It Pays To Understand Credit Card Discount Rates

November 7, 2005

By Anna Solomon
President, Fast TransAct

Navigating the complex world of processing fees is not easy for anyone including online merchants.

However, if merchants pay keen attention to a handful of key factors and put measures in place to prevent them from happening, they can save thousands of dollars in annual processing fees.

Visa and MasterCard have come up with an interchange category often referred to as “discount rates” for each standard SIC code or merchant category code.

This means card issuers assign merchants to specific categories reflecting their processing environments. There is discount rate set for each merchant that assumes compliance with prescribed procedures, and failure to do so, like neglecting to obtain electronic authorization, can results in higher fees.

Usually, discount rates are divided into a percentage rate plus a transaction fee. There are three general interchange categories - Qualified, Mid-Qualified and Non-Qualified - with multiple sub-categories under each one.

Qualified transactions are swiped, magnetically -read transactions that occur face-to-face with a customer. These transactions are the lowest risk and so they are given the lowest pricing. The only other condition for the transaction to qualify at this interchange level is that the transactions are batched out and processed the same evening of the day they were run.

Mid-Qualified transactions are most often keyed in. It requires AVS data (street number and zip code of the cardholder) to be passed through to the processor. Since April 1, Visa’s new Signature Cards under the Rewards 1 program (usually airline and gas cards) will qualify at the mid-level, even though the card is swiped. Most often, merchants are surcharged between .5 percent and .9 percent higher rates than the qualified, swiped transactions.

Non-Qualified transactions are the highest risk transactions and consequently are the most expensive transactions, which can typically range between 1.25 percent and 2 percent higher than qualified rates.

There are several factors that will cause a transaction to be downgraded to Non-Qualified; keyed transactions that do not include AVS data; improper SIC code passed to processor; missing required qualification data; if the transaction involves a corporate credit card (only MasterCard swipes at the lowest pricing rate); Rewards 2 Signature Cards, and if batch of transaction is processed 36 hours of the sale/capture date.

Strict adherence to the policies and procedures in each interchange category can result in a significant savings for knowledgeable merchants.