What is a Merchant Account?
If you’re in business today, unless you have an exclusive market, you have no choice but to set up a merchant account. A merchant account is an account set up with a bank or credit card processor to give you the ability to accept credit card transactions, such as Visa, MasterCard, Discover, American Express, and also less common cards including Wright Express, Voyager, JCB, etc.
The most common merchant account types are:
Retail Merchant Account
This is the type of merchant account you should have when you are processing credit cards primarily in a face-to-face environment.
MOTO Merchant Account
MOTO is an acronym for Mail Order Telephone Order. This is the type of merchant account you should have when you are processing credit cards primarily by mail or over the phone.
Internet Merchant Account
This is the type of merchant account you should have when you are processing credit cards primarily online.
E-Commerce Merchant Account
The same as Internet Merchant Account
Debit Merchant Account
This is the type of merchant account you should have when you are processing credit cards primarily through debit card transactions (very common in delis, convenience stores, dry cleaners, etc.). Debit merchant accounts are also used frequently by merchant account providers to make your rate appear to be much less than it really is. See “Billing Scams” for more information.
Note: In all of the above merchant account types, you will notice that they are based on how a merchant processes the majority of its credit card transactions, but not all! The credit card networks have different rules for different merchant account types. If a merchant is set up with the wrong merchant account, it can cause excessive downgrades, which leads to higher processing costs. The banks benefit from this error. It is up to each merchant to look at their contract and have their bank or processor put in writing (on company letterhead) the type of merchant account they have been set-up to use.
What is a Bundled Merchant Account
A credit card transaction is primarily made up of three key components:
- Interchange – This part of the fee goes back to the card issuing bank, it cannot be negotiated but can be managed, i.e., for a card present merchant the base interchange is 1.54% + $0.10 for Visa and 1.58% + $0.10 for MasterCard.
- Dues and Assessments – This part of the fee is kept by the networks (Visa and MasterCard) and is 0.11%.
- Discount Rate- This is the merchant account provider’s (bank/processor/ISO) profit.
As you can see, 1.54% (interchange) + 0.11% (dues) + ____ = the bundled merchant account rate.
On your statement, you may see the term Discount Rate with a number like 2.02%. To figure out what your merchant account provider is making from you, simply subtract the 1.54% + 0.11%, and you have 0.37%, the Discount Rate. The average merchant should not be paying more than 0.07% – 0.10% for their Discount Rate.
In this example, the merchant would be getting surcharged 0.27%-0.30%.
To keep merchants from spotting the high Discount Rate, they bundle all the rates together. For other deceptive billing tricks see “The Top 6 Indicators You’re Being Cheated”.
What is a Tiered/Bucket Merchant Account?
A tiered merchant account is when the merchant account provider uses terms like Mid-Qualified, Non-Qualified, etc. 
The merchant account provider takes large groups of interchange categories and lumps them together into a few generic named tiers/buckets. By keeping the terms generic and not specific, a merchant can’t compare rates or validate fees.
Here is an example of what a grocery bill would look like if stores were given the same billing freedom as merchant account providers. Hundreds of items would get condensed to four line items with no pricing details. Imagine not knowing what you paid for a gallon of milk; you just knew it was part of the $257.07 they took out of your account. Luckily, all other industries have laws and regulations that prohibit this type of billing.
What is a Numeric Merchant Account?
The same as a bucket merchant account except instead of using generic words, merchant account providers use generic codes i.e., 1201,1504,1308 etc., and provide a master key of what the numbers represent. And like a bucket merchant account, many interchange transaction categories are lumped together and given one price as a group making it impossible to calculate exact overcharges.
What is a Merchant Account Discount Rate?
This is the processor’s mark up or profit. It should be their only source of profit; however, most processors will use several different types of deceptive billing to add extra profit. For a better understanding, see“The Top 6 Indicators You’re Being Cheated“ as well as “The Anatomy of Merchant Account Fees” for a better understanding of how this works.
What is a Base Rate?
Commonly referred to as “My Rate” or “Contract Rate” and is bundled together with other fees, such as Interchange, Dues & Assessments, etc. For example, you have a “Base Rate” of 1.91% and you are a Card Present merchant, which means your Visa Interchange Category Rate would be 1.54% + Dues and Assessments 0.11% + the processor’s profit “Discount Rate” (0.26% in this example). Take the 1.54% + 0.11 + 0.26% and bundle them all together and you get 1.91% which is your “Base Rate.” The reason it is called a Base Rate is because only transactions that match the Interchange category at which it was set (Card Present) will get that rate. All other transactions will clear at a different rate, which is referred to as a downgrade.
What is a Merchant Account Gateway?
A merchant gateway is nothing more than a PC or web-based terminal. Consumer cards clear at the lowest rate when swiped on a dial terminal, aka the little black box. Commercial cards clear at their lowest rate when keyed in to a gateway (the web version of the little black box often referred to as a Virtual Terminal).
What is a Downgrade?
Any transaction that did not clear at the Base Rate (i.e. your base contract rate as a Retail Merchant of 1.54%) is based on a non-rewards transaction consumer card swiped. You key that same transaction, and it receives a 0.26% Downgrade surcharge. The issue is that a merchant account provider will surcharge on top of the surcharge sometimes as much as 1% or more, taking the rate to 2.54% versus 1.80%. They can do this by using deceptive billing such as Enhanced Billing, Padding, etc. See “The Top 6 Indicators You’re Being Cheated” for more details on how they use Downgrades to play the game.
