Accepting cash is one of the original ways to accept payment face-to-face. Bartering came before that... However, credit cards are relatively recent developments.
For online businesses, their only viable option is credit cards.
In truth most of the merchant service providers do not want you or anyone else to know how it all works. If
The purpose of this training is to demystify all the fees and terms used to obfuscate the money trail. We will cover many areas of merchant services. The goal is to educate you about merchant accounts so you can provide superior service to the merchants you encounter.
Who the players are
We discuss who participates in the merchant services industry and what
The basic elements of merchant accounts
Rates and fees – How and why they’re determined and charged. We will go over the environment in which credit cards are processed and the types of cards used and these variables impact merchant accounts and the fees charged.
Rates & fees
We won’t discuss the 30+ variable tables used by the card companies but we will cover the basics. The rates and fees are the most
These companies are the big players in the whole process. They own the cards, establish guidelines, and determine who gets a card and how merchants are able to accept the
VISA (Visa International Service Association) and MasterCard are both payment processing institutions that are each owned jointly by
They set and enforce rules and regulations governing their bankcards, such as operational and Interchange procedures. They supervise the bankcard processing function within their members' banks.
They are also responsible for conducting
Combined Visa and MasterCard account for the majority of all credit card transactions.
American Express is not a credit card like Visa and MasterCard. Financial services corporation, which specializes in
Unlike Visa and MasterCard, American Express is not comprised of member banks but is its own entity. This is why there is a separate application process for American Express for merchants who wish to accept it.
Discover Card was started by Sears and is the newest of the four major credit cards. Although Discover
The card issuing bank is the bank
The Acquirer provides credit card
A Merchant Service Provider (MSP) or Independent Sales Organization (ISO) is a licensed broker of credit card services or banks through which business is processed. A MSP/ISO is usually an independent salesperson or company who contracts with a bank or a processor to sell credit card processing, equipment, and services to the merchant. The MSP/ISO sometimes provides back office functions such as settlement and chargeback/retrieval management, equipment-related customer service, paper storage and retrieval, and supplies. MasterCard originated the term MSP, while Visa uses the term ISO (Independent Sales Organization).
The cardholder uses the credit card given by the card issuing bank to purchase goods and services or to obtain a cash advance and receives a monthly bill from the card issuing bank. The cardholder is expected to sign the back of the card and limit its use to only authorized users, stay within the assigned credit limit, and pay the card issuing bank all or a minimum amount of the balance when the
The merchant provides goods and/or services to the cardholder. Visa and MasterCard require that the merchant be financially responsible, have acceptable credit rating and adhere to all rules and regulations set forth by them. The acquirer requires that the merchant adhere to the merchant processing agreement they signed that details the prices the merchant will pay for equipment, discount rates and fees. It also spells out the terms and conditions under which the merchant will conduct credit card business, such as the card types the merchant will accept, chargeback rights, and access to the merchant's bank accounts.
Processing Platforms, also known as Processing Networks, are the computer networks that electronic transactions occur over each day. There are multiple networks available for electronic transactions to occur over but the merchant does not choose which platform(s) they use. Each acquiring bank establishes relationships with the processing platforms they feel would be best for their business model (usually basing the decision on cost and availability).
Not all platforms are created equally. Each platform establishes a unique API (Application Programming Interface - It specifies how software components should interact with each other) for which software and equipment can communicate with it. Thus, software and equipment cannot use a platform to process electronic transactions until it has verified that it can support that platform's API
When choosing a merchant account provider, some merchants will base their decision on the platforms that provider has available to them. This will typically be because the merchant has a specific piece of software or equipment that only works on a specific platform. An example would be restaurants that use proprietary POS software.
In the world of credit card processing, one size does not
A retail business is face-to-face with their customers and can swipe their customers' credit cards through a credit card terminal and process them in real time. Brick-and-Mortar retail stores are typical examples of a retail business but they are
Businesses that are not face-to-face with their customers at the time of sale are classified as Card Not
The one thing they all have in common is that the merchant is not face-to-face with the customer at the point of sale. These transactions are usually keyed into a credit card terminal or POS software.
Another form of CNP business is merchants who perform recurring billing. Although the very first transaction may occur in a retail environment (face-to-face with the merchant and swiping
There are several different kinds of credit cards issued by Visa and MasterCard. The differences between them affect the rates and fees charged for those cards and how a merchant is responsible for processing them.
