For every card transaction your merchant account bank approves, it will charge you a few percentage points in fees. In the case of credit cards this will usually be a percentage of the transaction amount: the transaction amount less a percentage gets deposited in your merchant account.
The percentage of the transaction fee you pay to your merchant account bank is called the discount rate. Discount rates can be calculated in several ways. The most common is called three tier pricing, which varies the percentage you pay depending on the risk of the transaction as well as other factors. Interbank plus varies the percentage you pay in accordance with the fees your bank pays on your behalf plus a margin and other fees, while Bill Backs splits the fee you pay into two components: one part you pay at the same time as the transaction and the other part is added to other charges on your monthly bill.
Three tier pricing is slowly being replaced by six tier pricing. Six tier pricing has been introduced as a result of the lawsuit filed by Wal-Mart and by Visa and MasterCard’s desire to compete against debit card companies that operate outside of their network. Debit card companies charge fees well below the fees that Visa and MasterCard charge.
It is worth understanding what three tier pricing is about if you want to understand how six tier pricing evolved. The word tiers indicate that there are three pricing levels and which level you are charged by for a successful transaction depends on the characteristics of the transaction.
The cheapest rate is called a qualified rate. Only some of the credit card transactions that are put through Credit Card Processing systems actually qualify for the cheapest rate. Qualified rate transaction occurs under ideal circumstances where the risk of fraud is minimal so, say, when a customer pays you in person with a card you can physically read with a credit card terminal.
On the other hand if you don’t have a person’s card with you but enter card details into the credit card terminal manually or if you use an online Credit Card Processing facility you’ll be charged a semi-qualified rate which is the rate you pay for a qualified transaction plus one or one and a half percentage points. You will also pay a semi-qualified rate if your customer uses a card with benefits or rewards.
Transactions associated with the highest risk of fraud fall under the non-qualified category so these transactions are by far the most expensive to you, because your bank adds what is effectively a risk premium.
Six tier pricing goes further by splitting each of the three tiers up into debit card transactions and credit card transactions. The reason for this is that debit card transactions are cheaper. Because debit card transactions involve an immediate debit against the cardholder’s account (and will only be approved if the account has funds available) there is no risk of a transaction being declined at a later point, which in turn means the risk premium is lower. Hence extra tiers were added to facilitate the lower fees of debit cards. In a six tier Credit Card Processing system it also matters whether the debit card has been verified using a PIN or a signature.
It is best to invest a little bit of time to find out which charging structure will be the best fit for your needs; different merchant account providers charge different discount rates but you do have a choice.