Discount rates are percentage-based fees required for processing a merchant’s credit card or other electronic sales transaction. It is paid to an acquiring bank and the credit card processing organization for the time and expense that is typically involved in the handling of a transaction, and in the typical three-tier system used today are divided into Qualified, Mid-Qualified and Non-Qualified levels. The small percentage that these discount rates collect essentially covers the use of a merchant’s account by the bank. These rates also cover assessments, dues, network charges, provider profit markups and the interchange fee, the amount a merchant’s acquiring bank pays a customer’s issuing bank when merchants accept credit cards for purchases.
Discount rate percentages are usually determined by the merchant’s type of business, and the scenario in which the credit card is ultimately processed. In-store retail transactions (in which a credit card is present) will always have a lower discount rate than a transaction that takes place through the mail, over a telephone, or online (where the credit card is absent and thus the fraud risk is higher). Other factors, such things as whether a card is keyed with or without an AVS code or whether the card is a rewards or corporate card, influence the actual rate as well.
Usually, the discount rate of all sales transactions owed to the bank by a merchant for credit card processing is a small percentage. If the discount rate is 2.33%, for example, the discount rate fee paid to the acquiring bank is $2.33 for a sales charge of $100. Of the different discount rates for each transaction type – Qualified, Mid-Qualified and Non-Qualified – the Mid-Qualified rate is higher than Qualified and Non-Qualified is higher than Mid-Qualified.
A Qualified rate is the percentage rate that a merchant is charged whenever that merchant accepts a traditional consumer credit card and processes it in a standard manner defined and determined by their merchant account provider, and employing an approved credit card processing solution. This is typically the lowest rate that a merchant will ever incur when accepting a credit card for sales transactions. The Qualified rate is also the rate commonly quoted to merchants when they inquire about pricing from the banks, since it represents the type of transactions that they hope merchants seek.
Naturally, in the course of business other customers with greater credit and fraud risks come to a merchant’s business every day and cost the merchant significantly more money in fees. The Qualified rate is based on the way that a merchant will accept a vast majority of credit cards and other payment cards. For example, a here-and-now brick-and-mortar retailer that has only traditional terminal-swiped transactions will be defined as Qualified. There is very little fraud risk in this case, since the cardholder, the credit card and requisite identification can easily corroborate who is making the purchase from the merchant, in real time.
For an online merchant, on the other hand, the Internet interchange categories will be defined as Non-Qualified, which signifies a higher fraud risk without the cardholder’s physical presence.