it comes to credit card processing fees and discount rates, things can get confusing fast. Merchant account industry jargon can leave new business owners in a daze, and unsure when and why different rates are charged for different transactions.

If you are starting a business and have heard various rates mentioned but don’t know what the merchant account provider is talking about, don’t worry. Even merchants that currently accept credit cards are sometimes confused about rates and fees associated with merchant accounts. This article may help clear things up. Hopefully.

So here is a basic explanation of credit card processing fees & discount rates.

In every credit card transaction, there are 5 players involved. Each party plays a small role in every transaction:

· Credit card associations (Visa, MasterCard, etc.)
· The merchant account provider (processor)
· A card issuing bank (customer’s credit card)
· The merchant
· The merchant’s bank

Here are the main fees:

Interchange Fee – this is the rate that the merchant account provider (aka processor or ISO) “buys” from the card associations. This is a fixed rate (although it is adjusted as frequently as twice a year by the card associations).

Discount Rate – this is the percentage of the sale amount set by and charged by the processor for each transaction. This amount has the interchange fee built in. The discount rate will vary depending on the transaction.

Typically, 1 of 3 discount rates are charged to merchants by processors:

Qualified – The qualified rate is the lowest rate that the merchant will qualify for or be charged by the processor. To receive the qualified rate, the merchant must swipe a customer’s personal, non-reward credit card. This rate is often quoted to merchants, however it’s rare that merchants will pay the qualified rate.

Mid-Qualified – The mid-qualified rate is the rate that most merchants will pay for keyed-in debit and credit card transactions, basic rewards cards and almost all online or ecommerce credit card transactions.

Non-Qualified – The non-qualified rate is the highest surcharge. This rate applies to upper-level rewards cards and business cards, international credit cards and transactions processed without the customer’s billing address.

Transaction Fee – When a customer’s card is swiped or keyed in at the point of sale, the credit card processor contacts the card-issuing bank for approval for the specified amount. Regardless of whether the transaction is approved or declined, the transaction fee is charged by the processor. The merchant is obligated to pay the transaction fee, even on declined transactions.

When a sale is approved by the card-issuing bank, the bank forwards the funds to the merchant account provider or processor. The processor then applies the discount rate and transaction fee, and forwards the remaining amount to the merchant’s bank within 48 hours.

Other Fees…
Most merchant accounts have other fees as well. These fees may include a set up fee, a monthly service fee, and termination fee.

Set Up Fee – A set up fee is sometimes charged by processors in order to cover the costs associated with the merchant application.

Monthly Service Fee – A monthly service fee is pretty standard among most credit card processors. This low fee covers the general admin costs of managing the account.

Termination Fee – Some processors have a termination fee included in the merchant account agreement. Merchants can be locked into a merchant account agreement for a specified term, unless they want to pay a hefty early termination penalty.

Before You Start…

Comparing rates quoted by different merchant account providers isn’t always apples-to-apples. Before signing a merchant account agreement, it’s important for merchants to understand the rates and fees for each provider, as well as the obligations outlined in each contract. Don’t be afraid to ask questions.

If you need further clarification or would like additional information about merchant accounts, we’d be happy to help. Give us a call, or send us an email at sales@thetransactiongroup.com.