Industry Terms: Discount Rate

August 13, 2012

This is the latest installment in The Official Merchant Services Blog’s Knowledge Base effort. Well we want to make the payment processing industry’s terms and buzzwords clear. We want to remove any and all confusion merchants might have about how the industry works. Host Merchant Services promises: the company delivers personal service and clarity. So we’re going to take some time to explain how everything works. This ongoing series is where we define industry related terms and slowly build up a knowledge base and as we get more and more of these completed, we’ll collect them in our resource archive for quick and easy access. Today’s term is Discount Rate.

Discount Rate

The simple definition of the term Discount Rate as it applies to merchant accounts — it is a combination of the fees charged by the card acquirer to the merchant for processing payment card transactions. So what that’s really saying is the Discount Rate is what the payment processor charges the merchant so that they can make profit off of the transaction — it’s not really a discount in any sense of the word when defined like that.

So let’s break this down a little more to understand this buzzword beyond just the obvious. A Merchant Account has a variety of fees. Some of these fees are charged periodically, such as a monthly service fee. Others can be charged on a per-item or percentage basis, such as a Chargeback Fee. Some fees are set by the merchant account provider.

The majority of the per-item and percentage fees, however, are passed through the merchant account provider to the credit card issuing bank according to a schedule of rates called interchange fees, which are set by Visa, Discover, and Mastercard.

Each merchant services provider has real costs in addition to the wholesale interchange fees, and creates profit by adding a mark-up to all the fees they have to take on to provide their services in the first place. The discount rate comprises the combination of dues, fees, assessments, network charges and that additional mark-up merchants are required to pay for accepting credit and debit cards. The largest of these fees by far is the Interchange fee.

There are a number of pricing models that merchant services providers utilize, but Host Merchant Services uses the Interchange Plus pricing plan.

Interchange Plus pricing means that the acquirer charges you a variable MSC consisting of the cost price plus a fixed markup. Interchange Plus Pricing  is exclusively how we quote at Host Merchant Services. Interchange Plus, also known as Cost Plus, pricing gives the customer a fixed rate over published Interchange Fees. This pricing format is normally quoted as a discount rate (percentage fee) along with a per item or authorization fee. The great thing about Interchange Plus pricing is that you always know exactly what you are paying to your processor to services your account. Think of Interchange, and all the associated fees, as an unavoidable cost. No matter who you process with, you have to pay these fees. They may be labeled differently, or wrapped up in a confusing pricing tier, but one way or the other, you are paying Interchange fees. By understanding the markup you pay over Interchange, you know exactly what you pay to your processor and exactly what is going to the card associations. That allows you to make a decision on whether or not the markup seems reasonable for the service you get and choose your processing partner accordingly.

Here’s a small graphic explaining the basics of how Interchange Plus works.

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