Terms to Know If You Plan to Accept Credit Cards
Accepting credit cards in your business can help you increase sales and provide your customers greater convenience. But it will also introduce you to an array of previously unfamiliar industry terms. Here’s a handy cheat sheet:
Authorization fee: For some transactions, the cardholder and card won’t be present. If you want to get the discount rate, you may need to verify the cardholder's address. Your processor will charge you a flat fee per transaction for this verification. The fee may be listed separately or bundled with your rate.
Card association: For any credit card brand, the card association is the network of issuing and acquiring banks that process it.
Chargeback: Within 60 days of the statement date, the cardholder can dispute a charge. Their complaint will go to their issuing bank. Next, you’ll receive a retrieval request, for which you’ll pay $10 to $50. Respond promptly, or you could face an additional fee or lose the transaction completely. After a refund, you’ll often lose the interchange fee from the original transaction as well as the sale.
Downgrade: When one or more of your qualifying requirements have not been met and your risk exposure increases, you’ll face a downgrade. The higher your risk, the more you’ll pay the merchant service provider and other players to process that transaction. Much of the cost of accepting credit cards comes from transactions that don’t qualify for a discount because they don't meet certain regulations set by the card associations. Common reasons for a downgrade include not settling a transaction within 2 days of the initial authorization, missing or invalid data, corrupted swiped data, and the absence of address verification on manually keyed transactions.
Interchange fee: Most major card associations charge an interchange fee for processing each transaction. You’ll pay different fees depending on how the transaction is sent and what type of merchant account you have. Your interchange fee covers the cost of getting funds to your merchant bank and billing information to the issuing bank. It normally represents a percentage of the total transaction plus a flat fee.
Merchant service provider: Your merchant service provider makes sure your account is set up to handle credit-card transactions on the front and back end. It also serves as the intermediary for your communication with card associations, processors, and your bank. One example is QuickBooks Payments.
Mid-qualified rate: You’ll pay this type of rate when you accept and process a card that doesn’t qualify for the lowest rate. This may happen when you manually key a card into a terminal instead of swiping it, or when a rewards or business card is being used. (See Rates,” “Qualified rate,” and “Nonqualified rate.”)
Non-qualified rate: You’ll pay a non-qualified rate any time you accept and process a card that doesn’t qualify for either of the lower rates. This may happen when you manually key a card into a terminal instead of swiping it. You may also pay this rate when address verification isn’t performed, information is missing, or the authorization isn’t settled within 48 hours.
Payment gateway: Transmits payment data from you to card associations and credit-card processing companies. Payment gateways support most point-of-sale systems, banks, processors, and merchant types.
Qualified rate: This rate is typically the lowest rate you’ll receive. It’s the percentage that’s charged whenever you process a card transaction through an approved processing solution.
Rates: The rates you pay cover transaction processing and the depositing of funds into your account. You’ll often pay a combined rate based on a percentage of the sale plus a flat fee per transaction. This rate may bundle the fees of your merchant service provider, processor, issuing bank, and card association. Your interchange fee is fixed, but you can try to negotiate for lower communication and processing fees to reduce your rate.
You’ll pay different rates depending on how each transaction was processed. Swiping a card in person will often give you the lowest rate. Contain your costs by processing your transactions at the qualified rate whenever possible.