The discount rate comprises a number of dues, fees, assessments, network charges and mark-ups merchants are required to pay for accepting credit and debit cards, the largest of which by far is the Interchange fee. Each bank or ISO/MSP has real costs in addition to the wholesale interchange fees, and creates profit by adding a mark-up to all the fees mentioned above. There are a number of price models banks and ISOs/MSPs use to bill merchants for the services rendered. Here are the more popular price models:
The 3-Tier Pricing is the most popular pricing method and the simplest system for most merchants, although the new 6-Tier Pricing is gaining in popularity. In 3-Tier Pricing, the merchant account provider groups the transactions into 3 groups (tiers) and assigns a rate to each tier based on a criterion established for each tier.
First Tier - Qualified Rate
A qualified rate is the percentage rate a merchant will be charged whenever they accept a regular consumer credit card and process it in a manner defined as "standard" by their merchant account provider using an approved credit card processing solution. This is usually the lowest rate a merchant will incur when accepting a credit card. The qualified rate is also the rate commonly quoted to a merchant when they inquire about pricing. The qualified rate is created based on the way a merchant will be accepting a majority of their credit cards. For example, for an internet merchant, the internet interchange categories will be defined as Qualified, while for a physical retailer only transactions swiped through or read by their terminal in an ordinary manner will be defined as Qualified
Second Tier - Mid-qualified Rate
Also known as a partially qualified rate, the mid-qualified rate is the percentage rate a merchant will be charged whenever they accept a credit card that does not qualify for the lowest rate (the qualified rate). This may happen for several reasons such as:
- A consumer credit card is keyed into a credit card terminal instead of being swiped
- A special kind of credit card is used like a rewards card or business card
A mid-qualified rate is higher than a qualified rate. Some of the transactions that are usually grouped into the Mid-Qualified Tier can cost the provider more in interchange costs, so the merchant account providers do make a markup on these rates.
The use of "rewards cards" can be as high as 40% of transactions. So it is important that the financial impact of this fee be understood. So therefore, merchants will be charged the qualified plus the mid qualified rate. Example: If your qualified rate is 1.5% and the mid qualified rate is 1 %, your effective rate would be 2.5 %.
Third Tier - Non-qualified Rate
The non-qualified rate is usually the highest percentage rate a merchant will be charged whenever they accept a credit card. In most cases all transactions that are not qualified or mid-qualified will fall to this rate. This may happen for several reasons such as:
- A consumer credit card is keyed into a credit card terminal instead of being swiped and address verification is not performed
- A special kind of credit card is used like a business card and all required fields are not entered
- A merchant does not settle their daily batch within the allotted time frame, usually past 48 hours from time of authorization.
A non-qualified rate can be significantly higher than a qualified rate and can cost the provider much more in interchange costs, so the merchant account providers do make a markup on these rates.
As a result of the Wal-Mart Settlement and to compete against PIN-based debit cards (which are processed outside of the Visa and Mastercard networks), Visa and Mastercard lowered the interchange rates for debit cards well below those for credit cards. Some providers can pass on the lower cost of these cards directly to merchants. Consequently, the 3 tiers programs have added 2 classifications for debit cards that are processed without a PIN or with a PIN for a total of 6 rate classifications.
Interchange Plus Pricing
Some providers offer merchant account services priced on an "interchange plus" basis. These accounts are based on the "interchange" tables published by both Visa Visa Interchange and MasterCard MasterCard Interchange. This type of pricing creates a discount rate by adding interchange rates, fees, assessments, markups and other costs.
A bill back is a relatively new price model and a variation on interchange plus pricing. It has some variations but the basic concept is that the merchant pays interchange on the statement that the transactions took place and then pay all other fees, like dues, fees and assessments, etc. on the next month's statement. It requires a great deal of time to research the actual cost per transaction with the bill back system. Some merchants feel this form of pricing is very misleading.
Nuisance Fees are charged when a card is declined and then swiped again this results in a so called "nuisance fee" for each additional swipe. This fee can be very costly to the merchant upwards of $20 dollars is common for a "nuisance fee".
