While many business owners are not aware of the full spectrum of credit card processing costs, many are cognizant of the fact that each transaction will be assessed a merchant account discount rate – a percentage fee which will be taken out of the sale, kept by the merchant account provider or bank.
Alas, per transaction profit will be comprised by the costs incurred by credit card processing but overall profit should increase as customers tend to spend more and engage in greater impulse buying when paying by plastic. Still, it is so vital to know one’s merchant account discount rate, and it’s perhaps the first question I am greeted with when I speak with a prospective client. (I wish I had a dime for each time someone asked me, “What’s your discount rate?”)
It is important to note that the percentage rate that the merchant is assessed depends on how the payment is received. For example, it always costs business folks less when they open a retail merchant account as opposed to a mail order telephone order (MOTO) account or an Internet account. Indeed, swiped transactions are considered safer than keyed in ones – less prone to fraud – and such transactions are cheaper for merchant account vendors to process. The savings are then passed on to merchants. (Seeing the glass half empty, one can also assert that the additional cost for keyed in transactions will be passed on to merchants.)
A typical retail account merchant may be quoted a 1.79% merchant account discount rate. If a $100 transaction is initiated, this means that the merchant account vendor will apportion $1.79 out of the $100 sale for processing. (Of course, there are other applicable fees, such as the transaction cost or a per item fee – the number of cents that the merchant will be assessed per transaction.)
In contrast, a standard keyed in or Internet-based rate can be 2.39%. Here, it costs the merchant $2.39 per $100 as a result of the discount rate. As you can see, the retail merchant saves $.60 per $100 than his/her MOTO or Internet merchant account counterpart in the example above. However, the merchant account discount rate needs to be further scrutinized.
A vast majority of merchant account providers charge a tiered model. The discount percentage can easily increase, depending on several factors. For example, if a merchant does not batch out within 24 hours or if the customer’s billing address/zip code does not match the one associated with the customer’s credit card, the discount rate will increase. Moreover, if a customer uses a special rewards card, the merchant may easily be defraying the cost of the rewards in the form of a higher discount percentage.
Too many credit card processing companies only quote the lowest qualified discount rate and decide not to highlight their mid or non-qualified rates. Indeed, there is not just one discount percentage rate but several tiers. When researching companies, a more appropriate question should be posed: “What are your discount rates?” – plural, with an “s” at the end.
With the proliferation of rewards cards, more transactions are downgrading to the mid or non-qualified rates, or special category rate, so it important to know the surcharges for these downgrades. Remember to add the surcharges to the qualified discount rate or ask the vendor what is your TOTAL mid-qualified rate and TOTAL non-qualified rate.
Other credit card processing companies may charge you based on an Interchange plus cost model. Here, your merchant account rate will fluctuate, dependent on the type of credit card that you receive from your customer. For example, rewards cards will be at a higher Interchange rate than debit cards. However, merchants who receive Interchange pricing usually benefit from the price structure as long as the merchant account provider does not add too great a cost beyond Interchange. (There are vendors who assess Interchange + .3%, and even lower – particularly for high volume merchants who do a large volume of credit card processing.)
In summary, it is necessary to perform your due diligence when evaluating competing offers. Become familiar with all the relevant rates, and particularly hone in on ALL applicable merchant account discount rates.
