Merchant discount rate and merchant account quotes

Increasing popularity of pass through merchant account pricing formats has caused confusion with a common industry term that is making it tougher to compare merchant account quotes.

If you're like most people, you compare merchant accounts by asking prospective providers for their rates and fees. Until recently this approach worked just fine. But the increasing number of providers that are offering interchange plus pricing has made this question tougher to answer. And the reason lies in how charges are determined on different pricing formats.

The term merchant discount refers to the final rate that a business pays to process credit card transactions. The greatest contributors to merchant discount are interchange, dues and assessments and the merchant service provider's markup.

Of these three major components, only the merchant service provider's markup is negotiable. In rare cases, some providers have been known to apply a small markup to assessments, but for the most part Interchange, dues and assessments will remain consistent between providers.

The two most commonly used pricing formats are tiered and interchange plus, and both formats use interchange rates to determine the final merchant discount rate. The confusion arises from how the two types of pricing are typically quoted. Providers quote tiered pricing using the merchant discount rate whereas only the markup component of merchant discount is quoted with interchange plus.

The generalization of interchange categories on a tiered pricing format into qualified, mid-qualified and non-qualified buckets makes it impossible to differentiate interchange charges from the provider's markup. Therefore, providers that utilize tiered pricing have no choice but to offer quotes based on merchant discount which includes interchange, dues and assessments and their markup. An example of a tiered quote for a retail business looks something like 1.69% plus $0.25 with greater mid and non-qualified tiers.

In contrast, the interchange plus pricing format passes interchange, dues and assessments directly to merchants. Since the provider's markup is separate from the other components of merchant discount, and remains consistent regardless of the interchange category to which a transaction qualifies, providers are able to offer quotes by disclosing only their markup. An example of an interchange plus price quote would be something like 30 basis points (0.30%) plus $0.10.

To calculate merchant discount from an interchange plus price quote, the two figures that represent the provider's markup must be added to dues and assessments and the interchange fees associated with the category to which each transaction qualifies.

By looking at the examples above it's easy to see how comparing quotes based on these two pricing models can be confusing. Until it's understood that interchange plus quotes don't include all of the other costs associated with processing, they appear artificially low when compared with tiered rates that are already based on merchant discount. The confusion over quotes between pricing models may prove beneficially since interchange plus pricing is often substantially less than tiered over the same volume.