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Merchant Accounts

What is a merchant account?

If you have a bricks and mortar business then you have a merchant account that enables you to accept point of sale (POS) transactions where the buyer is present to ‘swipe’ his or her credit card at the time of purchase. If you have a mail order or telephone order business then you probably have a MOTO (Mail Order/Telephone Order) merchant account. If you want to accept credit cards over the Internet you will need the latter type of account.

A merchant account for an online business is similar to a merchant account for a mail order business in that there is risk associated with the fact that the buyer and credit card are not physically present – this is called a ‘cardholder not present’ (CNP) transaction. While authorization for a CNP transaction validates that the cardholder has sufficient funds in his or her bank account, it does not assure payment of the transaction since there is no guarantee that the cardholder is initiating the transaction. In other words, the chance of fraud is increased and because of the amplified risk these types of accounts tend to be more costly.

There are two options available for establishing your Internet merchant account - through a bank or through an independent sales organization (ISO). An ISO acts as a third party between the merchant and acquiring bank (merchant bank). The option you choose will depend on how risky your business is and the costs you can afford to pay.

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If you have a bricks and mortar business and want to sell online, it is recommended that you go to your current bank for an Internet merchant account because you already have an established relationship with them. Since your current bank has access to your existing accounts and financial information, the application process may proceed faster and the likelihood of securing an account is increased. If you acquire your Internet merchant account through a bank that you do not normally do business with, ensure that your Internet merchant bank can transfer funds to your regular bank.

Banks offer security, reliability and stability, but they are more selective when opening Internet merchant accounts. ISOs tend to be more flexible towards riskier businesses, such as online casinos or adult sites, but they will generally charge more for accepting this risk. Also, they are not as regulated as banks and therefore may not be as dependable. Consequently, you should only go to an ISO if you have been turned away from your bank.

How do I choose a merchant account provider?

Not all merchant account providers are created equal so it is necessary to identify one that best suits your business needs. As with any business endeavor selecting a good merchant account provider requires in-depth planning for increased success.

Determine Your Needs

Choose between batch (manual) payment processing or real-time payment processing.

Manual processing means the order is received with the credit card number through a phone call, fax, or online form and processed manually, either by contacting the payment processing company to verify the credit card number or by using a point of sale terminal to swipe the card.

In contrast, real-time payment processing means the credit card is automatically processed when the customer submits an order. Once the credit card is verified and approved, the customer receives immediate notification that the order is accepted and the funds are transferred from the customer’s bank account to the merchant’s account.

Whether you choose batch or real-time processing depends primarily on the number of transactions that occur on your site. If you expect low volume sales then manual processing is a viable route. It is not only less costly than real-time processing but it also protects against fraud, as you have more control over the processing procedure. The major disadvantage is the amount of time it takes to manually process orders.

On the other hand, real-time processing is better for large volume sales and for products that are sent electronically. Time is saved in processing the order, but it is more expensive to have and requires continuous monitoring to ensure there is no downtime.

Examine Your Business And Determine Your Critical Success Factors

Products and Services: The products and services you sell will determine the transaction fees you can afford to pay. For instance, if your products are small, inexpensive and sold in high volumes then it is beneficial to choose a provider that offers low transaction fees, which usually range between $0.20 and $0.70. Otherwise, the fees will chew into your profits.

Business Duration: In many cases, the length of time you have been in business will influence the number of transactions you have on your site and the level of your transaction fees. For instance, some banks require a minimum number of transactions per month. If you do not meet this minimum, you could be required to pay additional fees. Some banks will ask you to estimate the number of transactions you expect on your site. If you are a new business, estimate conservatively.

Internal Resources: Your internal resources will influence the type of services you need from your provider. For instance, if you lack technical resources, then it would benefit you to select a merchant account provider that focuses on customer service and can work closely with you.

Existing Solutions: Your existing technology solutions may include the provision of an Internet merchant account. As a result, before you go to a bank or ISO, review the package that you have with your hosting company or E-commerce provider. If the package includes an Internet merchant account, evaluate what it comprises and ensure it is acceptable for your business.

Evaluate Your Hardware, Software And Service Requirements

Integrated Systems: When you decide to sell online, selecting a merchant account provider is only one consideration. You also need a storefront solution to enable customers to send orders, a payment system to process transactions, and a payment gateway to securely process payments as they travel from a customer’s site to your site. A number of merchant account providers offer integrated systems (turnkey solutions) that include each of these components, as do hosting companies and E-commerce solution providers, which bundle merchant accounts and other services into their packages.

Merchant account providers that offer integrated services can be expensive because in many cases they work with agents who make their money through commissions. As a result, costs are often ‘marked-up’ so the provider can make an acceptable profit. On the positive side, working with a merchant account provider that offers integrated services means that each level of the transaction is compatible with the other.

