A discount rate is composed of a number of dues, fees, network charges, assessments and mark-ups that merchants must pay for accepting credit and debit cards. Every bank or ISO/MSP has real costs on top of the wholesale interchange fees. They can make a profit by adding a mark-up on all the fees they have to pay. There are price models that banks and ISOs/MSPs can use to bill merchants for services rendered.
Popular Price Models
- 3-Tier Pricing – This is the simplest system and, so far, the most popular pricing method that merchants need to understand. In this price model the merchant account provider groups transactions into three groups. Each group is assigned a rate based on the criteria established for each group or tier. One disadvantage of this price model is that it prohibits any direct comparison from a Tier 1 of one provider to a Tier 1 of another provider. The rates per tier are as follows:
- First Tier – Qualified Rate – A qualified rate is the percentage rate that will be charged to the merchant when they accept and process a regular consumer credit card. This is the lowest rate a merchant will be charged when accepting a credit card.
- Second Tier – Mid-Qualified Rate – This is the percentage rate a merchant will be charged once he accepts a credit card that does not qualify for qualified rate. This happens when a consumer card is keyed into a credit card terminal or when a special kind of card is used, such as reward cards or business cards.
- Third Tier – Non-Qualified Rate – This is the highest rate charged to the merchant each time they accept a credit card. This happens when a consumer credit card is keyed into a credit card terminal and no address verification is performed. Or it could happen when a special kind of credit card is used like a business card. Lastly, it could also happen when a merchant does not settle his daily batch within a given time frame.
- 6-Tier Pricing – Some providers pass on to merchants the lower cost of debit cards. On top of the three tiers they have added two classifications that can be processed with a PIN or without a PIN.
- Interchange Plus Pricing – There are providers who offer merchant account serviced with prices based on “interchange plus.” A discount rate is created on this type of pricing by adding interchange rates plus an authorization and percentage fees.
