Merchant Services and Credit Card Processing: The Crash Course

“Paper or plastic” these days often doesn’t refer to what sort of bag one wants his or her groceries put in. These are forms of payment, and ‘plastic’ is becoming increasingly trendy. Just about any consumer over the age of eighteen carries – or has carried – some form of credit or debit card with which he or she makes purchases of any number of products and services. What a credit card consumer doesn’t often know – but a merchant is typically painfully aware of – is the fact that it costs money for a store to take a credit card.

See, “paper” is simple. Cash is cash, easy to identify, easy to quantify, and unless one runs into a counterfeit bill, there’s not much risk or potential problem with depositing cash. “Plastic”, on the other hand, is a completely different animal. There are many different types of credit cards, and one can generally not tell how much money is on that innocuous rectangle just by looking at it. Credit cards are also unique and cannot be duplicated or passed around between multiple consumers. It is the balance left on the credit card that is the means for payment to a merchant for goods or services, and for the services of ascertaining the availability of funds on the card, transferring money from the consumer account to the merchant’s account, and keeping track of such transfers via statements both to the consumer and the merchant, a merchant requires a credit card processor and credit card processors all charge money.

So, for each dollar that a merchant gains in revenue via credit card, he or she might actually only be able to keep about 70 cents. Of course, not everyone keeps track of all the nitpicky details as far as how much money is utilized in credit card processing fees, but a difference of ten cents per transaction can mean hundreds of dollars a month. Now, for the convenience of any current or aspiring business owners, here’s credit card processing in a nutshell.

The Benefits of Accepting Credit Cards

Credit cards now account for up to 40% of an average business’ revenue, regardless of average ticket, average volume or location. In a high-end neighborhood, most consumers have fairly high credit limits and won’t hesitate to charge purchases up for anything from gum to gasoline to gold. Credit cards are convenient, easy to use, and compact (no one wants to carry a thousand dollars in a cute little purse). In a lower-end neighborhood, most consumers do not feel comfortable carrying large amounts of cash upon their persons, and prefer to charge more expensive purchases. Moreover, while the average consumer might only carry a few small bills in his or her wallet, he or she might have a credit limit of hundreds or thousands of dollars. Any business that accepts credit cards is likely to have a higher average ticket than a cash-only business. Also, because credit cards can typically be verified on the spot, a personal check often takes longer, and while merchants might have problems with bounced checks, plastic can be approved or declined before a sale is complete. With the convenience of immediate verification, a merchant can also utilize other business venues such as e-commerce, mail order and phone orders without much chance of mishap. All in all, if done correctly, it is in the benefit of any business to take credit cards.

Now, onto the specifics of different cards and services.


Visa and Mastercard (or debit cards with these logos that are taken as credit cards) are the most common two credit cards used by consumers. Most have a credit limit, which can range from a few hundred to a few thousand. Many are sponsored by banks and financial institutions, while some are sponsored by corporations (the dreaded “non-qualified” transaction: more on this later). These are the only credit cards where there is a great deal of variation to be found in terms of processing fees, because hundreds of different companies process Visa and Mastercard, and all of them charge different fees.

Visa and Mastercard typically account anywhere from 75 to 90% of all credit card transactions, and the gist of the processing costs are as follows:

Discount Rate: This is what percentage of the total monthly Visa/Mastercard volume is taken by the processor. Typically, for a qualified transaction (a swiped non-corporate card), the discount rate is anywhere between 1.5% to 2.2%. This means that, if a processor’s discount rate is 1.8% and the merchant did $1000 in Visa/Mastercard volume that month, the processor would take $18. Follow?

Transaction Fee: This is also sometimes called the Authorization Fee or a variety of other names, and is the flat amount charged per swipe. Again for a qualified transaction, this usually ranges from 5 to 25 cents per swipe. This means that, if a processor’s transaction fee is 10 cents per swipe and the merchant took 100 credit cards that month, the merchant would be charged an additional $10 on top of the discount rate.

Statement Fee: Also known sometimes as the monthly fee, administrative fee, etc., this is the amount that a processor charges for sending out monthly invoices detailing all transactions, and it typically ranges between $5 to $20. Basically, this is a one-time charge per month on top of the discount rate and the transaction fee.

Batch Fee: This is the fee that the processor charges each time the machine batches out (typically at the end of every night) and sends all the credit card information to the necessary bank account. Batch fees apply whether the batch is done manually or automatically. Typically, this fee is between 10 and 30 cents per batch. So, if a processor’s batch fee is 10 cents per batch and the merchant was open for business 30 days a month, the merchant would pay $3 in batch fees on top of the discount rate, transaction fee and statement fee.

There are potential other fees, for machine leasing, warranties, and special services such as check processing, gift cards or pin-based debit service. Also, there can be various penalty fees for retrievals and chargebacks. But unless these special situations apply, a merchant should make sure that he or she is not being charged any other fees in addition to the above for Visa and Mastercard transactions. Obviously, the goal in searching for a processor is to find one that charges the smallest amount possible with a combination of those categories.

American Express/Discover/Diner’s Club

American Express, Discover and Diner’s Club do not have so much leeway as Visa and Mastercard when it comes to processing fees. Unlike Visa and Mastercard, these credit card companies do their own processing, and the rates are typically higher than Visa and Mastercard (though they do charge in the same ways). If a merchant decides to take these credit cards, he or she will have to pay whatever the company charges for the processing (which is determined by type of business and average ticket).

Debit Cards

Debit cards can be accepted as credit cards, or used with their PIN numbers and rung up as debit, with or without cashback. Often-times, a debit card will have different processing rates than a credit card, and a rule of thumb is to accept a debit card with a PIN number with larger transactions. Nine times out of ten, the processing rates will be cheaper.

