How to decode your merchant account rate

How to decode your merchant account rate

Merchant account salespeople will often quote you a "discount rate" or "qualified rate" to seal the deal. However, before you sign anything, take the time to understand exactly what they have offered. The oft-quoted discount rate will likely apply to most of your transactions -- but not all of them.

Here are the concepts you need to grasp to truly understand your rate.

Tiered rates
The specific percentage of a merchant rate is broken down into the qualified rate, the mid-qualified rate and the non-qualified rate.

The qualified rate should be familiar. It's another name for the discount rate and is often referred to as the "qualified discount rate." It's the best rate, and the one most often quoted to merchants.

The mid-qualified and non-qualified rates -- known as the "higher rate" categories -- can be deceptive at first, because they seem lower than the discount rate. However, merchants should remember that these higher rate percentages are added to the discount rate, sometimes doubling that percentage.

For example, say a merchant has a discount rate of 1.70 percent and a mid-qualified rate of 1 percent. If a transaction falls under the mid-qualified category, the merchant would pay 2.7 percent.

So what bumps a transaction out of the low qualified rate? It often boils down to the type of credit card the customer uses, according to The Transaction Group. Typically, a standard personal credit card will fall under the discount rate, while a personal rewards card will generally fall into the mid-qualified category. Government credit cards, international cards and business cards, meanwhile, will cause the non-qualified rate (the highest rate) to be applied to the transaction.

Another thing that can bump a transaction into a higher rate category is how quickly you batch it. "Batching" involves sending all your transactions of the day to your acquiring bank. In most cases, you'll need to do so within 24 hours of the transaction for the discount rate to apply, according to Intuit. If you wait too long, you're increasing the risk of disputes, so any delayed transactions will be bumped up to a higher rate tier.

Keep in mind that these rules of thumb will not always apply. Merchant account providers set their own rates -- and determine which cards fall into which category.

Types of transactions
The type of transaction -- whether the transaction was swiped or keyed, for example, can also affect your rate. Generally, swiped transactions are assigned lower rates than keyed-in ones. Why? Because keyed transactions tend to be riskier, according to The Transaction Group.

A keyed transaction occurs when the merchant manually types the credit card numbers into the keypad of a computer. The term also applies to credit card payments taken over the phone or via an online payment gateway. Keyed transactions are considered riskier because they generally don't require the merchant to have the actual card in hand to complete the transaction.

A swiped transaction, on the other hand, justifies a lower rate because it typically means:

• A reduction in fraud, because the merchant holds the physical card in hand and can therefore verify the cardholder's signature and compare the name on the card to the name on the customer's ID.
• A decrease in chargebacks and disputed sales. Swiped transactions generally indicate that a transaction was processed in-store. That means that the customer has probably seen and felt the product, rather than purchasing it based on a picture or product description on a website or in a catalog.

Keep in mind: even if you are a brick-and-mortar merchant who swipes all cards, some transactions might still get bumped into the keyed rate -- if your card scanner cannot properly read the magnetic stripe on a customer's card, for example, requiring the cashier to key in the transaction.

Merchant rate agreements
Choosing the right merchant services provider depends on many factors. Before you make any decisions, take the time to ask questions, insist on full disclosure about all applicable rates and related considerations, and consult an expert if you need additional assistance.

Published: December 7,2023