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Credit Card Processing Rates & Merchant Account Fees Explained

Huh? What did he just say?

If you are starting a business and have had the exhilarating experience of speaking with a credit card processing provider about setting up merchant services, you may have thought the same thing.

credit card processing rates & feesCredit card processing jargon can be quite confusing when you’re new to it, yet merchant services sales people spew their lingo like everyone should have learned that merchant account vocabulary in 1st grade. What seems like it should be a simple process can be a real headache.

Here’s a quick overview of how the credit card processing industry works. Basically, with every transaction there are four players involved.

  • Major credit card associations (Visa, MasterCard, etc.)
  • Customer’s bank (issuing bank of the credit card)
  • Merchant’s bank 
  • Merchant account provider 

A merchant account is set up through a merchant account provider and each player has a small role in the transaction and gets a small piece.

The Interchange Fee is the cost paid to the card associations by the ISO or credit card processor (merchant account provider). It is the rate and fee that the processor “buys” from the association.

Processors then add their rate and fee, making up the Discount Rate and Transaction Fee

The discount rate (the discount rate has the interchange fee built in). The discount rate is a percentage charged on each transaction and will vary based on the type of credit card as well as the type of transaction (keyed vs. swiped).

Just like it sounds, the transaction fee is a fee charged for every transaction regardless of whether or not the transaction is approved or declined.

When a transaction occurs, the credit card processor contacts the customer’s bank for approval. If the transaction is approved, funds are transferred to the credit card processor. The processor applies the discount rate and transaction fee, collecting a portion of the transferred funds. Typically within 48 hours the funds (minus the discount rate & transaction fee) are deposited into the merchant’s bank. 

Qualified, Mid-Qualified Non-Qualified

The primary rates that a merchant will be quoted by a merchant account provider is known as the Qualified Rate.

The qualified rate is the lowest rate a merchant can qualify for in their specific plan. In order for a transaction to receive this rate, the customer must use a personal (non-reward) credit card or debit card and the card must be swiped, not keyed in. In most cases, merchants rarely receive the qualified rate.

The Mid-Qualified rate pertains to rewards cards and keyed-in debit and credit card transactions at the retail level. However, almost all ecommerce or online transactions receive the mid-qualified rate. This is due to the fact that these are card-not-present transactions. This rate is slightly higher, but not as high as non-qualified.

The highest surcharge, Non-Qualified rate, is applied to upper level rewards cards and business credit cards, international credit cards as well as transactions that are processed without the customer’s billing address

Other common fees that you may hear from a credit card processing provider are Set-Up Fee, Monthly Service Fee and Termination Fee.

The set-up fee is a one-time charge by merchant account providers. This fee covers administration costs for underwriting and approving the account.

The monthly service fee, also known as a monthly statement or support fee, is charged by most processors to cover the cost of monthly statements as well as customer support.

A termination fee, also referred to as a cancellation or early termination fee, is charged when a merchant cancels the merchant account before a specified term is fulfilled. The terms and costs will vary from provider to provider.

Some merchant account providers may quote other fees not mentioned above. Be sure to ask questions when anything is unclear. And remember, just because a provider quotes what is seemingly the lowest rate, it may not be the best actual deal. Additional fees can instantly make a low rate the worst deal of all.

Before signing up for credit card processing services…

It’s important for merchants to understand these fees as well as their obligations prior to signing a contract. The varying rates and fees tacked on can be confusing. And early termination fees can be painful.

The truth is that in this day and age customers often prefer to pay by credit card. Therefore, credit card processing services are necessary for almost all businesses, especially ecommerce stores. The fees attached to merchant accounts are simply a cost of doing business.

If you have questions about merchant account fees and can’t find an answer, we’d be glad to help clear things up. Give us a call at The Transaction Group.


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