Warning:  This article, while very informative, may make you sleepy 

The question most often posed by a merchant is, “What are your rates?”  We normally answer, “What do you want them to be?”  After that, there is a long silence.  That’s because most people don’t understand interchange and how it works.  We don’t expect anyone other than those in our industry to truly understand interchange.  And in many cases, neither do the people who work in this industry.

Some common terms used in this section are:

• Basis points.  One basis point is equivalent to 0.01% (1/100th of a percent) or 0.0001 in decimal form.
• Dues and Assessments.  Dues & Assessments fees comprise the component of Merchant Discount that goes to the Card Associations, such as Visa and MasterCard.

First, credit card issuing banks issue credit cards to consumers.  When a consumer uses a credit card to purchase a product or service, an acquiring bank, also known as a merchant bank, obtains approval from the card issuing bank at the time of the transaction.  Merchant pay “merchant discount” as a fee in order to accept credit cards as a form of payment.

In order to make the economic system work, the issuing bank, acquiring bank, Visa/MasterCard and the merchant must be paid, while the consumer gets something of value for their transaction. The infrastructure and networks are extremely complex and require great security considerations to prevent fraud and compromise.

Now to interchange, which even industry professionals do not use correctly. Visa defines interchange as, “Visa uses interchange reimbursement fees as transfer fees between financial institutions to balance and grow the payment system for the benefit of all participants. Merchants do not pay interchange reimbursement fees; merchants pay “merchant discount” to their financial institution. This is an important distinction, because merchants buy a variety of processing services from financial institutions; all of these services may be included in their merchant discount rate, which is typically a percentage rate per transaction.”

It may sound confusing, but in essence Visa uses interchange between financial institutions like banks.  Merchant pay “merchant discount” as a fee in order to accept credit cards.

An Acquiring Bank accepts payments made by a consumer for you, the merchant.

A card refund is the return of funds to the consumer, voluntarily initiated by the merchant.

A card chargeback is the return of funds to the consumer, forcibly initiated by the consumer’s issuing bank.  This is usually because the consumer did not receive the proposed products/services as promised by the merchant.  Generally speaking, chargebacks that exceed 0.5% of the total payments received are considered high risk accounts.

The acquiring bank accepts the risk that you, the merchant, will remain solvent over time and that you will be able to pay your fees and cover your charge backs and returns. It is this risk that often determines whether you can get a merchant account and your merchant discount rate.

Interchange and Merchant Discount fees can best be illustrated by a typical 4-party transaction involving the purchase of an item using a typical VISA/MasterCard type general-purpose credit card issued by a bank.  When a Cardholder purchases a $100 item from a Merchant using a typical VISA/MasterCard type credit card, the Merchant passes on the $100 charge to its Merchant/Acquiring Bank in exchange for $98.00, pursuant to the Merchant’s contract with the Merchant/Acquiring Bank.  The Merchant/Acquiring Bank submits the $100 charge into the VISA/MasterCard system and receives $98.50 from the customer’s credit card Issuing Bank (less a small processing VISA/MasterCard fee) in accordance with the VISA/MasterCard rules.  The Issuing Bank eventually receives $100 from the Cardholder when the credit card charge is paid.  Under this scenario, the Merchant/Acquiring Bank keeps a net “Merchant Discount” fee of $.50 ($98.50 - $98.00), while the Issuing Bank receives an “Interchange” fee of $1.50 ($100 - $98.50).  These fees combined are sometimes referred to as a “Merchant Discount” fee.

While your rates many not be the same as in this example, the ultimate effect is the same.

When you are in a three or four tier pricing system, you are given a Qualified, Mid-Qualified and Non-Qualified merchant discount rate.  There are some very good tiered systems out there.  The key is understanding how your merchant services provider put the tiers together!  There are approximately 250 discount rates on the Visa/MasterCard interchange table.  Which of these 250 is Qualified, Mid-Qualified and Non-Qualified?  Generally, that’s information they don’t share with you.

This is why when you are quoted a ridiculously low qualified rate of 1.03%, it is because just one card of the 250 represents your Qualified tier and the other 249 are dropped into the Mid and Non-Qualified categories.  If you look at the Visa and MasterCard interchange tables, you quickly realize if a merchant services company provided them with a true Qualified tier of 1.03%, the bank would be paying the merchant to process!

If it sounds too good to be true, then you’re setting yourself up for disappointment.

Also, when you are in a tiered system, an unscrupulous company can jack up your rates anytime they want.  They can move the rates in the tiered structure for their convenience.  This doesn’t normally happen with Interchange Pricing.  That’s because your true cost is defined in your contract.

Let’s say that your current agreement is 20 basis points above costs.  Here is what some example charges you would expect to pay in merchant discount.

So, with merchant discount pricing based on interchange, your costs in this example remain the same . . . 20 basis points.  Usually, two times per year, in April and October, Visa and MasterCard may add or modify the rates.  

While interchange pricing was set aside for the largest big box retail establishments, this pricing is now available to you! If you have a low risk business, we can provide you with very affordable and competitive pricing.  Contact us now at (866) 258-7095 or fill in the Contact Us form.