A consumer credit card is a plain old credit card carried by an average person. It is not tied to a checking account, offer any rewards, or associated with any
A check card is very similar to PIN-based debit cards. Unlike a typical credit card where you wait
Unlike PIN-based debit cards, however, you do not have to key a PIN number
A rewards card offers its cardholder special bonuses for using that card to make purchases. The bonuses will vary by card issuing bank. Typical rewards include airline miles and vacation packages.
All rewards cards are placed into a special Interchange table and typically cost more to accept then a traditional consumer credit card. They typically fall into a mid-qualified rate for retail businesses. Mobile, MOTO, and Internet businesses typically pay their qualified rate for these cards.
Business cards, also called corporate cards, are carried by business owners. These are typically used to make purchases for the cardholder's business. They are popular amongst businesses as they offer extra features not traditionally found in consumer credit cards. The more detailed statements are their primary benefit.
Business cards are placed into a special Interchange table and typically cost more to accept then a traditional consumer credit card. They typically fall into a
Purchasing cards are virtually identical to business cards with one exception: they can only be used in predetermined businesses. All transactions outside of the predetermined businesses will be declined automatically.
The predetermined businesses are determined by SIC code. If a corporation has allowed a purchasing card to make purchases from a merchant listed in that SIC code the transaction will proceed normally. The company that the purchasing card has been issued to has the ability to determine what SIC codes a card may be used with. If a merchant has a customer that cannot make a purchase due to the SIC
Although processing a sale is the mostly completed and discussed transaction type it is
This transaction is just a basic, common everyday sale. Whenever a purchase is made it really is a transparent two-step process. The merchant's POS system contacts the processing bank and acquires an authorization for that credit card transaction. It also requests for that sale to be captured (completed and funds delivered to the merchant).
A refund is very similar to a sale
“Auth Only” transactions are similar to Authorize & Capture transactions except the transaction is not captured. The merchant is issued a six digit authorization number indicating that the funds are available and the transaction is approved. However, the merchant will receive the funds only after they are captured.
Authorizations are only valid for up to 30 days from
An Important thing to note is that the funds from authorizations are frozen on a customer's credit card and cannot be accessed by that customer. From the customer's point of view, that money is essentially spent. Authorizations should not be used without a customer's consent and with care.
Authorizations are captured when a Force transaction is processed.
A Force transaction takes an existing authorization number obtained from an Auth Only transaction and forces the sale through so the merchant may receive those funds. Unused funds from an authorization are immediately freed for the customer to use.
A void transaction erases another transaction of any type. It essentially makes that transaction act and appears as if it never existed.
Voids can only be performed before a POS device has successfully batched its transactions. Once a transaction has been batched a void cannot be performed.
Naturally accepting credit cards is not a free service. In fact, this may be the one service that has the most middlemen! Every time you accept a credit card the following people all receive a fee from the transaction:
Card Issuing Bank (they get the biggest cut)
Merchant Service Provider / Independent Sales Organization
It's this fee that makes establishing merchant accounts so lucrative. Although the fee each entity above receives is relatively small, when you have millions of cardholders making purchases at millions of business the numbers add up very quickly. So who pays these fees? The merchant. Why? Because they cannot afford to ignore credit cards. Consumers can use another form of payment quite easily. But merchants need to accept credit cards if they wish to stay in business.
How fees are charged can get very complex and we won't try to explain it all here. But as a general rule you can get charged fees under these circumstances:
These fees are charged every time you accept and process a credit card transaction of some kind. Examples include the qualified rate and authorization fee.
On a recurring basis
These fees occur on a set schedule and usually are not dependent
One time based on a special situation
These occur only when certain criteria are met and otherwise are not charged normally. Examples voice authorization fees and monthly minimums.
Visa and MasterCard's rates as they are the most complex as well as the most common fees most merchants will experience. They are based on Interchange which is explained below.
Interchange is the clearing and settlement system where data is exchanged between the credit card processor and the card issuing bank. It is a part of Visa and MasterCard. Most communication that occurs between the cardholder, the merchant, the card issuing bank and the Acquirer or Merchant Service Provider (MSP) must go through Interchange (such as transactions, deposits, chargebacks, etc).
