So you think you may need a merchant account for your business?
Businesses and companies that want to accept credit card payments from their customers for goods and services sold will need to get a merchant account that will allow them to accept and process credit card payments.
There are however alternatives to having a merchant account. But unfortunately, few of those alternatives are even barely worth considering and are not acceptable to businesses.
Most businesses will sooner or later consider accepting credit card payments from their customers, if they have not already. Mostly because, credit cards are the most convenient way for people to pay for goods and services.
There is always the reality that we live in a credit society and credit cards are easier to shop with and we can forget about not being able to really afford what we want - in some cases.
To accept credit cards from your customers you will need to obtain a merchant account for your business. However, there seems to be a lot of confusion about what a merchant account is and how best to get the most appropriate (and cost-effective) merchant account for your business.
A lot of people think that a merchant account is a bank account, like a checking account for instance. Well, it isn't.
Merchant account is not the same as a standard personal or business checking or savings account. It is an underwriting process by a merchant bank (also called acquiring bank) and this facility allows a business (referred to as a merchant) to accept credit card payments from their customers.
There are in essence three different types of merchant accounts (although these should be considered more like three different underwriting risk analysis categories as defined by the underwriting departments of acquiring banks).
These are: 1) retail merchant account, e.g. restuarants, theaters, shops, department stores, or where the card is present while purchasing and making a payment, 2) wireless merchant account, e.g. trade shows, seminars, or onsite services that need to process payments using a wireless terminal or a wireless smart phone (like an iPhone or Blackberry), and 3) Web based merchant account for processing payments online or on the telephone where the card is not present while processing payment.
Merchant accounts usually come with a 48 hour processing turnaround whereby the funds associated to the sale of your product or service is kept during settlement and capture (a process that refers to handling and completing the credit card transaction processing). Once processing of the transaction is complete, the funds will be transferred to your business bank account with a small service fee deducted (2%-2.5% deduction or called discount rate).
A bank that is authorized to issue merchant accounts (directly or through its affiliates called merchant account providers or ISOs) to businesses and companies is called an Acquiring bank and it has been certified by Visa and MasterCard associations to offer merchant accounts through their affiliates (or directly) for retail, wireless, and Web based online transactions.
American Express and Discover Card offer merchant accounts only directly through their own merchant services division have no indirect relationship with other organizations to sell or resell their merchant services. However, their application process is seemlessly integrated with a single application that can easily accompany an application to an acquiring bank for merchant processing of Visa and Mastercard.
An Acquiring bank can provide the merchant with all of the services related to his/her merchant account needs, including the Discover and American Express (although a separate application process) which can be added to the merchant processing for Visa and Mastercard.
Once the merchant account is setup and "live" on a payment processing system, merchants can accept credit cards from their customers. This applies to both brick-and-mortar businesses, wireless merchant processing, as well as Internet-based businesses.
What are the fees for merchant accounts?
Well that is where lots of confusion can occur with all the different fee structures that are offered. In the case of retail merchant accounts, it is much clearer and easier to understand. For online payment processing, it is slightly more difficult since online merchant accounts started around 1995 and at that time it was something new and no one had associated a proper risk analysis algorithm to processing payments on the Internet. Therefore accepting payments on the Internet was treated by banking institutions similar to a MOTO merchant account. MOTO stands for Mail-Order-Telephone-Order, also referred to as card-not-present.
The processing of credit cards online is slightly different than processing for restaurants, retail shops, hotels, car rental, etc. There is usually a higher associated risk for the bank and hence their pricing is higher.
Online payment processing offers a lot more choice in processing facilities and methods, i.e. although the final process is the same and credit card payments for goods and services sold are settled through the banking Interchange network system, the actual transaction processing is not manual (or batch processing) like a restaurant and therefore the automated real-time processing can be performed in many different ways and using many different methods or software systems, such as virtual terminal, integrated API, batch processing (manual or automated) through payment gateway, etc. So the fees and pricing structure can vary slightly depending on how a card is processed.
Here's an expert from leading industry merchant account provider explaining the various aspects of pricing and fee structure for merchant accounts:
Jane Andrews, Merchant Services Underwriting Manager - eComAvenue.com |
Merchant account discount rate (% of total sale amount) pricing is based on a 3-tier system although some merchant account providers have divided these 3 tiers into even larger subsets and more categories and additional fee structures that can get quite confusing.
However, for the sake of explaining it clearly, the 3-tier system will be described here.
