A merchant is a business—or in terms of e-commerce, a Web site—that accepts credit or debit cards in exchange for goods or services. In order to accept credit cards as a method of payment, a merchant must first establish a merchant account by forming a relationship with an acquiring financial institution (or "acquiring bank"). This relationship enables the merchant to process transactions and obtain cash from credit card purchases. A merchant discount, or discount rate, is the percentage of sales that a merchant pays to the acquiring bank to process credit card transactions.
The merchant discount rate is based on sales volume, average ticket size, industry, and risk. The rate is determined by multiplying the total credit card volume by a percentage charged by the bank. Most rates fall between one and three percent and are based on the rate requirements of a credit card company, such as Visa or Mastercard.
Online merchants, those that do business via the Internet, have a higher merchant discount rate than retail merchants. For example, USA Bankcards' online merchant discount rate was 2.39 percent in August 2001, while its discount rate for traditional retail merchants was 1.59 percent. In a traditional retail transaction, the merchant typically makes contact with both the credit card and the consumer and, as a result, is not held responsible for potential fraud. An online transaction, however, is completed without the customer or credit card present, leaving the online merchant accountable for any wrongdoing. Consequently, both the merchant and the credit card company become vulnerable to charge-backs, which happen when a consumer disputes a credit card transaction. If a charge-back is issued, the credit card company is responsible for pulling the payment back from the merchant and crediting that amount to the customer's account. An online merchant that continually receives charge-back requests is considered high-risk and may find its authorization to process credit cards suspended.
Most online merchants typically strive to make online purchasing at their site as safe as possible in order to reduce their merchant discount rate. Many utilize secure electronic transaction (SET) specifications that support credit card payments over the Web. Address verification service (AVS) is also used by online merchants. This security device checks U.S.-based billing addresses—the first four numbers of a street address and zip code—that are given to the online merchant by the consumer at the time of purchase. Shoppers who give a billing address that does not match their credit card billing address are unable to complete their purchase. Another online credit-card fraud deterrent, FraudScreenNet, was developed by merchant services and credit card processing firm Merchant Express LLC. This security service was used by 40 of the top 50 Visa and MasterCard credit card issuers in the United States in 2001. It not only verifies addresses, but also reviews the purchaser's e-mail address activity, shipping method history, product purchasing pattern, payment method history, work and telephone number patterns, time of day purchases are typically made, and purchasing frequency in order to pinpoint unusual activity and reduce the occurrence of fraud.
As online spending increases, credit card transaction security continues to be a major concern for merchants. In order to lower their merchant discount rates, online merchants will, no doubt, continue to utilize security measures designed to decrease credit card fraud.
ePay Management LLC. "Merchant Accounts." Mesa, AZ: ePay Management LLC, 2001. Available from www.epayinternet.com.
SEE ALSO: Acquiring Bank; Charge-back; Merchant Model