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The_Ins_and_Outs_of_Merchant_Accounts
| The Ins and Outs of Merchant Accounts
THE INS AND OUTS OF MERCHANT ACCOUNTS By Robert Levings,
President, EasyPay123
Merchant accounts are necessary in order to accept payments made
by credit card from your customers, whether you are operating a
retail store or an online business. The following article
answers the key questions that you may have regarding merchant
accounts. It is part of a series of articles offered by
EasyPay123 to help merchants understand the many facets of
processing credit card payments.
1. Why Do I Need a Merchant Account?
Merchant accounts provide you with the ability to accept credit
card payments from customers for goods and services. A merchant
account establishes a relationship between your business, a bank
and a credit card processor such that funds generated from
credit card sales are deposited into your bank account on a
regular basis, less merchant account fees (to be discussed
later).
Without a merchant account, your customers will not be able to
pay you using their credit card. Given that credit card payments
are still the dominant form of payment on the Internet, this
would place you at a competitive disadvantage in a highly
competitive business environment.
2. What Are the Different Types of Merchant Accounts?
There are two primary kinds of merchant accounts that are
issued, depending upon your method of capturing the credit card
information at the time a payment is made.
The first type of merchant account is called a “card present”,
“signature-based” or “retail” merchant account. This type of
account is issued to merchants whose customers will be
physically present at the time of payment. In such a case, you
would be able to inspect the card and the signature on the
reverse of the card, and would also be able to match the sales
receipt signature against that on the back of the card.
Typically, these types of payments are captured by using either
a card imprinter (using credit card slips) or a “card swipe”
(Point of Sale) terminal.
The second type of merchant account is called a “card not
present”, “non-signature-based”, or MOTO (Mail Order/Telephone
Order) merchant account. This type of merchant account is issued
to merchants whose customers are not physically present when
they make a payment. This is typical of most Internet payments -
where customers key their payment information into an online
payment form - and phone-in payments - where operators key the
payment information into some kind of payment application.
The types of merchant accounts will be a key factor in
determining your fees, since banks typically view card not
present payments as higher risk (i.e. a higher risk of fraud)
than card present payments.
3. Where Can I Obtain a Merchant Account?
Merchant accounts are traditionally obtained through a bank that
issues merchant accounts called an “acquiring bank” or
“acquirer”. Generally, there is a separate group within the bank
that processes merchant account applications.
When you apply for a merchant account, there is no guarantee
that your application will be accepted. The merchant account
risk group will assess a number of factors before approving your
application, including (but not limited to):
– Your company and/or personal credit history – The type of
product/service you are selling (note that it is extremely
difficult to obtain merchant accounts in the U.S. for certain
types of “high risk” products and services such as online
gambling, pornography, outbound telephone sales, prepaid phone
cards, travel agencies and others. What is perceived as high
risk varies by acquirer). Falsifying the nature of the product
or service you are selling when applying for a merchant account
could lead to termination of your merchant account. – Estimated
dollar volume – Average order size
A good place to start is with your existing bank, since you
already have a relationship with them. You may also choose to
inquire about merchant accounts with other banks to compare
rates and policies (in fact, we strongly recommend this). It is
possible to have a merchant account with an acquiring bank that
is different from the one where you have your bank account,
although they may encourage you to move your bank account if you
obtain a merchant account from them. It is likely that you will
need to open a bank account with your acquiring bank so that
funds can be deposited there. Some acquiring banks will route
funds to a bank account of your choice (within the U.S.) if you
request it, although there may be an additional fee for this
service.
Note that American Express and Discover are their own acquiring
banks, so if you want to accept either of these cards, you will
typically complete a merchant account application directly with
them.
Another option for obtaining merchant accounts is through a
credit card broker or “ISO” (Independent Sales Organization).
These companies have relationships with many banks, and attempt
to match your credit history and type of business with a bank
that will accept your application. They are typically paid a
commission from the acquiring bank for your business, and this
is passed on to you in the form of a set-up fee or a percentage
of sale fee. There are many ISO’s to choose from. Be aware that
not all of them are reputable, so you would be well-advised to
do some research on them before “signing on the dotted line”.
When you start the process of investigating merchant account
options, we recommend strongly that you shop around so that you
can compare rates and service levels. The merchant account
business is highly competitive, and it is not uncommon for rates
to vary even within acquiring banks, depending upon which
merchant account representative you speak with, and how valuable
they perceive your business. Having said that, price should not
be your sole factor in obtaining a merchant account. Service is
important too. Understand the acquiring bank’s policies with
respect to such factors as charge-backs (when a customer refuses
to pay a charge). You may wish to reevaluate your merchant
account provider if their policy is to revoke your merchant
account status after a small number of charge-backs.
Finally, if you are using a payment gateway such as EasyPay123,
make sure that your acquiring bank connects to a payment
processor that your payment gateway also connects to. In the
case of EasyPay123, this would include First Data Merchant
Services, Global Payments, Vital, NOVA, First Tennessee and UPP.
