The Processing Game - What No One Wants You to Know
We frequently encounter Merchants who tell us they don't need our services - or don't want to have us check their pricing - because they have a "great, low rate." While there is a chance they do in fact have a great, low rate, the odds are otherwise.

When a merchant service provider quotes you a straight rate, such as 1.2%, it sounds great. Merchants often take the deal, signing a multi-year contract with cancellation fees.

They often discover later, much to their chagrin and after their provider has disappeared, that the "rate" they were quoted - and which prominently appears on their contract - is not the rate they are actually getting.

Why? It is because what we call a "rate jockey" has failed to educate the Merchant. Few Merchants understand how rates actually work and apply. This is not the Merchant's fault - it is the fault of their provider. Providers simply don't want Merchants to know about something called "tiered pricing."

Tiered pricing reflects the simple fact that Visa and Mastercard do not treat all credit cards, or transactions, the same. Different kinds of cards are classed as different types of transactions and different rates apply.

When merchants look at their statements and cannot figure out why the rate they were quoted and that appears on their contract does not seem to apply, it nearly always is because of tiered pricing.

Indeed, merchants sometimes find that less than 10% of all their transactions actually fall into the "too good to be true" rate category that appears on their processing agreement.

So how does tiered pricing work?
The lowest possible rate a merchant can obtain (usually around 1.3% for debit transactions). Ideally, this is the rate that all Merchants would like to have 99.9% of the time. Merchants can obtain this rate swiping a customer's personal (not corporate) credit card or debit card and having your terminal successfully read and transmit the cardholder's information to the processing center. This is the lowest rate available. Any transaction that differs from this one results in a downgrade and thus a higher processing rate.
There are several circumstances that can result in a "downgrade" and therefore a higher rate than what appears on your agreement.
These circumstances include:
A Merchant manually enters the card number (ie., a "keyed-in" transaction;) and uses address verification.
Certain corporate cards or a rewards card, whether swiped or keyed-in might result in a mid/partial qualified rate.
Downgrade charges vary depending on the precise circumstance and the processor, but they usually result in an additional charge of between .67 percent to 1.2 percent.

How does this work in actual practice?

Assume that a processing center receives a manually entered (keyed-in) credit card number. Terminals that are programmed correctly will then prompt for additional information from the Merchant, usually asking for the cardholder's billing address, zip code, the card's expiration date and the CVV2 code.

The processing center next verifies this information with the cardholder's issuing financial institution. If all the information matches, then the rate remains at a mid or "partially" qualified rate (the rate described above, which is .67 to 1.2% higher than the straight qualified rate). If, however, the information doesn't match, or the transaction is "forced" without verification, then the transaction will be priced at an even higher rate - this rate is known as "non-qualified."

This is the highest rate that a Merchant can pay on a transaction; it usually is 1.5% to 3% higher than the quoted qualified discount rate - resulting in an effective rate to the Merchant of between 3% and 5%.

Causes of non-qualified rates vary, including certain corporate and rewards cards, a forced transaction - which is a transaction pushed through without additional verifying information. Another way to fall into this profit-killing rate category, is a Merchant's all too common failure to batch a credit card terminal every 24 hours.
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