Tier 1 discount rate pricing: Qualified Rate
A qualified rate is the most talked about or most standardized percentage rate a merchant will be charged when their customer pays for goods and services using a credit card while the card was present, i.e. the buyer and the seller were at the 'terminal' with the card physically present during transaction processing. This (from a merchant banking point of view) would result in less risk associated to the processing of the credit card since there is the perceived notion that there will be less chance of fraud or use of stolen credit card and little risk of any form of fraudulent activity when card is present with cardholder.
Tier 2 discount rate pricing: Mid-Qualified or Partially-Qualified Rate
There are times when a transaction is not categorized as the Qualified and therefore will be charged at a higher rate. There are two particular scenarios when a transaction is categorized as higher rate or Mid-Qualified and these are: 1) when the credit card is not present and the transaction is processed via a virtual terminal or a software; 2) the card type is not a standard credit card but is instead a business credit card, gift credit card, or rewards card. The discount rate for these are about 2% higher than the standard Qualified Rate described earlier.
Tier 3 discount rate pricing: Non-Qualified Rate
This is the highest discount rate that you could end up paying and it refers to all transactions that do not fall into the above two tiers (Qualified and Mid-Qualified). It includes transactions that are keyed in at a terminal without an AVS (address verification), international credit cards, business cards that have missing information, transactions that are not settled within a specified time for capture and settlement, and transactions that do not have security measures such as CVV2 checking (4-digit code next to the signature at the back of the credit card).
Mel Baisley, Wireless Merchant Services Director - eComavenue.com |
Outside of discount rates, tiered fee structure, and Interchange rates - there are other fees and charges depending on services provided and transaction processing performed.
Application Fees or Setup Fees
Although many are waiving these fees, some internet merchant account providers still require an upfront application fee or setup fee. In almost all cases, this is really a sales fee that is paid to the salesperson or the sales organization and any attempt to persuade a customer that this fee is really an application processing fee is futile. Underwriting departments that process your application do not charge a fee and it is part of the overall service they provide for merchant accounts. Don't let anyone tell you that this fee is necessary. However, most merchant account providers waive this fee.
Monthly Minimum Fee
The truth about this is that you will be paying at least $25 per month minimum for your merchant account service (on top of the monthly statement fee). In case your account is idle and you do not use it to process payments, the merchant account provider that facilitates the service wants to make at least a minimum monthly fee for their service. If you however process more than $1,000 per month, this minimum fee will not make any difference because a discount rate of 2.5% (or $25 based on $1,000 monthly processing) will make the minimum payment irrelevant. You would have to pay the fees for processing anyways, so the minimum fee will not apply to you.
Most all merchant account providers require a monthly minimum fee since they feel that they need to cover their costs even if you don't use your merchant account as much each month. If they don't have a minimum monthly fee (like PayPal) then they are probably a 3rd party processing service which means that they will get you in the discount rate being as high as 2.9%-10% depending on type of card processed. So you will end up paying anyways.
To me minimum fee is logical and, if you are wondering, from my years of experience in this industry, I have never seen any merchant service provider waive this fee (unless they were playing tricks and get you somewhere else).
Statement Fee (also called, Customer Service Fee, Online Support Fee, etc.)
I have a different name for this fee. I call it NONSENE fee. Merchant companies are not content with making $25 minimum per month, so they want to come up with another trick to charge you more money. $10 for printed statements, $8 for online transaction reporting, and $15 customer support fee, etc. all nonsense and silly. You should suggest to the merchant company that you do not wish to pay for any of this.
Discount Rate
As explain briefly above, Visa and Master card merchant account discount rates should be TOTAL of 2.1% for qualified cards. If you are getting anything other than this, YOU ARE PAYING TOO MUCH. American Express and Discover merchant accounts charge 3.25% and 2.6% respectively. This discount rate gets deducted from your sales ticket (for instance, if you sell an item for $100 to a Visa cardholder, your sales proceed will be $97.90 before other fees are deducted.
Samira Ensoreas, Merchant Account Consultant - eComAvenue.com |
Transaction Fee
This is a fixed fee between $0.10 and $0.30. The transaction fee is a fixed fee and does not vary like the discount fee. You pay 10 cents whether your sales ticket is $10 or $10,000. This is yet another fee that the merchant bank makes on top of all the other fees they charge. Sales organizations make part of this fee as their commission for bringing new customers to acquiring bank or the merchant account provider.
Payment Gateway Transaction Fee
Some gateways also have transaction fees. Please remember this is paid to the payment gateway company or its processor and not to the merchant account provider. This transaction fee is different than the fee associated to per transaction processing fee.
