Merchant Account Discount Rates

You just obtained a merchant account at a quoted discount rate of 1.79% for your store. But, lo and behold, when your account statement for your first month’s processing arrived, you discovered to your dismay that many of your customers’ transactions were processed at a much higher rate than the one quoted to you. Not a pleasant surprise.


You are not alone. In fact, we bet the majority of merchants don’t really understand how merchant account discount rates are applied and calculated.


So let’s see if we can shed at least a little light on what’s happening here.


A Discount Rate is a charge that is levied on each transaction you process through your merchant account and is calculated as a percentage of that transaction’s dollar amount.


The Discount Rate that most applicants are quoted when searching for a credit card processing solution is what is known as the Qualified Rate. Your processing company determines the Qualified Rate by initially looking at the InterBank Exchange rate that VISA and MasterCard levy – this InterBank Exchange fee charged by the credit card companies is the same for all banks and processing companies. The banks and processors then add on a further percentage to that fee (this is part of the profit they make) to determine the Qualified Rate they charge to their merchants.


In the case of a retailer, the current Qualified Rate is in the 1.70% to 1.85% range – and for phone and mail orders, as well as internet processing, the range is commonly 2.25% to 2.49%. The latter range is higher because of the fact that in those types of transactions, the merchant does not have the customer’s physical credit card present – so the risk of fraud is greater than it is for retail ‘card present’ sales.


So far so good – most merchants understand things to this point. But there are certain risk factors that can cause your transaction to be levied with an additional percentage charge. These surcharges are extracted on ‘Mid Qualified’ and ‘Non Qualified’ transactions. The surcharge for Mid Qualified transactions is usually in the .75% to 1.25% range and for Non Qualified is generally 1.50% to 2.00%. Remember, these are charges on top of the standard Qualified Rate.


So what are the most common circumstances when either Mid or Non Qualified surcharges may apply?

  • Mid Qualified: (a) for phone and mail order as well as internet transactions, where there is no AVS (address verification) match; and (b) where a retail merchant manually keys-in the transaction because the credit card is present but cannot be swiped, or keys in an order where the card is not present (e.g. a phone order).
  • Non Qualified: (a) for phone and mail order and internet sales, where the transaction is keyed-in but is not part of a daily batch out of that day’s transactions. (Note: where a person keys in his information on a website, the large majority of gateways do the ‘batching’ automatically. Therefore for internet processing, this is not generally a concern); (b) where a retail merchant doesn’t batch out daily; or (c) where the transaction is made utilizing a corporate, a non-U.S., a business or a government credit card.

So, if many of your customers reside outside of the United States, or use corporate, government or business cards, you can do yourself a big favor by negotiating as low as possible Non Qualified Discount Rate.


Unfortunately, there are another fifty or so other factors that can affect the discount rate you’ll be charged(no-one said it would be easy to understand all this!). These include:

  • high risk merchants can expect higher discount rates across the board
  • Visa Signature Reward Cards and MasterCard World Cards have surcharges applied
  • if the customer’s order is not shipped within 24 hours, a surcharge may be levied

The bottom line? Prior to signing on for your merchant account make sure that you carefully read the provider’s complete array of criteria for evaluating what discount rate will be applied to a particular sale. And speak with your agent if you have any questions.


For a discussion of the other fees (besides the discount rate) that can be levied regarding your merchant account, see our discussion of Merchant Account Fees.