Every card transaction you complete will carry a once-off fee which is a percentage of the transaction value (with some exceptions). This percentage is called the discount rate which can range between 2% and 10%, depending on how your Credit Card Processing facility is set up. It is likely to account for the majority of the fees and charges associated with your Credit Card Processing facility, so it is worthwhile keeping the discount rate at the top of your list, when considering Credit Card Processing alternatives.
Banks are required to pay fees for various aspects of every transaction they complete including the interchange fee: the fee the acquiring bank and your bank charges the issuing bank, your customer’s bank. However the bank adds a mark-up to the fees it pays which eventually adds up to the discount rate. The discount rate applied to a transaction varies and depends on the type of transaction, the amount of the transaction and your total turnover. Different discount pricing models prevail with the 3-Tier pricing model the most common, but 6-Tier pricing, interchange plus pricing and Bill Backs are also common.
3-Tier pricing is the simplest system in most cases, considering that several factors need to be accounted for when processing a transaction and the associated costs a bank faces. The three tiers are a qualified rate, a mid-qualified rate and the non-qualified rate. Which tier your transaction falls into depends on the perceived security risk involved in approving the payment.
A qualified rate is the percentage a merchant is charged if they accept a consumer credit card under optimal circumstances, defined as standard and is the lowest rate. This includes a customer paying at the point of sale, in person using a chip and PIN card with a valid PIN number. The mid-qualified rate applies when the transaction does not qualify for the lowest rate, for example when a consumer credit card is keyed into a point of sale machine instead of being swiped or verified by PIN number. If a customer pays you with a rewards card you will also be charged mid-qualified rate as you effectively fund the rewards part of the transaction.
Non-qualified transactions carry the highest discount rate. You will pay this rate if no address verification information is entered, if it is a corporate, government or international card, or if your batch-processing does not occur within the allotted time.
The nature of online Credit Card Processing means that your customers are not physically present which makes it difficult to qualify for the cheapest rate – the qualified rate. To improve the situation you should make sure you capture the CVV2 number (the security number on the back of a card), enter an order or invoice number, gather all required address verification details and also make sure your payment gateway batches are settled within 24 hours.
6-Tier pricing is an evolvement of 3-Tier pricing and the result of a law suit successfully filed by Wal-Mart. It is more complicated due to provisions for debit card transactions. Interchange plus pricing is where your bank charges you their interchange fee plus a mark-up. Bill Backs are more complicated but in summary consists of an initial rate paid at the time of the transaction plus additional charges related to individual transactions paid, which are billed in the following month in one batch.
When you’re deciding which Credit Card Processing solution is best for you, you need to consider what your transactions would look like and match it to the best payment model and service provider or bank that gives you the best rates. This can be a frustrating comparison to make so remember; it is not the only selection criteria when choosing your service provider.