The Authorization fee (actually an authorization request fee) is charged each time a transaction is sent to the card-issuing bank to be authorized. The fee applies whether or not the request is approved. Note this is not the same as Transaction fee or Per Item fee.
The statement fee is a monthly fee associated with the monthly statement that is sent to the merchant at the end of each monthly processing cycle. This statement shows how much processing was done by the merchant during the month and what fees were incurred as a result.
Many times, the statement fee is not directly linked to "paper" statements but rather general overhead. This means that a provider would not waive this fee if a merchant chose to have a "paperless" statement.
Monthly minimum fee
The monthly minimum fee is a way to ensure that merchants pay a minimum amount in fees each month to cover costs from the provider to maintain the account and to create minimal profits. If a merchant's qualified fees do not equal or exceed the monthly minimum they will be charged up to the monthly minimum to satisfy their minimum fee requirements.
Example: A merchant has signed a contract with a $25.00 monthly minimum fee. If all the fees for the most recent month of processing total only $15.00, this merchant will be charged an additional $10.00 to meet their monthly minimum requirements. Sometimes there are fees that are charged that are not a part of the monthly minimum, such as statement fees. It is industry standard to charge a monthly minimum.
A batch fee (also known as a batch header fee) can be charged to a merchant whenever the merchant "settles" their terminal. Settling a terminal, also known as "batching", is when a merchant sends their completed transactions for the day to their acquiring bank for payment. Some providers perform this automatically. It is important to close a batch every 24 hours or a higher rate will be assessed by Visa or Mastercard. The term "batch header" originally came from processing pre-electronic terminal era, when each batch of credit card receipts was turned in to the merchant's local bank for deposit. The batch header was a mini report summarizing those receipts bundled within.
Customer Service fee
The customer service fee (also known as a maintenance fee) can be charged by some providers to pay for the cost of customer service. Also referred to as a "merchant support fee", "customer support fee", or simply, "service fee" by some merchant providers.
The Annual fee can be charged by some providers to pay for costs of maintaining the merchant's account. Sometimes these fees can be quarterly. The fee can be from $79–$399.
Early Termination fee
The early termination fee can be charged by some providers if the merchant ends the contract before the end of the contract term. While contract terms of 1–3 years are typical, some providers have terms of up to 5 years with a one year prior notice to cancel or the fee will be assessed. Some providers also assess all statement fees and monthly minimums remaining when the contract is terminated. Some providers may also assess a "lost profit" fee based on an assumption of profits they concluded they would have earned during the full term of the contract.
The chargeback is the largest risk that is presented to banks and providers. This is not to be confused with a refund, which is simply a merchant refunding a transaction. In the Visa and Mastercard rules, the merchant's processing bank is 100% responsible for all the transactions that the merchant performs. This can leave the provider open to millions of dollars of potential losses if the merchant operates in an illegal or risky manner and generates many chargebacks. The providers pass this cost on to the merchant, but if the merchant is fraudulent or simply does not have the money, the provider must pay all the costs to make the card holder whole. The chargeback risk is the largest part taken into consideration during the contract application and underwriting process. Some banks are much more stringent than others when assessing a merchant's chargeback risk.
If a merchant encounters a chargeback they may be assessed a fee by their acquiring bank. A potential chargeback is presented on behalf of the card holder's bank to the merchant's credit card processing bank. A reason code is established by the card issuer to properly identify the type of potential chargeback based on the card holder's complaint. The most common complaint is that the card holder can not remember the transaction. Usually, these potential chargebacks are corrected when the merchant's processing bank sends over more details about the transaction. Some providers charge a fee for this service, known as a "Retrieval Request". A chargeback can also be related to a fraud or similar dispute that the card holder is claiming to the merchant. This fee can be charged by some providers whether the chargeback is successful or not and is not dependent on the amount of the chargeback.
Currently both Visa and Mastercard require all merchants to maintain no more than 1% of dollar volume processed to be chargebacks. If the percentage goes above, there are fines starting at $5000 – $25,000 to the merchant's processing bank and ultimately passed on to the merchant.
In all cases, a chargeback will cost the merchant the chargeback fee, typically $15–$30, plus the cost of the transaction and the amount processed.