In order to understand your merchant account, the first important part is knowing which pricing structure is being used on your account.
And in order to explain how this works, the first term I must explain is 'Interchange'.
The Interchange Guide (available for all to see on each of the card brands respective websites) are rates that are set by the card brands, and without spending all day on this trying to explain interchange in detail, the reader should look at it like interchange rates are the wholesale prices that ALL processor's pay, regardless of their size, for the different cards that are processed.
(there are hundreds of rates, thresholds, and different industries, that affect these rates as well, but takes years of studying to truly understand) So at the end of every month, the processor will receive the expenses of processing your account, and the difference between the rates charged to the merchant, and the rates received by the company you are working with, will determine the gross profit made per account on interchange.
Then of course there are usually other monthly charges that apply to an account that I will not go into in this article.
This article is specifically to identify which pricing structure is being used to process your account, and additional fee's may come with both.
First, I will explain the Tiered Pricing System, as this is the pricing structure that applies to as many as 85% of merchant's ( this # is not an exact statistic).
Tiered pricing is usually made up of 3 or 4 different tier's (although I have seen as many as 16), and each tier has it's own rate.
The tier's allow a merchant to know which rate is going to apply to all cards that process over that tier.
The tier's are generally broken up into Qualified, Mid-Qualified, and Non-Qualified.
Now let me explain how it is determined by the processor which tier a card will fall under as long as it is correctly processed, and not downgraded due to a procedural error: Tiered Pricing Structure: 'Qualified transaction'- is a transaction that is made in person with a regular consumer credit card that is swiped through a POS terminal, allowing the magnetic strip to be read(this excludes all corporate/commercial/business cards, and reward cards).
'Mid-Qualified' transaction- is a transaction that is key entered into the system.
Another name for this sort of transaction is 'card-not-present or CNP'.
So if the order is taken over the phone, in the mail, or over the internet, or with a manual imprinter and the magnetic strip is not read, the transaction has to be manually entered into the system, increasing the risk involved, and making it a 'mid-qualified' transaction.
ALSO, and this is a little tricky, if a rewards card is used, even when it is swiped through a POS terminal and the magnetic strip is read, is considered by most to be 'mid-qualified' transaction.
Some even consider them to be 'non-qualified' transactions.
Non-Qualified transaction- is any commercial/corporate/business card that is used.
Even when this card is swiped, it is still a non-qualified transaction.
Due to the fact that there can be more than one cardholder on a corporate credit card account, and that it is not tied to a person, and instead to an entity, more than one person may have a card for the same account.
So if an employee is given a card, and get's wind that they may be getting let go, they may use the card for things like treating VIP clients out to unauthorized lunch's, or things like that, and when the company gets the statement and see's the charges, there is a higher potential for a chargeback on those transactions.
So to sum the 'tiered pricing system' up,remember that no matter what the real rate is on each card, the merchant will only see on their statement 'qualified', 'mid-qualified', and 'non-qualified''.
Example: If you own a retail location, and a customer swipes their personal credit card, you know that they will be charged for a 'qualified' transaction every time (unless it is a rewards card).
And if someone calls into the store to pay for a product/service, and you have to enter in the card manually, you will always receive the 'mid-qualified' rate for those transactions, and if a corporate card is swiped through the store's terminal that it will receive the 'non-qualified' rate.
The next part of this post will explain the Interchange Cost Plus Pricing Structure.