Understanding How Discount Fees Impact Your Business

Updated on November 19th, 2021
Deal With Credit Card Processing Fees

When you’re choosing a credit card processor, a merchant services company, and anyone else who’s going to directly impact your bottom line with their charges and fees, it goes without saying that you need to choose very, very carefully. Start with the research and go from there; cool graphics and fast-talking salespeople aren’t going to help you keep the most money in your pockets at the end of the day. Let’s begin at the beginning. What are discount fees, and why is it that they have such a huge impact on your business’ bottom line?

What Are Discount Fees?

Merchant discount fees (also known as the merchant discount rate) impact any business owners who process credit cards. In exchange for processing credit card transactions, a merchant services provider takes a cut of the total. For example, if the merchant discount is 4%, the merchant keeps $96 for every $100 in sales. An interchange fee is Included in the merchant discount rate. This interchange fee is usually paid to the bank that issued the credit card used in a given transaction; at other time, it is paid to the acquiring bank, which profits from the transaction (this is called a “reverse interchange fee”). It’s really not as complex as it sounds for our purposes. What you need to understand is that when you’re quoted a 4% discount fee, you’re only taking home $96 out of every $100 your customers charge to their credit cards.

How Are Merchant Discount Fees Determined?

The average merchant discount rate is between 1-3%. However, for online merchants, the rate tends to be higher. This applies to merchants that deal both online and in-store. They will often pay a higher rate for their online sales. While the rate is determined based on factors such as volume, average ticket price, credit card used (business and reward cards can carry a higher fee), risk, and industry, there shouldn’t be a huge difference for your industry as compared to others in a similar category (and don’t let anyone convince you that there is). An interchange fee can actually be the largest portion of a discount fee. As a result, it can vary significantly from provider to provider.

How Can I Get the Best Deal?

Before considering merchant services and look at the fees individual services are charging, you should be aware of industry averages. While the average merchant discount rate is between 1-3%, the rate tends to be higher for online merchants. Merchants who sell their goods online and in store will pay higher rates for online products. Getting a good deal also means that you’ll need to think about what kinds of payments your business is most frequently taking.

If credit card transactions make up only a small part of your business and you’re not being penalized for a small number of credit card sales every month, then a higher discount fee might not be as devastating for you. If most customers pay using credit cards, take a look at the discount fee. Don’t let them highlight other advantages of using their service to the detriment of your profit. Not much is worth an entire extra dollar of every one hundred going into their pockets instead of yours.

 

William Lipovsky

William Lipovsky

William Lipovsky owns the personal finance website First Quarter Finance. He began investing when he was 10 years old. His financial works have been published on Business Insider, Entrepreneur, Forbes, U.S. News & World Report, Yahoo Finance, and many others.

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