Termination Fee
I dislike this the most. Some merchant account providers charge you anywhere between $200-$400 if in case you want to cancel or terminate the account within the first 12-months or the first 3-years. The worst companies I have seen doing this are those that represent themselves as International card service processing and offshore merchant processing or global merchant services - and some of their banking affiliates. There is no need for this fee. It is unfair and not necessary, in my opinion.
Chargeback Fees
If one of your customer requests a refund from their credit card issuing company without getting a refund or credit from you directly, your internet merchant provider will charge you a separate fee (usually between $10 - $20) for charge back in addition to deducting the sale amount from your sales receipts.
Read your merchant account application and contract carefully as other special fees may also apply. I have enclosed a sample merchant account application for your review - please remember this just a sample application only and not an actual application form.
However, there are a few things that you can consider before adding credit card processing functionality to your Web site.
Instead of credit card processing,
have you considered offering electronic
checks?
There is no doubt that online shoppers predominantly used their credit cards (97%+), but you can start by first offering electronic check payment processing for your customers before moving to credit card processing.
If you are going
to accept credit cards, have you researched
the best services offered by providers?
In particular I would suggest to never think of the VISA/Mastercard “discount” rates as the exclusive reason for your decision to choose one provider over the other. Providers who quote very low rates only as their basis of overall company promotion are usually trying to distract you from hidden fees they charge and this can make it much more expensive in the long run. Be warned.
Processing equipment
(hardware terminals, virtual terminals,
and software) should all be free.
I have worked in the industry long enough to tell you that almost everything is negotiable no matter what the merchant bank tells you. Here's what I regards as fair pricing: Internet discount rates of less than 2% (total all inclusive - Interchange+Plus), per transaction fee of 12 cents, monthly service fee of $7, no termination of contract fee, and no fees for : setup, application, annual, customer care, 24hour support, online statement, printed statement, or other such silly concoctions.
Don't sign a contract
that commits you to staying with a merchant
account.
If you sign a term contract then regardless of your level of satisfaction you have no choice but to stay with them for the duration of the contract unless you want to pay a hefty termination fee.
Make non-termination fee as part
of your agreement to sign a contract.
If you are still being forced to sign a contract, demand that they waive any termination fees and get this in writing to protect you in the future. Don't be shy asking for this.
Scott McEwan is a merchant services underwriting consultant and author who has worked and lived in various countries including Mexico, United States, Canada, Costa Rica, France, and Iran as well as his native country, Scotland. He has traveled around the globe extensively in Asia, Middle East, South America, Central America, Europe, and North America. His philosophy of life is to have as little material things as possible and spend as much time with people as possible, ideally people from all different kinds of backgrounds and ethnicity and ideology. Scott McEwan is a published author and has won awards for various commercial articles including Business Journal writer and journalist covering business, commercial notes, banking, and finance. He has been a WritersViews.com member since 2009 and can be reached via our contact page, writer ID 17693.
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posted by: Stewart Rogers - May 19th, 2012 at 11:07pm |
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| Fantastic and very useful article. I have merchant account for the past 3 years but never understood all the jargon these banks use. I contacted ecomavenue.com and I am getting a new merchant account that is much better rates and much better service than the one I currently have from International High Risk Merchant Services. , ... More >> | ||||
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posted by: Ryan Hillman - May 19th, 2012 at 8:53pm |
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| Wow. Good one. I give this high rating. The explanations are simple yet clear and concise. I read this article couple of times and felt I gained a lot out of it. My regards to the writer, Mr. Scott McEwan. , ... More >> | ||||
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posted by: Whitney Soohoo - May 19th, 2012 at 3:22pm |
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| Knowing this information and how they put together a pricing structure for the service has enabled me to get a better rate and sound intelligent when I contacted the company for merchant account. I think I got a much better rate because I knew a little about it. , ... More >> | ||||
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posted by: Sean Rusk - May 19th, 2012 at 12:31pm |
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| I just finished creating my Website and online store and I needed to decide about accepting credit card payments on my storefront. This has been great valuable information , ... More >> | ||||
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posted by: Simon Butler - May 19th, 2012 at 10:49am |
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| My wife and I tried PayPal because it seemed that the merchant account fees were very high. After 3 months and running into major problems with PayPal we applied for a merchant account, mostly thanks to this article. , ... More >> | ||||
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All ideas or comments made are the views of the writers themselves, and not the community organizers or other members and protected by FREEDOM OF SPEECH, recognized as human right under Article 19 of the Universal Declaration of Human Rights as stated in international human rights law in the International Covenant on Civil and Political Rights.