What are Merchant Account “Bad” Words?
Mid-Qualified, Non-Qualified, or Generic Codes such as 1205, 1608, 1785 are all signs of Tiered/Bucket Billing ; Electronic, Standard, EIRF, Data I, Data II are just a few of the words you will see if your transactions could be clearing at a better rate.
Hidden Merchant Fees
- The easiest and most common way for a merchant account provider to hide fees is to merely remove the transaction volume. By removing the transaction volume, they can charge any rate they want to on the downgrade, making the base rate (which you can see) irrelevant. If your base rate (which you can see) is 1.79% and your downgrade rate (which you cannot see) is 4%, then you have a bad deal. This is much more common than anyone realizes.
- Enhanced Billing is very similar in the sense that it uses a low base rate to deceive the merchant into thinking they have a good deal, and then charging anything they want on the downgrades. The difference is that they show the numbers, making it possible to calculate rates. However, this is only useful if you have a working knowledge of interchange and its pricing.
- Blending or Bundling of fees or rates is used to keep the merchant account provider from disclosing their true cost. It’s very common for merchant account providers to lump Interchange, Dues & Assessments and their Discount Rate all together. See Anatomy of Merchant Account Fees for a better understanding of what makes up transaction fees and how they are broken down. Most merchants make it easy for merchant account providers to take advantage of them by wanting to see fewer fees. It goes against what we think, but the more fees you see on your statement, the better.
- Miscellaneous Added On Fees such as Watts, AVS, PCI, Annual, Statement, Maintenance, Support, Membership, Auth, Transaction, Does Not Qualify and the list goes on and on, all the while merchant account providers add to it daily.
Should A Merchant Process at Level III?
If you accept corporate, business or commercial cards, the answer is YES! Level III fees are substantially lower. Level III is a win-win for the banks. They can offer it in their interchange pricing lineup to show lower rates. However, very few merchant account providers support it, and even less have a working knowledge of it. The two most common mistakes are when a merchant account provider tells a merchant they can take care of their Level III needs, and then has no idea how to support it; or, just the opposite approach, telling the merchant it’s too hard and not worth the savings. MRC specializes in making Level III easy, not just for our clients. We even hold the hand of the merchant account provider to ensure they process our clients’ transactions at the lowest rate possible, every time!
Do You Need A Special Merchant Account For Transactions Over $5,000?
If you’re accepting payments over $5,000 on any type of corporate, business or commercial cards, the answer is YES! If on a consumer card, the answer is NO!
For non-consumer card transactions over $5,000, there are different sets of rules and pricing. The fees are about half of a typical transaction. However, this is a subcategory of Level III processing, which means you have to be set up to process Level III in order to take advantage of this reduced interchange category.
Additionally, Visa requires a $1,000 registration fee. This fee is paid to Visa and is based on the business tax ID and is good for the life of the business and is not tied to your merchant account provider.
Dial Terminal (the little black box) versus POS
Consumer cards that are present should be processed on a Dial Terminal with the exception of business/industry specific POS systems such as restaurants.
Consumer cards that are not present as well as Corporate, Business or Commercial rather present or not, should be run through a POS.
Merchant Account Equipment Buy or Lease
Never lease! The average Dial Terminal is only $350. The average lease payment is $40, making the average leased terminal cost $1,400 – $2,000, depending on the length of the contract. This means after only nine months of your 36- or 48-month lease, you have already paid for the terminal.
A safe litmus test when looking for a Merchant Account Provider would be to ask if they offer a lease program. If they do, I would move on.
Should Banks perform their own audits?
You’re not on the same team, regardless what your bank or processor tells you. They have a job that is in direct conflict with your interest. Most banks pay their merchant processing representatives and the relationship manager assigned to your account commissions and bonuses based on how much profit is made on your merchant account.
So it’s not too much of a surprise when they take a look at your account and everything looks fine.
Why is it important to not have a contract?
All contacts read the same; the merchant account provider can change pricing anytime they want without notice or consent. This is a one-sided contract, and there is no value to the merchant to have a one-sided contract in the merchant account provider’s best interest.
There Were Four Interchange Categories in 1991. Today There Are Hundreds. Why?
Interchange makes up over 90% of the total cost of merchant’s fees. Managing this cost is crucial for merchants as well as merchant account providers. Their goal is to get your transactions to clear at the highest rate, while the merchant’s goal is to get the transaction to clear at the lowest rate. Prior to 1991 it was simple: Visa Card present, Visa Card not present, MC Card present and MC Card not present. There wasn’t much to get wrong and there was no need for a firm like MRC. There was nothing to manage, nothing to catch the merchant account providers doing wrong.
Having hundreds of interchange categories changes all of that. Giving birth to setting merchants up incorrectly to make them pay interchange fees, forcing downgrades. They have created a path for downgrades, surcharges, enhanced billing, bill back, etc.
If we could do what Australia did and capping and regulating interchange:
- It would eliminate over a thousand ISO’s (Independent Sales Organization) that resell this service.
- It would cost the banks over $50 billion a year in lost revenue. This sounds bad until you realize it’s you and other businesses that are funding it all.
They average merchant is being overcharged 50% and doesn’t even realize it. Take out your statements and read “Top 6 Indicators” and “Lowest Price Billing” for a little more awareness on how this works.