Discount Pricing is by far the most common way to quote merchant account pricing.
With discount pricing, the merchant account provider will quote a discount rate that is applied to each transaction. In reality, there is usually more than one discount rate.
- For retail merchant accounts, there is usually a "qualified", "mid-qualified" and "non-qualified" discount rate
- For internet and MOTO (mail order / telephone order) merchants, there is usually a "qualified" and a "non-qualified" rate.
The mid- and non-qualified rates are sometimes expressed as rates and at others as surcharges. The table below illustrates a few common scenarios.
|If you are quoted rates like this...||...it means|
If you have a tiered merchant account that uses discount pricing, you must understand the following:
- Most merchant account providers highlight the qualified discount rate and they hide the non-qualified rate. They do this because, in general, they make a lot of money on non-qualified transactions. The sales approach is to get you as the merchant to focus on the qualified rate. Although the qualified rate is important, recognize that the non-qualified rate is important too.
- A certain percentage of your transactions will be processed at the non-qualified rate. For example, rewards cards and commercial cards are processed at the non-qualified rate. The reality is that there are many, many factors that can cause a transaction to be downgraded and processed at a non-qualified rate. For some merchants, 10-30% or more of their transactions are likely to be processed at the non-qualified rate. It stands to reason that if 30% of your transactions are being processed at the non-qualified rate, then your overall effective rate is likely to be much higher than your qualified rate would suggest.
So, are merchant accounts that use discount pricing "bad"? Not necessarily. As long as your non-qualified rate is reasonable, a tiered merchant account that uses discount pricing makes sense in some cases. In particular, a tiered merchant account might make sense for low volume merchants.
It's also important to note that there is a good reason for non-qualified rates. As discussed in Interchange Fees and Assessments, all credit card and check card transactions have associated interchange fees and assessments. The interchange fees for some transactions might be as high as 3.0% or more. In addition, assessments of approximately 0.11% - 0.13% must be paid on each transaction to the card associations. If your merchant account provider is quoting a discount pricing scheme, then the provider is using the discount fees to pay interchange fees and assessments on your behalf. Most people would agree that it's entirely reasonable for merchants account provider to set the non-qualified rate high enough so that they are not forced to take a loss on a transaction. The problem is when merchant account providers set unreasonably high non-qualified rates and fail to educate their merchants about the consequences.
Let's take a look at a concrete example of the economics of discount pricing. Suppose you have a tiered merchant account and the qualified rate is 2.3% + $0.30 per transaction. Now suppose a customer makes a $100.00 payment using a check card (debit card). Finally, assume the interchange rate for the transaction as determined by the relevant card association is 1.6% + $0.15. What happens? The following table breaks it down for you:
Discount Pricing Example
|Your Cost (Discount)||$2.60||
$100.00 x 2.3% + $0.30.
The cost to you as the merchant will be $2.60 given the assumptions above.
$100.00 x 1.6% + $0.15.
The interchange fees must be paid to the bank that issued the credit card. Your merchant account provider will pay $1.75 in interchange fees on your behalf using the discount revenue it collects from you.
|Assessments and Network Fees||$0.15||
$100.00 x 0.13% in assessments + $0.02 network fees (approx.).
Assessments of 0.11% - 0.13% are paid out to the card association (Visa or MasterCard). Your merchant account provider will pay the assessments on your behalf using the discount revenue it collects from you. In addition, both Visa and Mastercard have "network fees" of about $0.02 per transaction.
|Merchant Account Provider Revenue||$0.70||
$2.60 - $1.75 - $0.15
The revenue to the merchant account provider in this example is $0.70. That is, after collecting $2.60 in discount from you and then paying $1.75 in interchange fees and $0.15 in assessments and network fees, about $0.70 remains. Not all of the $0.70 is profit. The merchant account provider also has to pay other processing and operations costs.