Interchange sends transactions that occur at the merchant level to the appropriate bank for posting, sends funds to the appropriate Acquirer for payment, and assigns a
A transaction fee is a flat fee charged each time a successful transaction is processed. This means the transaction fee is not charged if a transaction is declined. Only an approved transaction will incur this fee.
An authorization fee is very similar to a transaction fee except this fee is charged with every transaction regardless of the results
One of the complexities in accepting credit
As we saw earlier, there are many different kinds of credit cards available to consumers to make purchases with. Some of these credit cards are considered special by Visa and MasterCard and
How these credit card affect a merchant's fees will vary from provider to provider but it can happen in one of two ways:
A surcharge is applied to the purchase
The most common, and oldest, way to handle special credit cards is to apply a mid-qualified or
The credit card has its own special rates
A newer way of handling special credit cards is to create special rates just for them. So instead of the merchant having a regular qualified rate only, they will know have a qualified rate and a rewards card rate. The rewards card rate will be different from their surcharges and only apply when they actually accept a rewards card.
Besides the fees incurred directly for processing credit cards there are other fees associated with establishing and
The statement fee covers the cost for creating a statement for the merchant each month that details the processing history for the previous month as well as a breakdown of the fees incurred from that month's processing. It also typically includes the costs for customer service and technical support as well. However, some merchant account providers will
Most providers will not waive this fee even if you decline a paper statement being mailed to your business. This is because they still aggregate that data even if you don't
The monthly minimum fee is a fee which guarantees the merchant will be paying a minimum amount each month in processing fees. If a merchant's discount fees do not equal their monthly minimum fee they will be charged the difference between the two in addition to their discount fees.
A merchant has a discount rate of 2.50%, a monthly minimum of $25, and a monthly volume of $600.
So, what is the purpose of this fee? Merchant account providers and their sales agents make their money by taking a very small percentage of every sale a merchant processes. Naturally this can be very lucrative. But, if a merchant is very small, they won't make very much money from them. So, to make up for this, they charge this monthly minimum fee. Then, when the merchant has a slow month, this fee is incurred and the merchant account provider still makes their profit from this merchant.
This fee is not required by Visa and MasterCard to have an account with them. Many processing companies offer merchant account with excellent rates without the monthly minimum fee.
Annual fees are exactly what their name implies. They are charged each year that the merchant has their
This is not a standard or common fee for establishing a merchant account.
There are many potential fees that may be incurred while accepting credit cards as payment. The fees listed below are some of the few remaining fees worth mentioning. This is not all encompassing but should cover the majority of fees.
Occasionally a merchant may be instructed by their credit card terminal to call for a voice authorization. All merchants are provided with a voice authorization phone number when their merchant account is established. If they call this number and receive an authorization or decline they will be billed a voice authorization fee.
With computerized systems being more advanced than they were twenty years ago voice authorizations are less common then they used to be. However, they are still common for some merchants. A merchant may call for a voice authorization for their own reasons and not because they were prompted to do so. Typically this is used by mobile merchants for large purchases to verify the order before they give away their merchandise. By receiving authorization for their transaction over the phone they can
This fee is only charged when a transaction processed through your merchant account is disputed. This is always a fixed fee usually in the $15 - $35 range. It is
This fee is incurred each time your credit card terminal or payment gateway settle the transactions stored since the last time a settlement occurs. This fee is charged for each batch that is settled. Typically a merchant settles their sales once per day but occasionally a merchant may have a reason to settle their sales more frequently (their credit card terminal's memory may be full). Each batch settled will incur this fee. The number of transactions do not affect this fee. The same amount is charged whether one transaction is settled or one thousand. This fee is not incurred if there are no transactions that need to be settled.
Most merchant account providers charge a higher fee for batches. Some merchant account providers simply consider a batch just another transaction and only charge a transaction fee which is no different than running a regular transaction (no percentage is charged, just a
Some merchant account providers charge a fee when a merchant submits an application for a merchant account. This fee is designed to cover the merchant account provider's costs for processing the application and submitting it to their processing bank for approval. Since merchant account providers do not make any money from a merchant account until after the account is established they may charge this fee to make sure if the application is declined they did not lose any
This is not a standard or common fee for establishing a merchant account.
