If you’re new to the world of merchant accounts, then you probably have a lot of questions. Here are 18 common questions and their answers – enough to get your business well on its way to accepting credit cards online or offline.
Q. What is a merchant account?
A. A merchant account, sometimes referred to as credit card processing or payment processing, lets businesses accept payments through credit cards, debit cards, and gift cards. To begin accepting credit cards, a business must work with a merchant account provider aligned with an acquiring bank to apply for a merchant account. That merchant account belongs solely to your business and you are responsible for it in every way. Your merchant account is subject to all the rules established by Visa and MasterCard (and possibly with American Express and Discover).
Q. What is a third-party provider?
A. Third-party providers, also known as third-party payment processors, are similar to merchant accounts in that they allow your business to accept credit card payments. However, you do not need to apply to a bank. Instead, you apply to the third-party provider and the bank never sees your application. It is often easier to get a merchant account through a third-party provider, because some banks view ecommerce businesses as high-risk ventures. The merchant account that you use is operated by the third-party-provider and shared among multiple businesses. Unlike establishing merchant accounts, opening an account with a third-party provider requires no application process or underwriting evaluation.
Q. What are the fundamental differences between a merchant account and third party provider?
A. To obtain a merchant account, your business must apply directly to the bank. Applying through a third-party provider omits the need to work directly with the bank. As stated above, it may be easier to apply through the third-party provider because banks view many ecommerce businesses, especially new ones, as high-risk ventures. However, when you work with a third-party provider, your business must follow all of that provider’s rules and pay its fees. In contrast, if your business has its own merchant account, it is directly subject to the rules established by Visa and MasterCard (and possibly Amex and Discover, if you choose to accept those payments). Therefore, if your business is able to get its own merchant account directly from the bank, in most circumstances this is the preferred solution for accepting credit card payments.
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Q. What kind of costs do merchant accounts carry?
A. Costs associated with merchant accounts can be grouped into two categories: setup costs and ongoing costs. Setup fees include the fee for the initial application, the setup/installation fee, the costs of necessary hardware and software, and, on rare occasions, a security deposit or a minimum reserve amount that must be maintained in the account. Ongoing fees include the discount rate and per-transaction fee, daily batch fee, authorization/verification charges, voice/touch tone authorization fees, and chargeback fees. Additional ongoing costs may include annual renewal fees, fraud protection program fees, monthly gateway fees, monthly statement fees, and monthly minimum fees. The actual types and amounts of costs vary among merchant accounts, so be sure to request a complete list of all fees before signing up for any particular merchant account. Our free ebook defines all the relevant fees associated with a merchant account.
Download at http://www.intelli-collect.com/accept_creditcards.pdf
Q. Do American Express and Discover charge these same fees?
A. The fees described above are applicable only for Visa and MasterCard. For American Express and Discover, the merchant account provider controls only the transaction rates. All other rates are controlled by those companies themselves. Amex offers two different pricing plans, depending on your charge volume. Discover, on the other hand, has a percentage-processing fee that varies by organization, but is usually between 2.50% and 3.25%. Also, there is no sign-up fee for Discover.
Q. How can I process American Express and/or Discover credit cards?
A. If you wish to accept another type of credit card, simply notify your merchant account provider. In most cases, the provider can apply to Amex, Discover, and other companies on your behalf.
Q. What options do I have for accepting credit cards?
A. You can accept credit cards in many different ways. If you have a retail storefront, you can accept credit cards on site with a physical terminal, or you can use a virtual terminal to enter customers’ credit card information via the Web. A service known as Dial Pay allows you to call a number and enter customers’ credit card information through your telephone keypad. You can also accept credit card payments through mobile or wireless devices, or through your company’s website.
Q. What do I need in order to accept credit cards online?
A. You will need four things to accept credit cards online: an online shopping cart, a payment gateway service, a credit card processor and an authorized Internet merchant account. The online shopping cart allows customers to make their purchase selections and then check out, providing their credit card information for payment. The online shopping cart sends the information to a payment gateway service (a secure certificate must be employed), which acts as an intermediary mechanism between your website’s shopping cart and the banking networks. Once the customer’s card-issuing bank verifies adequate funds and reports this information to the merchant account provider’s acquiring bank, a notice of approval is sent back to the payment gateway system which, in turn, sends the notice to the shopping cart for display to the customer. The credit card processor then deposits the funds (minus any associated fees) into the merchant’s bank account. The final piece, the Internet merchant account, is available to the merchant when the credit card processing company approves his/her application and authorizes the merchant to accept credit cards.
