Merchant Acquiring Business

A merchant does not get the full value of the sale. For example, if the sale is for USD 100, the merchant would, upon submission of the sales draft, maybe receive only USD 98. The USD 2 loss to the merchant is the fee paid by him, and is called the discount rate applicable to the merchant. In this example, the discount rate is at 2%. However, if you delve deeper into the components of a discount rate, you will realize that it is made up of multiple components, some of which are driven by the volumes of transaction and others which are fixed in nature. All these rates are specified in the merchant agreement. Let us look at some of the rate categories in an agreement: 

 

This category would specify the fixed charges to be paid by the merchant irrespective of the transaction activity. Some such fixed charges will be: 

 

Setup Fee: This is the fee charged to the merchant for processing his documents and setting up the merchant account at the processor and the acquiring.

 

Break Fee: This is a fee charged to the merchant, in case the merchant moves his account to another processor or acquiring bank. This break charge could be driven by the tenor of the relationship, i.e. it would be waived if the merchant has continued the relationship with the acquiring entity for over 1 year, say. 

 

Besides the onetime fixed fees, there are also some components of recurring fees, which are payable monthly, irrespective of the volume of activity shown by the merchant.

 

 

 

 

Many of these fees are not kept by the merchant but are either passed on directly to the network or the issuing bank – or are partly shared with the network. The category which is passed on completely is called the interchange fee. This is a fee changed by the network to the acquiring bank, and is passed on to the issuing bank. This fee is the biggest component of the fees generated in a card transaction. Typically this fee ranges between 0.5% - 1.75% of the transaction value. In addition, there is a fixed cost of the interchange, say $0.50 per transaction. In addition to the interchange fee, the merchant is also assessed for other variable fees. Some of them are:

 

Authorization Fee: This is the fee charged to the merchant for processing a card authorization request. The fee varies between $0.05-$0.10 per transaction, based on the channel (POS, internet, voice) and the network who authorizes the transaction.

 

Capture Fee: This is the fee charged to the merchant for clearing and settling the funds due to the merchant. Again, this is on a per transaction basis and is higher than the authorization fee. The capture fee could vary between $0.20-$0.40 per transaction, agains based on the channel and the network which is used to settle the transaction.As a rule of thumb, the lower the automation, the higher the authorization and capture fee. Similarly, the higher the risk in the transaction, the higher the authorization and capture fees.The fees can be, in many situations not be specified as a breakup between interchange, authorization and capture fees. This is especially true when acquiring smaller merchants, where fees are quoted a qualified and non qualified rates. Qualified rates stand for the typical, often used mode of processing card transactions while the non qualified rates stand for the lower frequency channels of transaction. While qualified rates will normally be lower than non qualified rates, this might not always be true. For example, a mail order company, which receives card purchase requests via a mail order, will use a paper based mode of processing and authorization, and will therefore have a higher qualified rate. However, in case the company does get a walk in customer, whose transaction is processed on a POS terminal, the non qualified rate would apply, which will be lower than the qualified rate, as the POS transaction is both more automated and less risky than a mail order transaction. As a further refinement to a qualified and non qualified rate, banks insert another slab, called the mid-qualified rate, which addresses variations to the process which is eligible for the qualified rate. This is called a three-tier pricing. Debit cards will normally have a different interchange rate from a credit card. In case debit cards are also under scope of merchant acquiring, the three-tier rate becomes a six-tier rate, one three tier rate for debit card and another three tier rate for credit cards.