Two metrics eCommerce owners might overlook: Authorisation Rate and Merchant Discount Rate

It’s easier than ever to start an eCommerce business — usually in just a few clicks — and that may cause you to overlook details that are buried in the fineprints of your payment gateway. There’s no one surefire way to avoid all hidden costs, but we highly recommend that you look into these two: authorisation rate and merchant discount rate.

What is Authorisation Rate?

Let’s start with authorisation rate. 

When you choose to accept credit card payments on your online shop, you as a merchant will have to bear the risk that the issuing bank may decline the transaction. This is known as credit card authorisation.

Hence, the authorisation rate is the percentage of transactions that you submit and are accepted by the cardholder’s bank. 

Typically, the authorisation rate of eCommerce transactions can be 10% lower than that of physical transactions, as banks use a more conservative logic to assess an online transaction.

How do authorisations work?

To protect their customers from scam, card issuing banks tend to be extra careful in the online transaction authorisation process. 

When a customer initiates a purchase on your online shop, your payment gateway takes details of the card, such as the cardholder's address and transaction amount, then sends the payment request to the card networks (e.g. Visa, Mastercard, American Express) as an encoded message known as ISO8583.

An ISO8583 message consists of 128 fields, and it’s up to each bank how to interpret, and decide to accept or decline. Most common reasons are: insufficient funds, incorrect card information, and suspicion of fraud.  

How to improve authorisation rates?

Needless to say, declined payments will negatively impact your customer experience — you are practically waving them goodbye. Not only will they reconsider their purchase, they are also more likely to buy from your competitors. 

So, as an eCommerce merchant, what can you do to improve authorisation rates? 

1. Collect and submit additional information about the payment, such as ZIP code and CVC, to give the banks more confidence in your transactions.

2. Accept digital wallets such as Apple Pay and Google Pay. The inbuilt two-factor authentication can boost authorisation rates

3. Use a payment gateway that offers multiple retry mechanisms based on the type of decline reasons. 

Too much information? We’ve got your back.

Plug Airwallex Online Payment integration into your eCommerce site and take full advantage of our built-in fraud and dispute management system to give your authorisation rate a boost. We also empower you to accept payments from your customers’ favorite payment methods, such as Alipay, WeChat Pay, Union Pay and more.

Now that you know how to secure payment from your customers, let’s look into protecting your profit margin.

What is Merchant Discount Rate (MDR)?

If you haven’t noticed, you are giving up a percentage of your order in order to complete the transaction through the customers’ chosen payment service provider. This percentage is called Merchant Discount Rate — and it’s not the type of discount you’d enjoy.

The Merchant Discount Rate, generally between 1%- 3% of the amount of each transaction, is a sum that is paid by the merchant to their bank (“acquiring bank”) for making the transaction happen. The money is used to process the transaction and cover their infrastructure and operation costs.

Merchant Discount Rates vs. Interchange Fees

You’ve probably seen “Interchange Fees” listed in the terms and conditions of credit card companies. While it’s also a fee that you’ll need to pay when conducting a transaction, Interchange Fees are different from Merchant Discount Rates.

Interchange Fees are the amount that is paid by the merchant’s bank to the customer’s credit card issuing bank (essentially it’s paid by the merchant, a.k.a. you). It compensates the card issuing bank’s risk of issuing cards and potential fraud. 

The fee is determined by the credit card companies, such as Mastercard, Visa and American Express. According to Mastercard, Interchange Fees are typically updated semiannually. 

How to avoid Merchant Discount Rates and Interchange Fees?

If you operate an online business in a market that favours credit card payments, chances are that you can’t really avoid paying the Merchant Discount Rates and Interchange Fees.

Hopes are not lost — there are other ways to regain control of your profit margin.  

If you use any of the most popular payment gateways (think Shopify, PayPal, Stripe), you are likely paying the price of forced conversion. 

This is because these platforms operate in USD. When you complete a transaction, they will convert your local currency (e.g. HKD) to USD first; and when you get a payout from the platform to your local bank, they will have to convert to HKD again. 

This forced, double conversion will cost you an extra of 2% every time you transact, eating up your profit margin pretty quickly!

Reclaim your profits with Airwallex

With Airwallex Global Multi-currency Account, you can collect customer payments directly into your wallet without being forced to convert funds to your home currency. 

Start saving 99% of the transaction fees and foreign exchange costs with us. Sign up now or watch our demo here.