The discount rate is a percentage of each transaction that the acquiring bank charges for processing the transaction. The percentage is based on bank underwriting in regard to the risk associated with the business that is applying for the merchant account, as well as the industry sector the business is in. Part of the rate is paid to the card brands (Visa, MasterCard, etc.), part is paid to the acquiring bank that is backing the merchant provider, and part is paid to the provider for processing the transactions.
“Discount rate” is an industry term used to describe the total, all-in fees applied to a merchant account. The discount rate is comprised of several types of fees, including interchange fees, assessment fees and payment processor fees. Descriptions of these fees are provided in detail elsewhere in our FAQ section.
Rates vary drastically based on a merchant’s profile. For instance, a merchant based in Europe selling e-cigarettes online will pay more than a merchant based in the U.S. selling shoes face-to-face. Low- to medium-risk merchants are generally assessed fees in the 1% to 3% range; high risk merchants can expect to pay more. The chief risk factors that affect the discount rate include:
- General industry risk. Some businesses are inherently risky. Online businesses, for instance, are more vulnerable to fraud because no live, person-to-person contact is involved in the transaction. Other businesses are considered risky because of a higher than average risk of chargebacks. The travel industry, for instance, experiences a great many chargebacks due to cancellations, schedule changes, and dissatisfaction with travel or accommodations. Other businesses are considered risky because they are highly regulated and/or have a higher than average incidence of fraud — tobacco, firearms and cannabis, for instance. If your business is in a high risk category, discount rates likely will be higher than average no matter how strong your application is.
- Mode of payment risk. As mentioned earlier, online orders are inherently riskier than face-to-face or phone transactions. Brick-and-mortar retailers using chip readers for credit card transactions are exposed to less risk of fraud than those using older terminal technologies. Companies that use the subscription model or other forms of recurring billing usually incur a higher chargeback rate than merchants with a standalone purchase model. Underwriters take all of these payment mode issues into account when establishing a discount rate percentage.
- Transaction volume. Companies with high annual sales volumes tend to get more favorable rates, although the high risk factors detailed above affect that determination. For your merchant account application, accurately describing your transaction volume is important. Once you’ve accepted an offer, any abrupt or extreme changes in transaction volume will raise a red flag with the issuing bank.
The discount rate your business is assessed obviously has a large bearing on your gross profits and pricing. We will help you by reviewing your payment processing situation and advising on possible ways to reduce your discount rate. In many cases, merchants will earn a more favorable rate by taking the proper steps to mitigate fraud and reduce chargebacks. Contact us now to discuss your situation!