4. What Fees are Associated With a Merchant Account?
The fees that you will pay for a merchant account vary depending
upon many of the factors discussed earlier, such as perceived
level of risk, estimated dollar volume, the aggressiveness of
the acquiring bank, etc. In general, however, the following
rates will apply:
Setup Fee: sometimes called an “application fee”, this one time
fee varies widely, from $0 to $500 depending upon the acquiring
bank.
Discount Rate: the discount rate is the percentage of the total
sale that you pay to the acquiring bank. These rates are
determined using a number of factors, including the average
order dollar amount, estimated total monthly dollar volume, the
perceived business risk, etc. Discount rates range from
approximately 2% to 4%. Small variations in discount rate can
have a large impact on your total cost if you are processing
significant dollar volume.
Transaction Fee: some acquiring banks levy a transaction fee in
addition to the discount rate. Of those that do levy a fee, they
typically range from $.10-$.30 per transaction. Note that banks
that waive the transaction fee sometimes “build it in” to the
discount rate to make their fees appear more competitive.
Comparing the total cost of different providers will allow you
to make informed decisions by comparing “apples to apples”.
Statement Fee: this fee covers the cost of producing your
monthly statement. Typical fees are $10 or under, although some
banks will not charge a statement fee at all.
Monthly Minimum: some acquiring banks will charge you a minimum
fee (e.g. $25) if your discount rate plus transaction fees do
not exceed some minimum amount.
Chargeback Fee: if a customer successfully repudiates a charge
from you, the bank will charge you a “charge-back” fee. This
rate varies from $10 to $25 for each chargeback. Note that too
many charge-backs will likely result in the loss of your
merchant account status, so be sure to take advantage of
available fraud control technology and apply sound business
judgment in order to reduce incidences of charge-backs.
Reserve Funds: if the acquiring bank perceives that your level
of risk exceeds their standard guidelines but is not high enough
to result in a rejected application, you may be required to set
up a reserve account with the bank. This typically consists of a
percentage of your sales volume (e.g. 10% of your estimated
first six month’s sales). This provides a fund that the merchant
account provider can access should you exit the business.
Because of the number of fees involved, we recommend that you
prepare a spreadsheet to calculate the total cost of the various
merchant account alternatives that you are exploring. This will
help you make your final decision. EasyPay123 has a simple
online fee calculator available on our website that helps
simplify the process of comparing different merchant account
providers’ fees.
Merchant Account Tips
1. Determine what software you are going to use to process
credit card payments before you get a merchant account. This
will determine whether you will need a card present or card not
present type of merchant account. 2. Be sure to shop around in
order to get the best value from your merchant account provider.
Remember that price should only be one factor in your selection
process. Service, reputation and policies should be evaluated as
well. 3. Ensure that your merchant account provider connects to
a processor that your payment gateway also connects to. 4.
Minimize your charge-backs by employing the latest fraud
detection technology and exercising good business judgment
before shipping products. 5. Be sure to calculate total costs
when comparing merchant account providers. Often fees are
“hidden” in the discount rate to make it appear that, for
example, transaction fees or setup fees are being waived.
Understand the various components that will determine your cost
and take a few minutes to do the necessary calculations. It
could save you a lot of money down the road. To speed up your
comparison process, use EasyPay123’s merchant account fee
calculation located on our site.
Summary
Obtaining a merchant account is a necessary step in providing
your merchants the convenience of paying by credit card. If you
haven’t gone through the process before, it can be somewhat
confusing, since many players and fees are involved. Shop
around, understand all of the related fees and policies
associated with the merchant account, and ensure that you’re
dealing with a reputable company. Your business deserves nothing
less. If you have any questions about the process, please call
us at EasyPay123 toll-free at 866-438-8767.
About EasyPay123
EasyPay123 is a leading supplier of payment processing solutions
to businesses across North America. Offering world-class
solutions at affordable prices, EasyPay123 helps merchants
simplify the process of acquiring, launching and using payment
applications to improve the way they do business. Visit us at
www.EasyPay123.com.
For a description of some of the e-commerce terms used in this
article, please visit our online glossary at www.EasyPay123.com.
If you found this article helpful, you may wish to request one
or more of the other articles in the EasyPay123 series by
visiting our website. Articles in this series include:
Understanding E-commerce Transactions How Transactions are
Processed Getting Merchant Accounts How to Design and Build
Payment Applications How to Choose a Payment Gateway How to Pick
a Shopping Cart Preventing Online Fraud Gaining Visibility for
Your Website Understanding Wireless Payments
© 2003 EasyPay123 All Rights Reserved. This article may not be
copied, reprinted, published, translated, hosted, or otherwise
distributed by any means without explicit written permission
from EasyPay123.
About the author:
Robert Levings is President of EasyPay123, a leading North
American provider of online payment solutions.
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