Discount Rates

Tuesday, October 09, 2007

This is the first in a series of audio casts talking about the various merchant account fees that are charged by payment processors. It’s important to understand that fees can vary significantly from one payment processor to the next. The only way to make an accurate comparison between processors is to compare their “effective processing rate”. That means, calculating the total monthly processing costs you will be paying and dividing that amount by the dollar volume of transactions you expect to process.

Once you sign up with a payment processor, your Merchant Agreement should show all of the fees you will be charged. You should carefully examine your monthly processing statement and compare the fees you are paying to your agreement to make sure you are being charged in accordance with the agreement. If you see that you are being charged for something that was not on your merchant account agreement, contact your merchant account provider immediately.

The first fee you will be likely to see when shopping for a merchant account is the Discount Fee. The discount fee is the amount that is deducted from each sale you make and is stated as a percentage. The discount fee varies depending on whether you will have a “keyed” account or a “swiped” account. Keyed accounts are those that will have less than 30% of their transactions swiped through a point of sale terminal or card reader. All Internet merchants will have keyed accounts. Currently, the discount fee for keyed accounts with FDIS Loud is 2.19% and for swiped accounts is 1.69%. The reason for the 50 basis point spread is basically a risk premium that is charged because keyed transactions are inherently more risky than swiped transactions. With swipe transactions a merchant can see the card, look to see if the signature box is signed and match that to the signature on the receipt, observe the behavior of the customer, as for ID, etc. With a keyed transaction you don’t have any of these anti-fraud tools available. Therefore, the risk of chargeback is higher, thus the risk premium.

The discount fee that all processors will quote to prospective merchants is called the Qualified Rate. This is the rate a merchant will pay on qualified transactions. Many merchants don’t realize that a large percentage of their transactions won’t be charged the qualified rate. Instead, these transactions will be “downgraded” to mid-qualified or non-qualified and will be charged a surcharge. Whether a transaction is charged at the qualified, mid-qualified, or non-qualified rate depends on a number of factors including the type of credit card being used by the customer, specific information contained in the transaction, how and when the transaction is processed, your industry, and the type of merchant account you have. Internet merchants will typically have a 2-Tiered pricing schedule which means that transactions will either be qualified or non-qualified. Retail merchants with swiped accounts will have 3-Tiered pricing. Without knowing what the mid-qualified and non-qualified rate will be, you will be unable to calculate a true effective processing rate.

Please call Loud Commerce at 800-931-9835 and let us create a customized payment processing solution for you including a free no-obligation quote and cost savings analysis.

Thanks for listening!

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