They Are Taking Your Money by the “Bucket” Load
If you have had a merchant account before, you may be familiar with the terms “Qualified,” “Mid-Qualified,” and “Non-Qualified.” But what do they mean? Let’s take a closer look at the Interchange fee to get the answer.
Interchange Fees Explained in about 100 Words
VISA, MasterCard and Discover have different rates and collect different fees for different card types and card brands. For example, the rate charged for a debit card is different from a rate for a credit card, and a credit card with a rewards program (e.g. Airlines Miles, Points, Cash Back, etc.) has a different rate than a credit card without rewards. There are also different rates for cards that are swiped versus those that are keyed-in (keyed being more expensive). All in all, there are well over 100 different rates that range from 0%-3% and are collectively known as “Interchange” rates. As of this writing, the average rate of Interchange for a swiped transaction is around 1.8% and around 2.1% for keyed. You pay the Interchange fee for each card transaction you run, the majority of which goes to the bank that issued your customer’s card. The only money VISA and MasterCard keep is the “Dues & Assessment” fee mentioned earlier. As we go further into this guide, you will learn why the Interchange fee and Provider Markup are the primary costs of accepting credit and debit cards.
Fill Your Bucket!
Once upon a time, a merchant account provider had a brilliant and lucrative idea. This enterprising individual realized that he could take the numerous Interchange rates and turn them into just three different rates by packaging them into rate tiers, or “Buckets.” He named these buckets “Qualified,” “Mid-Qualified” and “Non-Qualified.” A short while later he became a very rich man. But how?
Let’s go back for a moment and examine how providers quote rates. Remember the quote of 1.5% + $0.15 per transaction from our earlier example? That rate quote is just one of the three Bucket rates. More specifically, it is a “Qualified” bucket rate and it is the lowest priced tier of the three buckets. It is also the only Bucket rate that most merchant account providers will quote you when marketing accounts to you. What about the other two buckets?
To say the least, the Mid-Qualified and Non-Qualified buckets are usually much more expensive than the Qualified bucket. Often, these two other buckets will cost the merchant over 3% per transaction. I have even seen cases where the Non-Qualified bucket (the most expensive of the three) was costing merchants over 5% per transaction. On average, more than 50% (often more than 80%) of a merchant’s credit card transactions will run at the Mid-Qualified and Non-Qualified rates. This means that merchants will have far fewer sales charged at the “Qualified” rate that they were originally quoted. When you hear seasoned business owners talking about “hidden fees,” the Mid-Qualified and Non-Qualified buckets are usually the culprits. Why do most transactions run in the highest priced buckets? Here is a breakdown of how the buckets are packaged:
- Qualified Bucket
- This bucket is primarily used for debit and credit cards that do not have a rewards program. They are just plain ol’ credit and debit cards, which are the minority of card types in the market today.
- Mid-Qualified Bucket
- This bucket is most often used for rewards cards that accumulate points or miles in relation to a consumer’s purchases.
- Non-Qualified Bucket:
- This bucket is most often used for corporate and business cards, foreign cards, and card types that are typically paid in full each month, such as Charge cards (excluding American Express, which we will go into later).
- Your actions can also cause Qualified and Mid-Qualified card types to be charged at the Non-Qualified tier. These actions include typing a credit card into a keypad instead of swiping it, forgetting to add certain details to keyed-in transactions, or failing to “settle” or “batch out” the account at the end of a business day. This last mistake can result in all card transactions for that day to be charged at the Non-Qualified tier.
Most credit cards today have a rewards program and a surprising number of people pay with business and corporate cards. Depending on your type of business, you will either have more “Mid-Qualified” or more “Non-Qualified” transactions, but the “Qualified” Bucket will almost never be the dominant rate that you will experience.
To make matters worse, each merchant account provider can package Interchange rates into buckets however it wants. This means that the card types that one provider uses to fill its “Qualified” bucket can be very different than the next provider. What one provider might call a “Qualified” transaction, another may call a “Mid-Qualified” transaction, and so on. Buckets make “apples-to-apples” rate comparisons between providers impossible.
One thing that all providers have in common with bucket pricing is that they set the rate of each bucket over the highest Interchange rate in that bucket. This means that if the highest Interchange rate in a “Qualified” bucket runs at 1.5%, the provider will set the bucket’s rate higher to something like 1.7% so that it can still make money on it. This means that if a card runs at an Interchange rate of 0% but is in a “Qualified” bucket with a rate of 1.7%, it will still cost you 1.7%. The merchant account provider will keep the difference as a Provider Markup. When the Interchange rate of just one card type within a bucket rises, it gives the merchant account provider an opportunity to raise the rate of the whole bucket even if none of the other Interchange card rates went up in that bucket. If an Interchange rate decreases within a bucket, the sole benefit will go to the merchant account provider as a bigger profit margin. In bucket pricing models, you will almost never see the benefits of a decrease in Interchange rates.
To Swipe, or Not to Swipe?
Is your head spinning yet? That’s because the industry has purposely made rates and fees complicated and difficult to understand.
Let me throw one more thing into the mix; under Bucket pricing models, merchant account providers typically have two different types of merchant accounts. The first one is usually called a “Retail Account” and is for businesses that will be swiping the physical credit card through a card reader or credit card terminal for the majority of their sales (also called “card-present” sales). The second account is usually called a “MOTO Account,” which stands for “Mail Order/Telephone Order,” and is used for businesses that need to key-in the credit card number because the card is not present for the majority of sales (also called “card-not-present”). MOTO accounts are also used for e-commerce businesses. In fact, some of the more progressive providers have dropped the term “MOTO” and just call these accounts “E-Commerce” accounts.
Both account types have the three Buckets tiers but the MOTO account has more expensive Buckets because the card is not present, which increases the chance of fraudulent transactions. In contrast, the Retail Account has less expensive buckets because the card is present and less susceptible to fraud.
Whew! This is getting complicated, isn’t it? Well, guess what? There’s a way around bucket pricing and all of its expensive, confusing nonsense. There is another simpler and less expensive pricing model that most merchant account providers do not want you to know about.