If the merchant account provider does not offer integrated services, it is important to ask what kind of software it requires. The storefront software, payment system, secure gateway, and merchant account must work together if you use real-time processing. If the components are not compatible, the transaction will not execute properly. While a good merchant account provider will tell you what software is compatible, it is important that you do your homework and ask the right questions.

Hardware/Software: Your hardware and software requirements will depend on your processing method (batch or real-time) and business needs.

If you decide to implement real-time processing, you will require payment gateway software to authorize and process the credit card number in real-time.

If you choose batch payment processing, you essentially have two options that enable you to manually process orders. One, you can purchase software that allows you to transact your orders manually. The software is housed on your computer’s hard drive and is connected to your bank through a modem and telephone connection. Second, you can buy a point of sale terminal to key in credit card numbers as they come in.

Leasing a terminal is an option, but it is not always the cheapest route. For example, perhaps you want to purchase a POS terminal that would cost you $400 to buy. To lease the same terminal using a 10 percent interest rate for three years you would pay $520. So, in fact you are paying $120 more than if you had purchased the terminal. And, in most cases, the original price is marked-up to start. Therefore, it is better to shop around and look for the best purchase deal.

Security: Whether you host your own site or house it on the server of a web hosting company, it is important to ensure you have security measures in place to protect sensitive information. The majority of web sites use SSL (secure sockets layer), an encryption program that will encrypt credit card information during the transaction process. As well, you should ensure you have redundancy systems in place and clear service level agreements with your provider, which provide a complete description of the services it is obligated to deliver.

Ask Questions

When choosing a merchant account provider, consider the following questions.

Q: What are your criteria for providing merchant accounts to Internet businesses? What kind of information do you need from me?

When making decisions on merchant accounts, providers may require the following information from you:

  • Credit history
  • Length of time in business
  • Business type
  • Types of products or services
  • Price of products or services offered
  • The market segment in which you operate
  • Business financial information
  • Average order size
  • Average monthly amount
  • The processing method in which products and services are being sold and delivered (manual or real-time)
  • Refund policies
  • Other sources of income
  • Business location i.e. it is difficult to get a US merchant account if you are not located in the US

Q: What fees do you charge for your products and services?

Typical fees include transaction, discount and set-up or application fees and could range in price according to the merchant account provider and your business (credit history, type of business, transaction volume).

Q: Do you offer integrated services?

Some merchant account providers offer integrated systems that include a storefront solution to enable customers to send orders, a payment system to process transactions, and a payment gateway to securely process payments as they travel from a customer’s site to a merchant’s site. If the provider does not offer integrated services and you need to go to different providers, it is important for you to ensure each of these components is compatible with your merchant account.

Q: Do you have a minimum transaction number per month?

Some merchant account providers require a minimum number of transactions per month. The volume of your transactions can impact your overall costs.

Q: If you charge per transaction, what do you consider a transaction?

It is important to understand the transaction process otherwise you could end up paying more than you anticipate.

Q: What is the time delay between a transaction and when the money is available in the bank?

The time delay is usually two to three days.

Q: Do you have a service level agreement I can review?

The service level agreement will identify the services to be provided by the provider, define the terms of responsibility to the customer, and outline remuneration if those responsibilities are not met. Ask your provider about them.

Q: Under what circumstances can my account be terminated?

Imagine arriving at your office one day and realizing your account may be terminated. For example, a high rate of charge backs could lead to termination of your account. This development is a serious threat to your business as it can negatively impact the loyal customer base you have created.

Q: What storefront solutions, payment gateways, and E-commerce back-ends are compatible with my merchant account?

When conducting real-time processing, your transactions will not execute properly if each of your E-commerce components is not compatible.

Q: What security features do you have?

Your merchant account provider should have ways to reduce the risk of fraud during the transaction process. Namely, they should have software like SSL that will encrypt sensitive customer information.

How much will a merchant account cost me?

When selecting a merchant account provider, you should ask for a list of service fees. Typically, you will need to consider the following costs:

Discount Rate - Percentage taken from a sale that the merchant pays the acquiring bank to cover the costs of the transactions and the risk involved. Usually 1.5 percent to 3.5 percent.

Transaction Fee - A flat rate charged for each transaction. Between $0.20 and $1.00 US per transaction.

Equipment and Installation - Software can cost nothing or range from $500 to $1200 US or more depending on whether you have batch or real-time processing. Costs for hardware (POS terminals) can range from $500 to $1,500 and could be more depending on the model you purchase (real-time or manual).

Monthly Fee - Typically around $25 US and could vary depending on whether you meet your minimum monthly transactions.

Reserve and Charge back Fee - Cost charged by the bank to cover contested charges. Can be higher for riskier businesses. Between $20 and $50 US. As an example, a customer purchases a coat from your site worth $100 through an online credit card transaction and later contests the sale. As the merchant, you will have to pay the bank $100 in addition to a charge back fee of between $20 and $50.