Merchant account providers have a couple of ways whereby they calculate the fee you pay when you charge a card. This is usually a percentage fee, except in the case of debit cards, where there may be a fixed per-transaction fee. When you process a transaction your bank pays you the transaction amount less the percentage fee it charges, so you may receive, say, only $97.50 for a $100 transaction.
By far the most common method for calculating fees is three tier pricing. It is called three tier because the structure sets three different fee levels depending on the circumstances under which the transaction takes place. The fee you pay increases the higher the perceived risk of the transaction is, and also increases if your customer belongs to a rewards program.
The cheapest fee you could pay is called a qualified rate. This rate is applied when the card transaction takes place under ideal circumstances in other words when the cardholder presents the actual card to you in person ñ assuming the customer knows the PIN number or is able to sign an authentic signature.
A mid qualified transaction either has a higher perceived risk of fraud or has some sort of rewards system connected to it. If your customer belongs to a credit card rewards program, you will effectively subsidize the rewards program by paying more for the transaction. This also happens if, say, you don’t have the card in front of you, but key the details into the machine: in the eyes of the banking system the risk that it is a fraudulent transaction is relatively higher.
Non-qualified transactions are best avoided as you can easily pay an additional one to two percent of the transaction value in fees. You will probably pay this rate if it is a corporate or government card or if no address verification details are collected with the transaction.
Online retailers find it difficult to process transactions that qualify for the cheapest rate mainly because the retailer does not actually see the card. To avoid paying non-qualified rates you should try to take down and verify address details and you should always capture the CVV2 number.
A six tier regime is slowly being implemented by the industry ñ as if a three tier structure is not complicated enough to deal with. However retailers have found that the three tier structure currently maintained by merchant account providers in conjunction with Visa and MasterCard is not charging fair prices. The six tier regime is designed to be a slightly more granular and possibly fairer fee structure and was initiated after a successful law suit against major card providers was won by Wal-Mart.
If you are setting up a shop online you should note that three tier pricing is, even though it is the most common method, not the only pricing structure you can choose from. Some providers of merchant accounts will charge you by interchange plus or Bill Backs, either of which could possibly be more cost effective for you, depending on your needs.