When business owners begin to look at online merchant account offerings, they're often drawn up short by the fee structures.
Depending on how the information is presented, the rates that apply to credit card processing can seem deceptively simply or hopelessly complicated.
Either presents a potential pitfall to a merchant. Choose the wrong account type for the way your business runs, and the fees can eat you alive. The best defense when you're shopping for a merchant services account is self-education.
Here are five things you need to understand about credit card discount rates:
1. The discount rate is the most important fee you will consider. Since the majority of the costs associated with a merchant services account stem from the discount rate, this is the most important fee to consider. In general terms, the discount rate is usually lower for swiped transactions, and higher for telephone, Internet, and card-not-present scenarios.
2. The term "discount rate" actually doesn't refer to one fee. The phrase "discount rate" doesn't refer to a single charge applied to all credit card transactions. The term generally blankets multiple rates associated with a merchant account. The three most common pricing models are ERR, tiered, and interchange pricing.
3. Discount rates are set by overlapping factors involving card and business type. Discount rate levels are determined by how the consumer's credit card information is captured and by the type of card used. The price for a swiped transaction will differ from one in which the user's information is keyed in. Card types may range from check and debit cards, to rewards and corporate issues. In a three-tiered pricing structure, for instance, a card swiped through a terminal may get a qualified discount rate of 1.79 percent, whereas an international card at a non-qualified rate would be run at 3.09 percent. A mid-qualified rate of 2.39 percent might apply to a reward card or a keyed transaction. As an example, a $100 transaction on a swiped check card would cost $1.79, but the same transaction with an international card would be $3.09.
4. Discount rates for high-risk businesses will be higher. Some businesses are perceived to be high-risk to the merchant account services provider, meaning they stand to lose money. This is particularly true of businesses that expect to process a high number of "chargebacks," (instances in which the card holder asks for a refund) as well as those with high turnover and an increased danger of fraud. These might include online pharmaceutical sellers, adult entertainment vendors, or even travel agents.
5. A low quoted rate does not necessarily indicate a well priced merchant services account. ERR or "enhanced rate recovery" pricing applies a single rate to transactions. This often seems like the most attractive option to business owners, especially if they are getting a merchant services account for the first time. This, however, is a case where "hidden" fees can run up the cost of credit card processing. Generally in ERR pricing limited card and transaction types get the qualified rate, with surcharges assessed on transactions outside the negotiated rate. It's crucial to understand total price structure including add-on fees before signing up for an account. Your account type and business model have to match up in order to achieve the maximum savings.