Merchant account

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A merchant account is a type of bank account that allows businesses to accept payments by payment cards, typically debit or credit cards. A merchant account is established under an agreement between an acceptor and a merchant acquiring bank for the settlement of payment card transactions. In some cases a payment processor, independent sales organization (ISO), or member service provider (MSP) is also a party to the merchant agreement. Whether a merchant enters into a merchant agreement directly with an acquiring bank or through an aggregator, the agreement contractually binds the merchant to obey the operating regulations established by the card associations.

Methods of processing credit cards[edit]


Credit card terminal[edit]

Main article: payment terminal
A typical credit card terminal popular in 2005, now typically out of use and of a style/era usually non-compliant per PCI-DSS standards.


Automated Response Unit (ARU)[edit]


Payment gateway[edit]


Level 2 or Level 3 Processing - Purchasing Cards[edit]



Merchant Account Marketing[edit]


Marketing by Banks[edit]


Marketing by Independent Sales Organization (ISO)/MSPs[edit]


Rates and fees[edit]


Discount Rates[edit]

The discount rate comprises a number of dues, fees, assessments, network charges and mark-ups merchants are required to pay for accepting credit and debit cards, the largest of which by far is the Interchange fee. Each bank or ISO/MSP has real costs in addition to the wholesale interchange fees, and creates profit by adding a mark-up to all the fees mentioned above. There are a number of price models banks and ISOs/MSPs used to bill merchants for the services rendered. Here are the more popular price models:

3-Tier Pricing[edit]

The 3-Tier Pricing is the most popular pricing method and the simplest system for most merchants to understand, if not the most transparent. The newer 6-Tier Pricing, including additional tiers covering debit, business, or international cards is gaining in popularity. In 3-Tier Pricing, the merchant account provider groups the transactions into 3 groups (tiers) and assigns a rate to each tier based on a criterion established for each tier. A possible drawback from the merchant's perspective, is that these "tiers" or "buckets" are variable from one processor to the next prohibiting any direct comparison from a Tier 1 provided by one provider to a Tier 1 provided by another provider.

First Tier - Qualified Rate[edit]


Second Tier - Mid-qualified Rate[edit]


  • A consumer credit card is keyed into a credit card terminal instead of being swiped
  • A special kind of credit card is used like a rewards card or business card



Third Tier - Non-qualified Rate[edit]




6-Tier Pricing[edit]


Interchange Plus Pricing[edit]

Some providers offer merchant account services priced on an "interchange plus" basis. These accounts are based on the "interchange" tables published by both Visa Visa Interchange and MasterCard MasterCard Interchange. This type of pricing creates a discount rate by adding interchange rates plus a percentage and authorization fees. This is a common pricing model for very low and very high average tickets.

Bill Back/ERR (Enhanced Recover Reduced)[edit]

A bill back/ERR is a variation on interchange plus pricing. It has some variations but the basic concept is that the merchant pays one set rate for qualified cards then is billed back for mid or non qualified cards. Merchants will be charged the qualified rate for all of their transactions. Then, for the transactions that are mid or non qualified, merchants will be charged again for the difference of the qualified rate (the rate they already paid) and the interchange rate (cost) plus a surcharge. There are two reasons this is called bill back. You are billed one rate and then billed back another. Also because you will typically see the surcharges on the next month's statement. It requires a great deal of time to research the actual cost per transaction with the bill back system.

Example of BILLBACK/ERR: Bill Back pricing: 1.75% + 0.50% surcharge

If you ran $1000 and you keyed in a regular credit card, that charge is now considered mid qualified because you did not swipe it. Interchange for a keyed credit card is 1.8%. The difference of the interchange plus the surcharge is 0.55%. Below is how it would look on your bill.

$1000 X 1.75%= $17.50
$1000 X 0.55%= $5.50
TOTAL= $23.00

Authorization fee[edit]


Transaction fee[edit]

The Transaction fee is charged when you accept your authorization. This fee only applies to an authorization that is accepted without error.

Statement fee[edit]



Monthly minimum fee[edit]

The monthly minimum fee is a way to ensure that merchants pay a minimum amount in fees each month to cover costs from the provider to maintain the account. If a merchant's fees do not equal or exceed the monthly minimum they will be charged the difference up to the monthly minimum.
Example: A merchant has signed a contract with a $25.00 monthly minimum fee. If all the fees for the most recent month of processing total (CLARITY: this is only for processing costs, so it does not include monthly fees, chargeback fees, etc.) only $15.00, this merchant will be charged an additional $10.00 to meet their monthly minimum requirements. Sometimes there are fees that are charged that are not a part of the monthly minimum, such as statement fees. It is industry standard to charge a monthly minimum, though not all acquirers charge this, nor do all that do charge it for every agreement.

Batch fee[edit]

A batch fee (also known as a batch header fee) can be charged to a merchant whenever the merchant "settles" their terminal. Settling a terminal, also known as "batching", is when a merchant sends their completed transactions for the day to their acquiring bank for payment. Some providers perform this automatically. It is important to close a batch every 24 hours or a higher rate will be assessed by Visa, Discover or Mastercard. The term "batch header" originally came from processing pre-electronic terminal era, when each batch of credit card receipts was turned into the merchant's local bank for deposit. The batch header was a mini report summarizing those receipts bundled within.

Customer Service fee[edit]

The customer service fee (also known as a maintenance fee) can be charged by some providers to pay for the cost of customer service. Also referred to as a "merchant support fee", "customer support fee", or simply, "service fee" by some merchant providers.

Annual fee[edit]


Early Termination fee[edit]


Chargeback fee[edit]





The Durbin Amendment[edit]

On October 1, 2011, new rules, resulting from the Durbin Amendment, went into effect that lower the debit card interchange fees the Visa and MasterCard networks charge merchants. The new rules apply only to debit cards issued by banks with more than $10 billion in total assets.

Prior to the implementation of the Durbin Amendment, the swipe fee for a debit card transaction averaged 44 cents. Under Durbin, the Federal Reserve has set a cap of .05% + 21 cents per transaction (22 cents if the card has security features).

Terms to know[edit]

Following are some useful definitions that pertain to pricing merchant transactions:

Basis Point: 1/100 of a percentage point. The term is used to describe discount rates, which are the bulk of card processing fees paid by merchants.

Discount Rate: includes fees, dues, assessments, markups and network charges merchants must pay for accepting credit and debit cards. Interchange is the discount rate's largest component.

Interchange: the fee paid to the card issuing bank by the card acquiring bank by way of the card brands. Interchange rates vary widely based on card type, transaction amount, risks and retail sector. Interchange is assessed on all Visa Inc.- and MasterCard Worldwide-branded credit and debit cards.

Mid-Qualified: the percentage rate merchants are charged when accepting credit cards that do not meet qualified rate requirements. Also known as a partially qualified, the mid-qualified rate applies in such cases as when cards are keyed into terminals instead of swiped or if the cards are of a special type such as rewards cards.

Non-Qualified: often the highest percentage rate merchants are charged for accepting credit cards. In most cases, transactions that are neither qualified nor mid-qualified fall into this category. The bulk of these transactions are done with corporate cards.

Qualified: the percentage rate merchants are charged when they accept regular consumer credit cards and process them with an approved processing solution in a manner defined as standard by their merchant account providers. Qualified is typically the lowest rate merchants incur when accepting credit cards.

See also[edit]