Understanding Merchant Account Discount Rates

Merchant Warehouse |

December 10, 2010

As a merchant, when you start up your new company, there are several fees and costs that arise right away that naturally must be taken care of. Some are for planning and building, while others involve facets of the merchant account crucial to business operation.

Many of these later costs enable merchants to conduct the vast majority of their business with the acceptance of credit cards for their good and services. Some of these fees which are paid to the merchant service provider include such things as application fees, hardware fees, credit card terminal fees, transaction rates, monthly minimums, chargeback’s, annual fees and what is known as a Discount Rate.

A discount rate – also known as a merchant discount rate – is a fixed percentage-based fee required for processing a merchant’s credit card or other related sales transaction that is paid to an acquiring bank and the credit card processing organization for the handling of any electronic transaction. The use of a merchant’s account by the bank is essentially what the small 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. The fee is deducted from the product or service purchase cost.

Discount rate percentages are usually determined by the type of business and the scenario that the credit card is processed. Brick-and-mortar retail transactions, where a credit card is present, have a lower discount rate than transactions that takes place through the mail, over a telephone or online. This is because of the higher fraud risk in mail, telephone, and online transactions due to the credit card not being present. Other factors, such as whether a card is keyed with or without an AVS code or whether the card is a rewards or corporate card influence that actual rate.

Typically, 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 2.35%, for example, the discount rate fee paid to the acquiring bank is $11.75 for a sales charge of $500.00. There are three different discount rates for each transaction type: qualified, mid-qualified and non-qualified. Qualified rates are lower than mid-qualified, with are in turn lower than non-qualified.

Qualified Rate

A qualified rate is the percentage rate that a merchant is charged whenever that merchant accepts a regular consumer credit card and processes it in a standard manner determined by their merchant account provider employing an approved credit card processing solution. This is typically the lowest rate that a merchant will incur when accepting a credit card for sales transaction. The qualified rate is also the rate that is commonly quoted to a merchant when they inquire about pricing from the bank. The qualified rate is based on the way that a merchant will accept a majority of their credit cards and bank cards. For example, a physical retailer that has only traditional terminal-swiped transactions will be defined as Qualified. There is little fraud risk in this case.

For an online merchant, the internet interchange categories will be defined as Non-Qualified, because of the higher fraud risk due to a cardholder not being physically present.

Mid-Qualified Rate

A mid-qualified rate – also known as a partially qualified rate – 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 is keyed into a credit card terminal instead of being swiped; or a special rewards card or business credit card is used.

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

Non-Qualified Rate

The non-qualified rate 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 emerges for several reasons including: a customer credit card is keyed into a credit card terminal instead of being magnetically swiped and an address verification is not made;
a special rewards card or business credit card is used and all required fields are not entered; or a merchant does not settle their daily credit card batch within a specified time frame from the initial point of authorization.

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