How Discount Rates for Credit Cards are Determined

Most credit card processing accounts are quoted to prospective merchant account clients by the lowest rate. This is called the qualified discount rate. However, many people are not aware that every transaction will not be processed at the quoted rate.

Instead, there are three categories into which a transaction can fall. These are the qualified discount rate, the mid-qualified discount rate, and the non-qualified discount rate. These rates are determined by the amount of risk that the merchant account provider feels they are accepting with any transaction.

To figure out how to avoid having the rate you pay “downgraded” (which means charged at a more expensive rate than the quoted qualified rate), it's important to know how these rates work, and what it takes to qualify for each category.

First, you need to distinguish between swiped and keyed transactions.

What is a Swiped Transaction?

A transaction is known as ‘swiped’ when it is passed through a terminal or card reader, so that the cardholder’s info is captured electronically from the magnetic stripe which is located on the reverse side of the card.

Many retail outlets, gas stations and restaurants swipe cards. Credit card processing companies trust swiped cards more than cards which are manually keyed in. This is because they feel that swiping eliminates the chance of human error in collecting the card data. The possibility of a disputed transaction or a chargeback is much lower in swiped transactions. Because of this, you'll be charged a lower rate if you swipe cards, rather than having them entered.

With a swiped transaction, you’ll pay the low qualified rate (usually 1.68% to 1.90%) only if all of the following happen: a standard consumer credit card is used in the transaction; the card is correctly swiped, with all appropriate data being transmitted; and the transaction is settled within twenty-four hours.

If you don't qualify for the above rate, you may be downgraded to the mid-qualified rate (an additional charge of 1.00% to 1.50%). This happens when the card information is manually keyed with all AVS information entered, or a rewards card is used.

However, if any of the following happen, you'll be downgraded to non-qualified (an additional charge of 1.50% to 2.00%): the card is manually entered or “keyed” without the billing address (AVS); the card type is government, international or business; the authorization code is manually keyed; or the transaction is not batched/settled within 24 hours.

What is a Keyed Transaction?

A transaction is “keyed” when the card information is manually entered via a terminal’s keypad, through point-of-sale software, by telephone, or via an online payment gateway (over the internet, from a website). Since most keyed transactions are processed without the credit card actually being presented to the merchant, there is more risk associated and higher discount rates are charged.

Keyed transactions have two types of rates. The qualified rate (usually 2.20% to 2.45%) is used where all of the following are present: a standard personal credit card is used (not a corporate, government, international, or rewards card); the billing address is provided for address verification (AVS); and the transaction is settled or batched within twenty-four hours. Otherwise the non-qualified discount rate (an additional 1.50% to 2.00%) is applied.

If you are already processing but haven't reviewed your current statement for your merchant account recently, consider taking it to a competitor of your account provider. They'll be able to analyze it and let you know what rates you are paying. You may be in for a surprise. They should also be able to provide a competitive quote that could reduce your costs significantly.

Article Source: Main Articles

Michael Rupkalvis operates The Transaction Group website. The web site provides information on merchant accounts and provides merchants with cheap internet merchant account discount rates, along with excellent customer service.

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