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Why Do Merchant Account Discount Fees Vary Over Such a Wide Range?

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Merchant Account

The main reason for the wide range of merchant account discount fees in today’s business marketplace is risk. In their original design and planning, banks structured credit card accounts to finance merchant customer purchases easily and at low, cost-effective interest rates. At this time, many retail companies encouraged their customers to apply for in-store charge cards for buying merchandise or services. However, the financing interest rates they charged were considerably less than individual store franchises or even store chains can now afford to offer. Today, only sizable retail stores can provide the option of in-house credit to shoppers often at finance fees of at least 8 or 10 percent. Even in our current uncertain economy, the average discount financing rate for consumer credit cards is from 2 to 3 percent. This vast difference in rates is rapidly making the formerly popular store-provided charge card a convenience of the past.

In today’s multiple charge card scenarios, banks assume responsibility for credit losses of the customer. Because of this, a large part of the merchant discount fee must be repaid to the card-issuing bank by the charge card processing agent involved. This current and commonly occurring variety of fee sharing is usually referred to as a merchant discount fee, service fee (MSF) or interchange fee.

How do merchant and customer charge card processor manage credit risk?

There are three major aspects to controlling risk to the merchant and charge card processor when customers use their credit cards to purchase goods:

1. The first precautionary measure is to determine that the merchandise purchaser charging an item to a credit card is, in fact, the owner of the credit card account.
2. The second security measure is for both merchant and charge card processor to carefully monitor the card data and customer signature.
3. The third precaution is to have accurate, updated electronic devices in stores for obtaining and processing all charge card data. This security measure is the most effective in cutting costs resulting from consumers charging purchases.

However, due to the increasing number of online and phone-order purchases currently being made by customers with greater risk of fraud, banks are now requiring that merchants take responsibility for a larger percentage of risk in these purchase charging transactions. Highest profile merchant charge processing environments today are given special fee level consideration and fraud protection due to their susceptibility to fraudulent charge card usage. These merchants include gas stations with automated gasoline pumps for consumer use, collection agencies and Internet vendors providing vitamins, natural supplements and drugs.

What factors may indicate potential losses on charges and higher merchant account discount fees?

Charge card processors must always guard against merchant fraud or signs of approaching merchant bankruptcy or business closings. Indications that a merchant is experiencing financial and operational difficulties that may lead to an end of the current merchant enterprise, thus resulting in the processor’s general increase in merchant account discount fees include:

• A record of charge-backs over a length of time at high rates;
• A marked increase in international purchase charges by consumers and fewer domestic purchase charges;
• Multiple accounts held by the same merchant and multiple processor usage by one merchant;
• Deterioration in merchant credit ratings and number of regular account deposits.

Although there are a number of different reasons for the wide variations in merchant account discount fees, the greatest contributing factor of all is the overall continuous risk involved.

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