Address Verification (AVS) is required on all non-swiped credit card transactions. Failure to do so will cause a transaction to incur a surcharge thus doing so is important whenever a transaction cannot be swiped through a credit card terminal (which is every transaction for all non retail merchants).
Most merchant account providers include AVS for free with all non-swiped
This fee is very similar to the Application Fee except it is not incurred unless a merchant account is established. Only at that point is this fee incurred. Merchants whose applications are declined do not incur any fees (unless an application fee is also charged).
This is not a standard or common fee for establishing a merchant account.
This fee is charged to cover the costs of labor when reprogramming an existing
This is not a standard or common fee for establishing a merchant account.
Just as the name implies this fee is charged when a merchant account is terminated. Since most merchant account providers do not charge an application fee or setup fee they incur a loss for every merchant account they establish until the merchant processes enough sales volume to make their account profitable. To ensure that each merchant is profitable most merchant account contracts contain a clause that imposes a penalty if the merchant leaves before the contract expires.
Some contracts are open-ended and do not have a cancellation fee. These contracts allows the merchant to leave at any time. Some have a fixed
Interchange pass through pricing is a form of credit card processing pricing that allows the actual cost of processing (interchange fees & assessments) to be passed directly to merchants.
The benefits of interchange pass through
It's safe to say that pass through pricing allows us to guarantee clear billing and the merchants will get some of the best credit card processing fees.
There is no complicated formula.
Here's an example of a qualified rate being applied to a transaction:
Transaction dollar amount: $15.00 Interchange+: 1.50% + .20¢
(First calculate the percentage) 15 x 1.50% = 23¢
(Then add the transaction fee) 23¢ + 20¢ = 43¢
The following rate examples are more common and they are known as Tiered or Bucket pricing. This is done to hide what Visa is charging vs. what the Merchant Service Provider is charging.
The qualified rate is the
The qualified rate is the fee most likely to be charged to the merchant and thus, is the rate advertised by merchant account providers. Once again, this isn't the only rate you may pay. It is just the most common.
Here's an example of a qualified rate being applied to a transaction:
Transaction dollar amount: $35.00 Qualified rate: 1.69% + 25¢
(First calculate the percentage) $35 x 1.69% = 59¢
(Then add the transaction fee) 59¢ + 25¢ = 84¢
In the above example a merchant with a ticket of $35 and qualified rate of 1.69% + 25¢ would pay 84¢ for that transaction.
But what if their sale was for $65?
Transaction dollar amount: $65.00 Qualified rate: 1.69% + 25¢
(First calculate the percentage) $65
(Then add the transaction fee) $1.10 + 25¢ = $1.35
As you can see the cost for that transaction is larger than the transaction for only $35. This is due to the percentage rate (1.69%). As the transaction grows larger so does the amount of that transaction dedicated to their qualified rate. If their transaction was smaller than $35 their overall costs would be smaller as well.
A blended rate is nothing more than a fee, either percentage based or a flat rate, which combines the qualified rate and transaction fee. So instead of having a traditional structured rate such as 1.79% + 25¢ per transaction that merchant might pay a flat percentage of 2.50% or a flat fee of $1 per transaction.
Blended rates are calculated by taking a
Here's an example of a flat blended rate:
Average Ticket Price: $40 Qualified Rate: 1.79% + 25¢
(Then add the transaction fee) 72¢ + 25¢ = 99¢
In the above example a merchant with an average ticket price of $40 and a qualified rate of 1.79% + 25¢ could have a flat blended rate of 99¢.
What if that merchant wanted
(Take the flat rate and determine what percentage of the $40 it is) .99 / 40 = 2.48%
All we needed to do is find out what percentage of $40, 99¢ is and we
Blended rates may seem like a good idea but in reality they're not. When you stop and think about it the fees will be exactly the same as if the rate wasn't blended. After all, the blended rate is based on your average
(Find out what our blended rate will cost on a $50 transaction) $50 x 2.48% = $1.24
(Next, find out what our old rate will cost) 50 x 1.79% = .90 + .25 = $1.15
The difference is 9¢ per transaction. That doesn't seem like
To make it worse, merchant account providers understand that if your average ticket were to suddenly change they could lose money. So they pad the blended rate to account for such a contingency. Thus, you may lose out even if your average ticket stays steady. Blended rates seem attractive at first but when
So what happens if your transactions do not qualify for the qualified rate? Most commonly they are charged a Non-Qualified surcharge. This is the highest rate you can pay for a Visa and MasterCard transaction. Basically, by not performing the actions required to make the transaction "qualify" you are increasing the potential risk and exposure for loss the processing bank and Visa and MasterCard may experience. By increasing their potential for loss and increasing their costs they essentially charge you extra to pay for it.
