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An Introduction To Common Credit Card Processing Fees

May 29, 2008
Many merchants are stunned by the number of different fees that are associated with processing credit cards. Some of the fees are assessed by the bank or ISO/MSP that provides the merchant with a merchant account. Other fees are forwarded directly to the credit card's issuing bank. Many of these fees can vary wildly depending upon the type of transaction conducted, the type of credit card used and the circumstances surrounding a purchase. In this article, you'll discover the details that govern interchange fees, discount rates and related charges that you can expect when processing credit cards.

Interchange Fees

Interchange fees are charged by a credit card's issuing bank. Visa and Mastercard set the rate schedule for these fees and they can be different for any given set of conditions. Here's how interchange fees are processed for each transaction.

When a customer purchases an item (or service) with her credit card, the merchant's acquiring bank collects the card information and forwards it to the credit card's issuing bank. If the transaction is approved, the issuing bank forwards the amount requested less the interchange fee to the acquiring bank. The merchant's acquiring bank forwards the amount to the merchant less the interchange fee (withholding another fee for itself). Of all the fees associated with processing credit cards, interchange fees routinely account for more than 70%.

Discount Rates

There are a variety of different fees and charges that comprise the discount rates calculated for credit card transactions. Typically, they're based upon either "padding" from the provider of the merchant account (either the bank or the ISO/MSP) or an assessment of risk assumed based upon the type of transaction being processed. Discount rates are normally divided into 3 different levels: qualified, mid-qualified and non-qualified rates. Here's a brief explanation of each...

Qualified Discount Rates

Qualified rates reflect the lowest rate a merchant will be charged to process a credit card transaction. The transaction must be consistent with how the merchant account provider defines an approved process. The qualified rate is usually reserved for transactions that carry the lowest perceived level of risk for the provider. Therefore, transactions eligible for the rate are usually limited to those in which the credit card is swiped through a terminal.

Mid-Qualified Discount Rates

These rates are higher than qualified rates. They're often reserved for transactions in which a credit card number is keyed into a terminal rather than swiped. Since a number that is keyed in implies that a credit card is not present, this carries more potential risk for the provider. As a result, the provider applies higher mid-qualified rates for such transactions to compensate for the extra risk.

Non-Qualified Discount Rates

Non-qualified rates reflect a high level of perceived risk. Credit card transactions that are assigned these higher rates are usually those for which a card number has been keyed into a terminal and the address has not been verified. This rate can also be assigned for other transactions such as those which aren't settled within 24 hours, "forced" authorization codes (those that are keyed in manually) and business cards.

Interchange Plus Pricing And Bill Backs

These types of fee structures are not commonly used. While discount rates usually fall into one of the 3 categories described above, interchange plus pricing and bill backs are marketed as a way to smooth the volatility of discount rates. That is, rather than merchants having to pay a certain rate of some transactions while being charged different rates on others, this fee structure simply assesses 1 markup in addition to the interchange rate for all transactions, regardless of the circumstances.

Fees, Fees And More Fees

Processing credit cards is a critical piece of every business. But, it's important to understand the types of fees you'll be paying for processing each transaction. Interchange fees and discount rates are the most common, ongoing charges that every merchant will experience. Many business owners build these fees into their own price structure, effectively passing them along to customers. The key is to plan ahead, knowing what to expect from whatever solution you use to process credit cards.
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