Merchant Accounts

merchant account

Having an online merchant account allows you to accept credit card payments from your clients via your own online retail website. It allows you to target customers who are based in countries worldwide, and therefore you are not limited to customers who live within the local area of you business.

About Online Merchant Accounts

Why Do You Need a Merchant Account?

Merchant accounts provide you with the ability to accept credit or debit 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 sales where you were paid by credit cards are deposited into your bank account on a regular basis, less merchant account fees.

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 disadvantage in a highly competitive business environment.

The Merchant Bank assigns you a unique number called a Merchant ID Number or MID. This unique number is attached to each credit card transaction that originates from your Web site. The Merchant ID number is also associated with your business checking (current) account. This allows funds captured from your customer’s credit card payments to be automatically deposited into the correct business checking account. To qualify for a merchant account, you must meet the bank’s requirements.

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 by 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 a type of payment application. The type of merchant account you require 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.

What is a Payment Gateway?

A payment gateway is a separate service and acts as an intermediary between the merchants’ shopping cart and all the financial networks involved with the transaction, including the customers’ credit card issuer and your merchant account. It checks for validity, encrypts transaction details, ensures they are sent to the correct destination and then decrypts the responses which are sent back to the shopping cart.

This is a seamless process and your customer does not directly interact with the gateway; as data is forwarded to the gateway via your shopping cart and a secure (SSL) connection. The shopping cart is configured via plugins to send information in a format that is acceptable to the particular gateway.

The proper choice of payment gateway is another vital element which will contribute to your success or failure as an online business.

Since the payment gateway is the secure connection and transmission of the orders through to banking networks, it is independent of the interface (point of sale software or catalog/cart) that you use to transmit the order information through the payment gateway.

Where Can You 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, 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 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 sales volume.
  • Average order size.

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”. We typically recommend that merchants obtain their merchant account through a bank if possible, since the rates are typically lower, and they are unlikely to go out of business. That said, many reputable ISO’s do exist and provide a valuable service to merchants that are unable to get a merchant account through other channels.

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, for example, their policy is to revoke your merchant account status after a small number of charge-backs.

Requirements for Setting up a Merchant Account

Getting important information together ahead of time will ensure that you go right through your merchant account application process. Here’s what you may or may not (depending on the provider) need in order to obtain your merchant account:

  • Corporate bank account.
  • Set of your corporate documents, such as Certificate of Incorporation, Articles of Incorporation, business license, by-laws, etc. The purpose of this is to prove you are a legitimate business.
  • Have a web site.
  • Details of your refund policy information.
  • Provide trade or bank references.
  • Photocopy of recent tax returns (may or may not be needed depending on monthly sales volume you expect through your merchant account).
  • A photocopy of your identity document such as passport, identity card, etc.

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 monthly 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, depending upon the acquiring bank.

Discount Rate: the discount rate is the percentage of the total sale that you pay to the acquiring bank, and is typically the largest cost of having a merchant account. These rates are determined using a number of factors, including the average order amount, estimated total monthly volume, the perceived business risk, etc. Internet-based merchant account discount rates range from approximately 2% to 5%. 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 $0.10-$0.50 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, and some banks do 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 the minimum amount.

Chargeback Fee: if a customer successfully repudiates a charge from you, the bank will levy 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 or you experience excessive charge backs.

Obtaining a merchant account is a necessary step in providing your customers 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. We can assist you to understand all of the related fees and policies associated with the merchant account, and ensure that you’re dealing with a reputable bank and reputable provider. Your business deserves nothing less.

If you have any questions about the process and you wish to set up a complete merchant account solution for your online business, please Contact Us.