Some possible reasons a sale may be charged at a Non-Qualified rate include:
A credit card was not swiped through a magnetic stripe reader and AVS was not performed properly. Not supplying a zip code or street address will cause AVS to fail.
Not supplying all required fields for a corporate/business credit card. This may include the tax amount for the sale or an invoice number.
Delaying your batches until after 48 hours after a
Acquiring an authorization and then performing a Force transaction to capture the sale.
If you see a lot of non-qualified transactions on your processing statements this usually is an indication that someone is making errors while
Some possible reasons a sale may be charged at a Partially Qualified rate include:
A credit card was not swiped through a magnetic stripe reader but AVS was performed properly.
A special credit card was processed that cannot qualify for a qualified rate. (See the section "Special Credit Cards" below).
In general this surcharge is only available to card present/retail merchants as all other business types are essentially being charged this fee as their Qualified Rate already.
Establishing a merchant account can be anywhere from a smooth and easy process to a nightmare. Where it falls is both the product of the merchant account provider and the merchant themselves. The better the communication between the two the smoother and faster the process is.
All merchant account providers require that every business sign a contract when establishing their merchant account. At the
Another important factor specified in some contracts is the length of term of the contract. Some contracts require the merchant honor their contract for a set period of time. Failure to complete the contract will result in a penalty being assessed also known as a cancellation fee.
When applying for a merchant account most small and medium-sized merchants will notice that a personal guarantee is required to establish the merchant
The reason why the processing bank does this is because of the high risk they are exposed to due to the nature of their business. If a new merchant
Risk is the single largest factor influencing the establishment and maintenance of a merchant account. As with anything financial, someone stands to lose a lot of money if something goes wrong, whether intentional or not. In the world of credit card processing the ones with the most to lose is the acquiring/processing bank. As a result, they make all of the decisions about whether or not a merchant account is established, under what conditions, and whether that account continues to process normally or have their account closed.
The biggest buzz word in the world of merchant accounts is "chargeback". A chargeback is when a customer initiates a refund for a purchase they made on a
When a merchant receives too many chargebacks, approximately 1% of their sales, they risk having their merchant account shut down and losing the ability to accept credit cards again (see "The Match File" below).
One way a processing bank may protect themselves from the risk a merchant account exposes them to be to hold some of that merchants funds in a special account called a reserve. A reserve allows a processing bank to cover potential future costs they may have associated with the merchant including chargebacks and potential fraud. If the merchant is unable to cover the costs of future chargebacks, possibly because they already have gone out of business, the processing bank can access the funds held in reserve to cover those chargebacks. If they didn't have the funds held in reserve they would have to pay those chargebacks out of their own funds.
The amount of the reserve can vary from a small fixed amount to a large fixed amount or an entire month's worth of
Reserves can be created and work in several ways. Sometimes a processing bank will hold all of the funds owed to a merchant until they reach the predetermined amount of the merchant's reserve. Sometimes the processing bank will hold one month's worth of processing and return it after the following month has passed. This is called a rolling reserve. With the exception of rolling reserves funds held in reserve are not available to be returned to the merchant until the potential for chargebacks for their account has passed. Since chargebacks can usually be filed for up to six months after a purchased is made a merchant won't see their funds held in reserve until up to six months after they close their account. In the case where a business offers a service that takes an extended period of time to complete (e.g. an annual subscription) the merchant may not see their funds for as long as eighteen months.
