23 Mar What Is a Discount Rate?
What is a discount rate and how does it apply to credit card processing for a business?
The discount rate is the rate the business is charged for the use of the services provided by the issuing bank. This rate is usually in the realm of 1 to 3 percent on each sale the business makes using merchant accounts. The rate is subject to change, and can be tied to the amount of sales the business has at any given period, and is usually the month in question.
Also, the rate is determined from the type of transaction that is being processed. This can vary as to the risk involved, volume and industry the transaction takes place. Online sales will usually incur a higher rate due to the very nature of the transaction. This is due in part to the merchant not physically having the card to witness signatures and verifying the identity of the card holder. Some industries are riskier than others when it comes to credit card processing. Chances are, a wholesome family business is going to negotiate cheaper rates for their merchant account than an online adult bookstore or gambling site.
Rates can also be affected by the risk based on chargebacks. A chargeback is issued if the consumer or customer is not happy with the transaction and demands their money back from the merchant. For example, as a merchant, you sell garden tools. The customer purchases a rake and for some reason the customer is not satisfied. The customer can talk with their credit card company and have the charges reversed. The bank then issues a credit to the card in question and the merchant is charged the amount of the purchase price via the merchant account. Having too many chargebacks can, and will, affect the discount rate for the merchant. The bank handling the merchant account will weigh the volume of sales to chargebacks. It is always expected to have at least some charge backs, and the providing banks understand this weakness. It is important to keep mindful of the risks associated with chargebacks. The merchant is wise to keep these chargeback issues at a minimum, and therefore reducing risks.
Payment gateways take the credit information provided to the business from the consumer. It then sends out the data to the credit card processing center for completion of the transaction. Whether manually conducted, meaning physical input from the merchant, to online based transactions, all are performed through the payment gateway.
The main points to remember are the following:
- Discount rates are based on risks and transaction volume.
- Chargebacks can increase risk and the additional hike rates.
- Online sales will normally incur a higher rate than brick and mortar stores.