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Hotel and Lodging Merchant Account:
Accept Credit Cards with Some Reservation

by Andrew Lax, September 2007

Can you imagine a hotel, inn, or lodge that accepts only cash payments from its customers in today’s marketplace?  That is probably beyond the scope of anyone’s imagination, even if the establishment were located in the modern-day equivalent of Mayberry.  As in almost all other industries today – perhaps even more than in many other industries – the hotel and lodging industry is expected to accept credit cards from customers.  But, as many hotel and lodge owners will woefully attest, having a merchant account and accepting credit cards can be very expensive!  Outrageous credit card processing costs and unwanted chargebacks can quickly get out of hand, cutting into hotel and lodge profits.

Fortunately, there are a few simple things that hotel and lodge owners can do to reduce the costs of maintaining and using their merchant accounts.  This article explores some of the most common costs associated with accepting credit cards in the hotel and lodging industry, and provides some tips and techniques that hotel and lodge owners can use to keep these costs under control.

Three-Tier vs. Interchange Pricing

Most hotel and lodge owners are unaware that credit card processing costs are calculated in one of two ways.  Almost all hotels/lodges unknowingly operate under the traditional, more expensive method, but about 5% have learned the tricks of the trade and enjoy the less expensive cost calculation method.  Let’s take a look at how credit card processing companies calculate the rate charged to hotels and lodges.

The traditional method (sometimes referred to as three-tier pricing) comprises three types of rates and is applied to most hotels and lodges:

  1. The qualified rate, which is the best rate available.
  2. The mid-qualified rate, for transactions that are keyed in.
  3. The non-qualified rate, for all other transactions.
The newer pricing scheme, which is less common but also significantly less expensive, is known as interchange pricing.  With interchange pricing, each charge is made of (1) a mark-up of a certain rate category and (2) a set fee per transaction.  At first glance, interchange pricing may seem more expensive, but it actually can result in significant cost savings.  Why?  Because the three-tier pricing most often resorts to the non-qualified or mid-qualified rates, which are more expensive than the qualified rates.  Talk to your credit card processing company about the possibility of switching to interchange pricing.  Once you start enjoying the lower credit card processing costs, you can choose to pass those savings onto your customers, having a more competitive room rate than your competitors who are being charged according to the older, more expensive pricing scheme.

Reward Programs

Many of the people who stay at hotels and lodges have credit cards that are tied to reward programs, also known as loyalty cards.  From the customers’ perspective, these cards are excellent, because they allow the user to accumulate frequent flyer miles or redeemable points with every purchase.  Unfortunately, these cards also carry many hidden additional costs to the hotel or lodge owner who accepts payment.

Under the older, three-tier pricing system, loyalty cards are automatically processed at the highest (most expensive) non-qualified rate.  Given the increasing prevalence of loyalty cards, hotel and lodge owners cannot afford to let this happen.  If, instead, they switch to a credit card processing company that uses the interchange pricing system, loyalty cards are charged at their real cost (plus the per-transaction fee), which is virtually always less than what would be charged under the three-tier pricing system.

Check Cards & ATM/Debit Cards

Many customers like the convenience of using check cards and ATM/debit cards.  With a little advance planning, hotel and lodge owners can make these cards work for them, too.  Under the three-tier pricing system, check cards often carry the highest rates.  As described above, however, by switching to the interchange pricing system, hotel and lodge owners can save a significant amount of money, especially since these cards usually have lower rates than regular credit cards.

With ATM/debit cards, hotel and lodge owners can take these savings even further.  These transactions cost much less than credit card or even check card transactions, usually around half a dollar.  There is no percentage fee, so the merchant account is charged only a modest fee per transaction.  To be able to take advantage of these cost savings, hotel and lodge owners need to invest in a PIN-pad, so that customers can easily and securely enter their four-digit PIN at the registration desk.

High Volume, Low Ticket Transactions

When a hotel or lodge has a small restaurant or café on-site, the owners can often save a great deal on credit card processing costs by establishing a separate merchant account.  That way, if the majority of credit card transactions are generally under $15 (the figure is $25 if a contactless machine is employed) – so-called high volume, low ticket transactions – the credit card processing company will recognize them as small-ticket items and, accordingly, charge a lower percentage rate.  With many such transactions each day, this can mean significant cost savings.

Also, having a small ticket program has additional benefits, such as obviating the need to obtain customers’ signatures for nominal payments.  This may represent just a few seconds for each customer, but on a busy lunch line when employees are strapped for time, this can mean greater convenience for customers and employees alike.

Minimize Chargebacks

Another huge opportunity to reduce the costs associated with having a hotel merchant account is in the area of chargebacks.  One of the most common causes of chargebacks is when a hotel or lodge charges a no-show customer for one night’s stay as a consequence of not calling to cancel the reservation.  Unfortunately for the hotel and lodge owners, many of these no-show customers then deny the charges when they receive their credit card bill.

Charging no-show customers for unused rooms makes sense, but the hotel or lodge owners needs to take several steps to minimize chargebacks.  First and foremost, the policy of charging for non-cancelled reservations needs to be displayed prominently on the website, in promotional materials, and at the registration desk.  Whenever customers call to make a reservation, the cancellation policy must be explained in full.  Also, whenever charging a no-show customer for an unused room, the charge should be accompanied with a mailed invoice advising the customer of the charge and citing the policy as justification.  If the customer later denies the charge, the hotel or lodge owner can fight back by presenting the details of the customer’s unused reservation, a copy of the establishment’s cancellation policy, and a copy of the invoice.  Presented with this evidence, the credit card company is less likely to present the chargeback to the hotel merchant account, instead either insisting that the customer pay or covering the cost on its own account.

By applying the tips in this article, virtually all hotel and lodge owners can significantly reduce the costs of maintaining their hotel or lodging merchant account.

About the Author
Andrew Lax has been in the merchant account credit card service industry for five years.  Today he is the account manager for IntelliCollect (, a merchant account service provider.


Andrew Lax

Also See: Shift4 Releases New Technology to Insure the Security of Its Merchants’ and Partners’ Payment Processing; Tokenization Moves the Liability for Securing Credit Card Data away from Merchants’ and POS Application Developers / October 2005


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