Qualified versus Downgraded Credit Card Transactions

Merchant Warehouse |

December 7, 2010

For merchants conducting business today, it is important to think not only about the merchant service provider who has established your merchant service bank account and the benefits that they provide above enabling you to process credit card payments, but also what fees are incurred as a result of those services. One of the more important rates to understand is the discount rate – or merchant discount rate (MDR) – which is a percentage-based fee required for processing a credit card or other sales transaction. This fee is paid to an acquiring bank and the credit card processing organization for the time and expense that is involved in the handling of any electronic transaction.

The use of a merchant’s account by the bank is essentially what this percentage covers. The fee also covers dues, assessments, network charges, provider profit mark-ups and the interchange fee, which is a fee that a merchant’s acquiring bank pays a customer’s issuing bank when merchants accept cards using card networks for purchases. One of the best discount rates that a merchant can pay is what is known as the Qualified Rate.

The rate ladder

Discount rate percentages are usually determined by the type of business and sales scenario in which the credit card is processed. Brick-and-mortar 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 or online transactions, in which the credit card is absent, because of the higher fraud risk. Such things as whether a card is keyed into a terminal with or without an AVS code or whether the card is a rewards or corporate card, can also influence the actual discount rate.

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 2.32%, for example, the discount rate fee paid to the acquiring bank is $23.20 for a sales charge of $1000. The different discount rates for each transaction type are Qualified, Mid-Qualified and Non-Qualified. Mid-Qualified is a higher rate than Qualified, and Non-Qualified is higher rate than Mid-Qualified.

A Qualified rate is the percentage rate that a merchant is charged whenever that merchant accepts a regular consumer-grade credit card and processes it in a standard manner defined by their merchant account provider employing an approved credit card processing solution. This is typically the very lowest rate that a merchant will pay when accepting a credit card for sales transactions. The Qualified rate is also the rate commonly quoted to a merchant when they inquire about pricing from the bank because it is, of course, the lowest and most attractive.
Rate definitions

The Qualified rate is based on the way that a merchant will accept a majority of their credit cards. As an example, a brick-and-mortar retail merchant that has only traditional, terminal-swiped credit card transactions will be defined as Qualified. There is very little fraud risk in this case, since the credit card, the credit cardholder and their respective identification are all present during the course of the sales transaction and can be verified electronically and by the sales agent on hand.

For an online merchant, the Internet interchange categories will be defined as Non-Qualified, which is a higher fraud risk without a cardholder’s physical presence. Of course, in this case, it is easier for customers to use a credit card that does not belong to them, which is fraud, of course. This is considered a downgraded discount rate.

Another discount rate that is downgraded from a Qualified rate is the Mid-Qualified rate – also called a “Partially Qualified” rate – which is the percentage rate that a merchant is charged whenever they accept a credit card that does not qualify for the lowest rate. This may happen for a number of reasons such as a customer credit card being keyed into a credit card terminal instead of being magnetically swiped, the use of special rewards cards – which account for a sizeable number of transactions – or when business credit cards are used.

A Mid-Qualified rate is always higher than a Qualified rate. Some of the transactions that are usually grouped into Mid-Qualified can additionally cost the provider more in interchange costs, so merchant account providers mark up these rates.

Lowest rating, highest cost

The last discount rate that is downgraded from a Mid-Qualified Rate is a Non-Qualified rate, which is the highest percentage rate that a merchant is charged whenever they accept a credit card. Virtually all transactions that are not Qualified or Mid-Qualified will be this rate. The Non-Qualified rate comes into play for several reasons that include a customer credit card being keyed into a credit card terminal instead of being magnetically swiped, with no address verification made; a business credit card or special rewards card being used when all required fields of information are not entered; and when a merchant does not settle the daily credit card batch within a specified time frame from the initial point of the sales authorization.

Non-Qualified rates can be significantly higher than Qualified rates and can cost the merchant provider much more in interchange costs, so the merchant account providers do indeed mark up these rates.