Gift Cards

Many larger credit card processors also offer merchants the option of creating gift cards for their customers’ use, and will either charge a flat monthly rate or the same combination of fees as Visa/Mastercard. Be aware: if a merchant decides to have a credit card processor make its gift cards, he or she will never be able to change credit card processors again. Because of the peculiar programming of a gift card which makes it exclusive to a store, and the fact that gift cards can be “re-charged”, if one switches processors, any existing gift cards (including the ones carried by customers) will cease to work. Therefore, it is important for a merchant to be certain that he or she is very satisfied with the processor’s rates and service before making this commitment.

Check Service

Various credit card processors also work in conjunction with check processors, most famously Telecheck, which verifies funds in checking accounts. Typically, these companies charge percentages and transaction fees rather like credit cards, but these rates are typically higher, and check verification may require the purchase or leasing of special equipment, as well as fees to set up the service. A merchant can investigate the cost of processing checks, the anticipated check revenue, and the frequency of bad checks with fellow merchants before deciding whether or not to invest in check services.

Mid-Qualified/Non-Qualified Transactions

The “Qualified” credit card transaction is swiped, point-of-sale, and utilizing a personal card. These transactions charge the lowest rates. There are, however, such things as “Mid-Qualified” and “Non-Qualified” transactions, which will both charge higher rates.

A transaction is considered “Mid-Qualified” if the credit card information is somehow punched into the machine instead of swiped. These are credit cards taken over the internet or the phone, or alternatively the beat-up credit cards that have non-functioning magnetic strips. It is assumed that any merchant swiping a credit card at point-of-sale has verified the consumer’s identity, making it a more secure transaction, while an entered number implies that the consumer was not present when the credit card was taken, and could have been reading off of someone else’s card, etc. Therefore, a merchant should not take any more mid-qualified transactions than necessary, and if his or her business is primarily NOT done point-of-sale (i.e. a mail order business, etc.), he or she should find a processor with a reasonable plan that accounts for mostly mid-qualified transactions.

A transaction is considered “Non-Qualified” if the credit card is a corporate card. This means expense account cards and the like. The reason that a merchant is charged more for taking these “Non-Qualified” cards is that not all purchases made by a consumer can be considered a “business expense”, and there is always the risk that the corporate card’s company will negate the transaction. Typically, unless a merchant is extremely fastidious and careful, he or she cannot avoid taking a few non-qualified transactions, but these don’t often make a huge difference, as most people do not use company-sponsored charge accounts for frivolous purchases if they desire to keep their jobs. Generally, if the credit card has a bank logo or name, it is qualified, whereas if it has the name of some company (i.e. Amazon, Northwest Airlines, Sears Rewards, etc.), it might well be non-qualified.

Retrievals and Chargebacks

These are situations where a merchant is charged penalty fees, and to prevent such fees requires keeping good records and prompt delivery of goods and services.

A retrieval is when a consumer pays for a product or service, typically a non-qualified transaction, and never receives said product or service. For example, if I were to order a book online from and pay with a credit card, and then never receive the book, would be liable to pay a retrieval fee.

A chargeback is when there is a dispute between the consumer and the merchant in terms of a transaction, and the merchant cannot show records of the transaction. For example, if I notice a $200 charge on my credit card statement to a store that I never remembered visiting, and call my credit card company about it. If the merchant cannot produce a receipt indicating that I or SOMEONE using my credit card on the given date and to the given amount, he or she is liable to pay a chargeback fee. To be on the safe side, a merchant should always keep credit card receipts filed away by date for at least six months.


Miscellaneous other costs may apply for taking plastic, including the cost of the credit card machine (and often-times the cost of the phone line that the credit card machine runs on), the cost of credit card machine paper, and possibly set-up or annual fees. Generally, it is cheaper in the long run to buy a good machine with an integrated printer, because it is faster and less likely to require repairs, and the cost of a cheap machine without a printer combined with the cost of a printer usually amounts to the same as the cost of a better machine that would take up less counter space anyway. Leasing a machine will eventually cost more than buying it out-right, and often requires good personal credit on the part of the merchant. Paper is typically cheaper if purchased in bulk from an office supplies resource than from a processor, and processors that provide “free paper” typically make up for that cost by charging higher rates on the processing itself.

Not all processors charge set-up fees or annual fees, and a merchant should figure out whether a processor that does has low enough ongoing rates to account for these set-up fees.

One myth prevalent with taking credit cards is that it is illegal to set a minimum purchase amount. Several individual processors (typically banks, which tend to charge higher rates anyway) will forbid a merchant from the practice, but others will not care whether a merchant only takes credit cards for purchases over a certain amount. Keep in mind, though, that some processors might also charge a minimum monthly requirement, which will need to be paid whether or not the sum of processing fees meet that amount.

Another thing to keep in mind is that almost all processors have contracts, usually ranging from one to three years, and the starting rates for processing might not be the ongoing rate. So before a merchant commits to any processor, it is best to find out, in writing, how the rates are to fluctuate within six months, one year, and beyond, because it would be a bad investment to start with a processor with a low introductory rate and then get locked into a long contract with a large termination fee and stuck paying high rates after the first six months or so.

And that, all of it, is the gist of taking credit cards. It might seem a bit intimidating, but once it’s broken down, it isn’t extremely difficult. Really, if one thinks about it, choosing a credit card processor is much like choosing a credit card. One looks for good service, wide usage, and low rates. A credit card company will charge differently depending on credit, much like a processor will charge differently depending on the type of transaction. In both cases, one looks for the minimal amount of “extra” fees, and a percentage/APR that does not skyrocket after several months. But even with the few complications, most people would agree that plastic is an integral part of our commercial world. Everyone wants a credit card… and takes a credit card.

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