The Discount Rate and Tiered Pricing

The discount rate. 

A discount rate is a percentage of the total transaction amount (the sale) which the processor charges the merchant to process the credit card transaction.

The most popular merchant pricing model used today, is tiered pricing.  In this model - the merchant is typically given three rates - a qualified rate (the best rate possible for any transaction), the mid-qualified rate and the non-qualified rate. 

Your qualified discount rate is the rate your processor or provider grabbed your attention with.  This is the rate that blasts out at you when you google for merchant accounts.   It's flaunted in headlines like  "best price" guarantee and  guaranteed "lowest rates"  - or "rates as low as"...

These qualified discounts rates are often, actually pretty darn good rates (often, not always).  Unfortunately statistics show, as does your processing statement, it is not the rate you process the majority of your transactions at.  (reread that last statement please).  Some might call it a teaser rate - but we won't go that far.  You know, the processor has to make money somewhere, and if you jumped on the FREE merchant account with the FREE terminal and the lowest rate in the industry guaranteed - you might want to take note.

The larger issue in this pricing model - is the "other rates" - the mid and non-qualified rates, which are higher.   When a transaction is processed at one of these higher rates, it is considered "downgraded".

These rates are important because as we noted, today the majority of transactions are indeed downgraded.  They could be keyed transactions, reward cards, commercial cards, etc - all of which do not process at the "qualified discount rate".  Mid and non-qualified rates in fact - can be set to process at 10, 15, and 20 TIMES higher than the actual increase in the wholesale cost to the processor.  This can be a huge area of profit for the service providers.  This makes that great qualified discount rate sort of a moot point.   

Transactions processed at the qualified discount rate typically are swiped standard (non-rewards) credit and debit cards that the merchant batches out within 24 hrs. of the transaction. 

All three rates should be listed on your contract.  Sometimes mid to non-qualified rates are listed as a range because it's impossible for even your merchant account provider to know how the transaction will process exactly.

There is another, lesser provided pricing method known as interchange cost plus that XBS recommends because mid and non-qualified transactions do not process at such wildly increased costs.  In fact, the only cost increase passed along to the merchant is the true and actual wholesale cost increase - substantially lower.

It makes for an awfully tough presentation though when merchants have been trained to focus on the qualified discount rate alone - and we'll touch upon it thoroughly in future blogs.

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