MERCHANT ACCOUNT:
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A merchant account allows a business to accept credit cards, debit cards, gift cards and other forms of payment cards. This is also widely known as payment processing or credit card processing.
Merchants, or business owners who receive credit card payment for their goods or services, must apply for a merchant account typically through a merchant bank or MSP (Merchant Service Provider). The merchant account will typically be established based on several factors. Merchants who own businesses with poor or no credit may find it difficult to establish a merchant account through traditional routes.
Rates and feesMerchant accounts are not free - a variety of charges are involved. Some fees are charged on a monthly basis but most are charged on a per-item or percentage basis. All of the monthly fees are at the discretion of the merchant account provider but the majority of the per-item and percentage fees are passed through the merchant account provider to the issuing bank according to a schedule of rates called Interchange fees, which are set by Visa and Mastercard.
Each transaction is categorized into an interchange category depending on the kind of card that was used for the transaction and the circumstances of the transaction. For example, if a transaction is made by swiping a card through a credit card terminal it will be in a different category than if it were keyed in manually. If a transaction is made using a rewards card it will fall into a different category than a standard card. The permutations add up - in total there are about 130 categories, each with a different rate.
Merchant account providers usually group the 130 categories into 3 or 6 categories and apply a single rate to that entire bucket. This includes Retail, Mail Order / Telephone Order and eCommerce or Card Not Present. They base that rate on the average interchange rate that they expect for that category plus a markup for themselves.
These tiers describe costs for different kinds of credit cards when processed under different kinds of circumstances. For example, a check card costs less than a consumer credit card which costs less than a business card. The method of how a credit card is processed changes which tier of Interchange is applied. For example, a swiped credit card costs less to process than one keyed into a credit card terminal.
Interchange Based Fees
3-Tier Pricing
3-Tier Pricing is the most popular pricing method, although 6-Tier Pricing is gaining in popularity quickly. In 3-Tier Pricing, the merchant account provider groups the transactions into 3 groups (tiers) and assigns a rate to each Tier.
Qualified rate
A qualified rate is the percentage rate a merchant will be charged whenever they accept a regular consumer credit card and process it in a manner that has been defined as "standard" by their merchant account provider. This is the lowest rate a merchant will incur when accepting a credit card. The qualified rate is also the rate commonly quoted to a merchant when they inquire about pricing. For example, for an internet merchant, the internet interchange categories will be defined as Qualified, while for a physical retailer only transactions swiped through or read by their terminal in an ordinary manner will be defined as Qualified.
Mid-qualified rate
Also known as a partially qualified rate, the mid-qualified rate is the percentage rate a merchant will be charged whenever they accept a credit card that does not qualify for the lowest rate (the qualified rate).
This may happen for several reasons such as:
A consumer credit card is keyed into a credit card terminal instead of being swiped A special kind of credit card is used like a rewards card or business card A mid-qualified rate is usually 1.50% - 2.50% higher than a qualified rate. Interestingly, the kinds of transactions that are usually grouped into the Mid-Qualified Tier only cost 0.30%-0.50% more in interchange costs, so the merchant account providers make much of their profit from these transactions.
With the prevalence of rewards cards it is not uncommon for 15-40% of transactions to be mid-qualified.
Non-qualified rate
The non-qualified rate is the highest percentage rate a merchant will be charged whenever they accept a credit card. All transactions that are not qualified or mid-qualified will fall to this rate.
This may happen for several reasons such as:
A consumer credit card is keyed into a credit card terminal instead of being swiped and address verification is not performed A special kind of credit card is used like a business card and all required fields are not entered A merchant does not settle their daily batch within the allotted time frame A non-qualified rate is usually 2.00% - 2.50% higher than a qualified rate (and only cost 0.50%-1.50% higher in interchange costs).