Some businesses by their very nature have higher than normal chargeback rates. Sometimes this is due
The businesses considered to be high risk will vary from merchant account provider to provider. However, there are some businesses and industries that are consistently considered high risk. This list includes:
Adult Book Stores
Adult Video Stores
Check Cashing Services
Credit Repair Services
Exotic Dancing Establishments
Pharmacies (Card Not Present/Internet)
Sexual Encounter Firms
For these businesses to accept credit cards they typically have to turn to high risk merchant account providers. These companies are typically offshore and always charge higher rates than traditional merchant account providers. Rates can go as high as 20% of sales and some may charge set up fees
The Match File is a database file used by MasterCard and Visa processing banks to identify specific merchants and owners who have had their merchant accounts terminated. Once a merchant is on this list it is highly unlikely that future
For a business or merchant to be added to the Match File they need to violate Visa and MasterCard rules in some way. The most common reasons include:
Factoring (ringing sales for another business)
An excessive number of chargebacks
The processing bank concludes that serious violations of the merchant agreement could result in increased loss exposure to itself or
Once a merchant has been placed on The Match File only the processing bank that added them can remove them from it. The merchant must work with them directly to accomplish this.
You do not want to be on the Match File!
Naturally an important aspect of accepting credit cards is how fast you get your money from your credit card sales. Merchant account providers typically provide funds within two business days of when a batch is settled. This means if you process a sale on
It is possible to have your funds deposited into your business account with 24 hours of settling a batch. For this to occur the process bank must have a direct relationship with the bank you have your checking account through.
An example of this is merchants who have a merchant account through Nova Information Systems and a checking account through Regions Bank will receive their funds in one business day due to the direct relationship that Regions Bank has with Nova.
An overlooked but important feature to note when selecting a merchant account provider is how your funds are deposited and your fees are subtracted. Ideally when you receive your funds you will receive the full amount of the deposit without any fees due being taken out. The advantage to this is it allows bookkeeping to be greatly simplified. If you have a batch of $500 settled on Monday, you can expect to see a deposit of $500 on Wednesday. No need to guess what fees were taken and if there are any problems you
Visa and MasterCard do not allow their services to be used for personal reasons. All accounts must be established for one business and to be used only for that business' products and services. An account cannot be established
Visa and MasterCard do not allow more than one business to use a merchant account. All accounts must be established for one business and to be used only for that business' products and services. When a business processes transactions for another business, even if they own that business, they are “factoring”.
Set a Purchase Minimum
Visa and MasterCard do not allow merchants to set a minimum purchase amount for
The most frequently asked question we get is
Every time a credit or debit card is swiped there are fees charged by three different entities:
Credit card issuers (mostly banks) charge a fee each time a merchant accepts one of their cards for payment. The term “Interchange” can be simply interpreted as the cost an issuing bank charges when a merchant accepts one of the cards they’ve issued. All Interchange fees are paid to the issuing bank, and not shared with the major Card Associations (Visa, MasterCard, Discover), nor are they shared with the ISO/sales office servicing the account. Interchange fees will generally cost a merchant a percentage plus a flat transaction fee.
Each type of card carries a different Interchange cost. An easy way to explain why different cards carry different interchange costs is through RISK & REWARD.
A merchant can process the same exact credit card two different ways and the Interchange cost will be different. Here is an example:
A swiped Visa CPS Retail card has an Interchange cost of 1.54% + $0.10. CPS retail is a regular credit card that does not earn rewards points.
The same exact Visa CPS Retail Card will cost 1.80% + $0.10 when it is Key Entered (manual) rather than swiped.
The reason for the difference in cost is how the transaction is captured (swiped vs. manual entry).
Years of data and research have shown Key Entered transactions are more often fraudulent or stolen, resulting in a higher rate of charge backs than swiped transactions. Merchants pay a higher fee to accept a keyed transaction because there is a higher risk the issuing bank will take a loss on a fraudulent transaction.
For example, a Visa Rewards card carries an Interchange cost of 1.95% + $0.10. The only difference between a rewards card and a CPS Retail card (1.54% + $0.10) is simply the rewards. In other words, the merchant is paying for
Business cards cost the most (starting at 2.05% + $0.10) because there is a mix of risk and reward. There is inherent risk in issuing a card to a business because of the high rate of
CARD ASSOCIATION FEES
Each Card Association
Interchange Fees, Dues and Assessments, NABU and APF, etc. are known as Processor Fees. These fees are charged to the MSP/ISO by the Card Associations, and in turn passed through to the client.
UNDERSTANDING THE RATE STRUCTURES
There are two rate structures commonly offered to merchants:
Tiered (Bucket) Pricing
INTERCHANGE PASS-THROUGH PRICING
In addition to the wholesale costs (Interchange, Dues and Assessments, NABU and APF) there is a small margin added to each transaction.
