Merchant Account Rates 101

Why is industry pricing so complex?

In today’s electronic age, businesses in all types of industries recognize the importance of giving customers the option of paying by credit card.  If you have compared offers or taken a good look at your account statement, you probably noticed that pricing for this service can be rather complicated.  Qualification levels, downgrades, surcharges, keyed versus swiped – why the complexity?  At the center of the pricing issue is what is known as interchange.


Developed by the MasterCard and Visa card associations, interchange is the wholesale pricing established for all types of transactions.  It accounts for the vast majority of the rate you are paying.  The broad range of categories depends on numerous factors including what type of card it is, how the transaction is entered into the system and in some cases the industry.  Interchange has evolved over time and currently consists of approximately 50 separate categories, each with its own specific qualification criteria and rate.  In most cases, interchange includes a basic percentage rate and a per transaction fee.  Every time you process a credit card payment, it “qualifies” for one of these interchange categories.  Two key reasons for the proliferation of interchange categories are the risk of fraud and data requirements.


Fraud occurs both on the card issuing side with stolen or fake cards, and on the processing side when an unscrupulous merchant knowingly uses their account to run fraudulent transactions.  The risk of fraud and chargebacks (disputed sales) is far greater if the card is not present when the transaction takes place.  This is the main reason key-entered transactions cost more than ones where the card is swiped through the terminal.

Data requirements

Corporate and government cards often require transmission of additional purchase data along with the essential transaction information for back end purchasing functions, or in some cases for compliance issues.  An address verification service allows a mail order company to transmit street address and zip code information with a key-entered sale as added confirmation that the cardholder is legitimate.  Additional interchange categories have been established to recognize these types of unique situations.

Card association pricing also includes a variety of dues and assessments that are charged to processors.  Add to that communication line charges – your terminal dials a toll-free authorization number each time you process a payment, which generates long distance charges for your processor – and all of the other normal costs of doing business.  The end result is that profit margins are very narrow for processing companies.

Many processors have attempted to simplify this maze of pricing factors into a few basic rate categories for their customers.  This is a complicated task that involves estimating what percentage of sales will generally fall into which category and what types of cards will be used the most.  While all processors have the same interchange rates as their base cost, each one is responsible for establishing pricing for customers.  With so many processing companies out there, it quickly becomes a highly competitive and complex pricing situation.

How do you compare multiple offers with so many factors to consider?  The best way is to look at the effective rate you are paying that takes into account all of the fees and charges in relation to the total volume processed.  As with any financial service, the level of service is critical.  Saving a few basis points (one basis point equals one hundredth of a percent, or 0.01%) on your rate probably is not worth spending hours on the phone every time you need help with a transaction issue.  Your best bet is to stick with an experienced, reputable company that offers a competitive rate.

You can expect the best from Merchant Financial Services!  Give us a call today!

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