Why The Lowest Merchant Account Rate Isn't Always The Cheapest
Posted by Jeff Shavitz on Tue, Sep 01, 2009 @ 08:36 AM
When shopping for a merchant account, the most diligent business people will do their homework. They'll get multiple processing quotes from different providers and negotiate the lowest rates to get what seems to be the least expensive processing solution. Here's the kicker - merchant accounts with very low discount rates are not always less expensive than accounts with higher rates. In fact, more often than not, they're substantially more expensive. Here's why:
The merchant discount rate that businesses pay to process credit cards is based on VISA and MasterCard's interchange fees. Basically, interchange rates are the wholesale processing rates paid to the issuing bank of a customer's credit card. If your merchant account is set-up in a tiered rate structure (the most common type of set-up for a merchant account), your merchant account provider will take the hundreds of VISA and MasterCard interchange fees and group them into three categories. The first rate category is called the qualified rate, and the second and third categories (called the mid-qualified and non-qualified rates) represent surcharges that are applied to the qualified rate. For example, a typical three-tiered merchant account pricing schedule mak look like this:
Qualified rate: 1.79%
Mid-Qualified Surcharge: 0.25%
Non-Qualified Surcharge: 0.60%
Simply put, merchant account providers have the ability to control which fee category interchange rates will be charged to - meaning they can conceivably offer a merchant account quote with a qualified discount rate of 1.50% and still make a profit by routing the majority of the charges to the mid and non-qualified rate categories. Rates as low as this are very appealing at first, but once it becomes apparerent how interchange fees are being routed, they're essentially worthless because they are virtually unattainable. This practice allows shifty merchant account providers to win business over honest providers that are actually offering a better merchant account.
In order to find the best merchant account rate, ask your provider how they will be routing interchange fees, as this can be more important than the rates and fees that you're quoted - again, a low rate is worthless if very few of your transactions will every qualify for it.
If you're already processing credit cards, now is a good time to call your provider and ask them to explain how they are routing interchange fees on your account - you may be surprised by the answer.
If you're in the market for a new merchant account, make sure to ask each provider how they'll be qualifying the different interchange fees. Don't get caught up in selecting the quote with the lowest rate, make sure to pick the quote with the lowest rate that will apply to the majority of your transactions.
Courtesy of: MerchantCouncil.org