If you want to accept credit cards as a form of payment for your business, you need a merchant account to process them. However, many business owners are not ready for the associated fees, especially those that come with high-risk industries. Merchant account providers charge different rates for various types of credit card transactions. Most credit card processing companies place transactions into three categories: qualified, mid-qualified, and nonqualified. Understanding this three-tier approach to transaction pricing can help you better understand costs associated with a high-risk merchant account.
Image via Flickr by JeepersMedia
Merchant account providers must sort through more than 125 different interchange categories, and that number is steadily growing. However, instead of creating a different fee schedule for each transaction type, the three-tier model classifies costs into categories.
Mid-qualified and nonqualified transactions have much higher processing fees than qualified transactions because these kinds of operations take more time and effort to process. You should find out about these rates before you sign up for a merchant account; fee rates are not always easy to find, and they vary based on different criteria. Here’s a look at these three categories.
Most transactions processed through your merchant account are eligible transactions. These operations include regular activities such as paying via credit card at a brick-and-mortar store or using a payment gateway at an online store where a credit card is not physically present during checkout. Most major consumer credit cards are qualified cards. Bank-issued debit cards that require a signature also fit into the eligible payment processing category. However, this classification is not set in stone, and businesses in high-risk industries often get upgraded to mid-qualified and nonqualified status automatically.
When you sign up for a merchant account, the rate quoted to you when you ask about pricing usually refers to qualified transactions only. This rate, known as the “discount rate,” can range anywhere from 2 to 4 percent. Qualified purchases are the least expensive to process since the risks are minimal to credit card companies and your fees for eligible transactions are lower than mid-qualified and nonqualified transactions.
When an operation does not fully meet the standards of a qualified transaction, that transaction appears in the “mid-qualified” category. For instance, many rewards cards, as well as cards with missing or incomplete information, are mid-qualified cards. These types of transactions are riskier for the credit card processor and may cost the merchant more money.
Another example of a mid-qualified transaction occurs when a customer’s credit card number gets entered into the credit card terminal instead of being swiped. This manual entry adds an extra step to the typical credit card processing procedures, which may translate to a higher fee rate for you. Business owners who don’t batch transactions every 24 hours may also be subject to a higher fee schedule.
Nonqualified transactions come with the highest fees for business owners. While these types of transactions do not necessarily ring a death knell for your business, you should be ready for high rates. These types of operations involve cards issued by state and federal governments and credit cards issued outside the U.S. If your business is in a riskier industry, then you might have a high-risk merchant account and be subject to many nonqualified transactions.
Additionally, when an operation has complications, that transaction often gets upgraded to a nonqualified transaction with a higher merchant fee. For example, if a transaction has any missing or incomplete information, such as a billing address that does not match the address on the customer’s credit card, the merchant assesses fees to compensate for the time needed to sort out the discrepancies. Another common situation that results in nonqualified transactions occurs when merchants don’t batch out operations within the typical 48-hour timeframe.
Fees vary from one retailer to another, so you must carefully consider your business needs. For example, if you deal with many international customers, choose a provider with low nonqualified rates. However, if you have a local business that does not experience much tourist activity, pick a vendor with the lowest qualified transaction price.
Do your research and make sure you understand how a merchant account provider handles the three pricing tiers. Remember, these pricing levels can affect the fees you pay.