Why Retail & Internet Merchant Account Rates Differ

Originally By: Jim Conley II, MerchantSeek.com

Updated May 2, 2012:
When merchants apply for a merchant services account, they are often drawn up in confusion by the different rates for retail, Internet and Mail Order/Telephone Order (MOTO) transactions. This is particularly true of the discount rate and per transaction fees that apply to these business models. These fees are likely to change even more as mobile payment technologies including “near field communication” payments with smartphones become more widely accepted in the United States.

As the situation currently stands, however, there are still three traditional ways consumers make payments. The first occurs in the “real world.” This is the standard scenario of a customer with a card physically swiping the card at a terminal. These “card present” transactions have long been considered the most secure and occur in about 70-80 percent of purchase situations. Consequently, these transactions carry the lowest discount rates and per transaction fees. The average cost to merchants to process those transactions is roughly 1.95 percent to 2 percent with per transaction fees of about .20 to .25 cents.

Transactions that occur over the Internet or through a phone call or mail order form are considered less secure because neither the card nor the consumer is present. This inherently raises the potential for fraud and increases the risks assumed by the card issuer. Consequently, rates are higher for these transactions. The average cost for card-not-present payments is 2.30 percent to 2.50 percent with transaction fees double that of card-present payments.

Currently most chip-based cards issued in the U.S. are international business cards, but this model is changing rapidly due to the proliferation of smartphones and the evolution of near field communications. These methods employ “single use” encryption and are very safe. They are, however, still an emerging payment model. The discount rates range from 0.39 percent to 0.99 percent for use in a physical retail environment to 1.69 percent to 2.09 percent online. Transaction fees range from 0.16 to 0.25 cents retail and 0.16 to 0.30 online.

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Jim Conley II is the Founder of MerchantSeek.