In the following example we are marking up the wholesale rate 0.20% and $0.10 per transaction.
We pass through Interchange and add 0.20% plus $0.10 regardless of the wholesale cost.
*The 0.20% markup is commonly referred to as the Discount Fee
If a merchant accepts a Visa Rewards card, they will pay:
+0.20% + $0.10 Discount fee + Transaction fee
The same formula would be used if the merchant key entered a CPS retail card. The only difference would be substituting the 1.80% + $0.10 interchange fee associated with a key entered CPS card. After adding Interchange, the Discount
+0.20% + $0.10 Discount fee + Transaction fee
The variable in this pricing structure is the Interchange Fee. It will change according to the type of card the merchant accepts. The discount fee and the authorization fee will remain constant when calculating the cost of accepting each type of card.
From the explanation of wholesale above, we already know there are many Interchange categories/rates. On the Interchange Pass-Through rate structure the merchant will pay hundreds of rates. On a 4-Tier rate structure the merchant will pay four rates.
This rate structure drops hundreds of Interchange categories into one of the four tiers listed below.
Also included is an example of the average rates we are seeing on our competitor’s statements:
CHECKCARD RATE* 1.60% + $0.25 (Includes any card linked to a checking account)
QUALIFIED RATE 1.75% + $0.25 (Includes non-rewards credit cards)
MID>QUALIFIED RATE 2.89% + $0.25 (Includes all rewards cards and keyed transactions)
NON>QUALIFIED RATE 3.75% + $0.25 (Includes all business cards and foreign bank cards)
*3-tier rate structures
Again, we’ve noted above that the cost of wholesale is the same to the processor regardless of what rate structure the merchant has. Interchange cannot be impacted by the MSP/ISO.
The two most common wholesale Interchange categories that fall into the Checkcard rate are Visa
CPS Retail Debit and MasterCard Merit III.
The Qualified rate is a teaser rate. Most consumer cards used in the United States are
Many Processors pitch 1.69% to new merchants. They do not mention anything about any other rates or fees, so the merchant thinks they are going to get 1.69% on all transactions. Their account rep or Merchant Service Provider is not disclosing there are Mid-Qualified and non-qualified rates or surcharges.
The Mid-Qualified rate includes transactions swiped rewards cards and Key-entered transactions carrying an Interchange cost between 1.80% + $0.10 and 2.05% + $0.10.
A Mid-Qualified rate of 2.50% + $0.25 remains constant whether the merchant accepts a card with an Interchange cost of 1.65% + $0.10 or a card with an Interchange cost of 2.05% + $0.10.
A merchant paying 2.50% on a Visa Rewards card with a cost of 1.65% is paying a markup of
The same merchant paying 2.50% on a Key-Entered MasterCard Enhanced card with an Interchange cost of 2.05% is paying a markup of 0.45%.
The markup of 0.85% is not a good deal for the merchant. The markup of 0.45% is fair. This means the merchant is paying between 0.45% and 0.85% on cards in this category.
The Interchange rates in the Non-Qualified category will range from 2.10% to 3.25%, with most cards falling between 2.20% and 2.65%.
At a Non-Qualified rate of 3.50%, the merchant is paying a markup between 0.25% and 1.40%.
The reason an interchange pass through pricing structure is better for the merchant is because the markup is low and fixed regardless of the type of card they swipe. On a tiered rate structure, the markup varies, and always costs more.
In July 2011, the Federal Reserve was required by Congress to rule on a reduced Interchange fee banks are allowed to charge when a merchant accepts one of their debit cards. Prior to October 1, 2011 the average Interchange cost banks were charging was $0.44 per transaction. The Federal Reserve ruled that the banks can only charge 0.05% + $0.22 per transaction. This brings the average down to $0.24 per transaction. This is nearly a 50% reduction in the average fee.
HOW THIS NEW RULE AFFECTS SMALL & MEDIUM-SIZED MERCHANTS:
Merchants processing on an Interchange Plus rate structure will automatically see a reduction in their fees associated with debit cards.
Businesses on a tiered pricing structure will not automatically
In order to benefit from this government mandated fee reduction the merchant MUST be on an Interchange plus Pricing structure. This creates a HUGE selling point vs. Tiered processors.
The previous pages