Q. How can I reduce online credit card fraud?
A. The key to reducing online credit card fraud is to communicate with your customers and be sure to get their authorization for all transactions in writing, whether via mail or email. You should also always verify the 3- or 4-digit security code (also known as CVV2) on the back of the credit card. (On American Express cards, the code is located on the front.) Because it is not encoded in the card’s magnetic strip, it is a reliable way to verify that the purchaser has the credit card in his or her physical possession during an online or telephone transaction. An Address Verification System (AVS) check should also be employed, comparing the customer’s billing address with the address indicated on the magnetic strip of the credit card. If there is an AVS mismatch, the transaction may be interpreted as a higher risk.
Q. How can I accept credit cards if I don’t have a website?
A. If your business doesn’t have a website, you’ll need to use a physical or virtual terminal to process credit card payments. A physical terminal lets you swipe the customer’s credit card on site. A virtual terminal lets you enter credit card information via the Internet. If you need to process only intermittent charges, Dial Pay (using the phone to input your customers’ credit card information) is probably your best option because of its associated lower monthly fees.
Q. What tiered rates do credit card processors apply to merchant accounts?
A. Traditional credit card processors use a three-tiered pricing scheme for their retail merchant programs: (1) the qualified rate, which is the best rate available; (2) the mid-qualified rate, for transactions that are keyed in; and (3) the non-qualified rate, for all other transactions. Some merchant account providers also discount their fees for check cards, creating another tier. Internet-only merchant accounts are usually limited to only two tiers: (1) the qualified rate, which is equivalent to a retailer’s mid-qualified rate; and (2) the non-qualified rate. Hence, online-only businesses generally pay more for their credit card transactions than do their bricks-and-mortar counterparts.
Q. What is Interchange Cost Pricing?
A. Interchange Cost Pricing is a pricing scheme for credit card processing that, for most businesses, is significantly less expensive than traditional pricing schemes. With Interchange Cost Pricing, each charge is made of (1) a mark-up of a certain rate category and (2) a set fee per transaction. The end result is often significantly less expensive than the traditional three-tier (qualified rate, mid-qualified rate, and non-qualified rate) pricing scheme. Ask your credit card processor to use a representative sample of your transactions to demonstrate the associated costs incurred under each pricing scheme
Q. Is it better to lease or buy a credit card terminal?
A. If you have the cash to make a large up-front payment and buy the credit card terminal upfront, this often makes the most sense. Over the life of the terminal, monthly lease payments add up to far more than the up-front purchasing cost. However, there are many other factors to consider. Ask your accountant whether you’ll be able to deduct the interest paid on monthly payments from your taxable income. And consider the implications of having the outstanding balance of the lease shown as a liability on your company’s financial statements. If having title to the credit card terminal is important to you, then you should buy it outright. Finally, consider the warranty service (and provider) that comes with having a purchased or leased credit card terminal. In truth, almost all businesses are probably better off buying a credit card terminal than leasing, but the decision depends on your specific circumstances.
Q. How difficult is the underwriting process?
A. The underwriting process is pretty straightforward. The underwriter will review your completed application, analyzing the nature of your business, your credit rating, and your history in credit card processing, if applicable. These and other factors are considered in deciding whether to approve your application. The decision is usually made within one or two business days.
Q. How does my business actually get the money?
A. After the credit card transaction has been approved, the amount of the transaction (minus any associated fees) is deposited directly into your bank account, usually within one or two business days of the sale. Some merchant account providers mandate that you open a bank account with their acquiring bank.
Q. Can credit card payments “bounce” as checks do?
A. One advantage of accepting credit card payments is that they cannot “bounce” as checks do if there aren’t enough funds available. However, the customer does have the right to challenge any charges on his or her credit card statement. If one of your transactions is challenged, the credit card company will contact your business, asking for proof of the transaction. If you aren’t able to provide adequate proof (within a designated timeframe), you will lose the transaction amount. Likewise, if the transaction was paid with a stolen credit card, you may be responsible for the transaction amount. Hence, it pays to do your due diligence and make sure that the purchaser is the person to whom the credit card was issued.
Q. Why should I accept credit cards?
A. Customers appreciate the convenience of paying for their purchases with credit cards, but there are many benefits for the business as well. First and foremost, your sales increase, primarily because customers are more likely to make impulse purchases when paying with credit cards. Some studies have shown that accepting credit cards can increase your sales by 1,000%. Also, accepting credit cards can improve your business’s cash flow, because you can receive payment within a few days, which is a definite advantage over waiting up to one week for a check to clear. Accepting major credit cards also increases your credibility from the customers’ perceptive.
Q. How do I decide which merchant account provider to use?
A. Of course, cost considerations must be weighed. Compare all merchant account fees, doing your best to contrast apples to apples, so to speak. Beware of any company that does not disclose important rates, such as their non-qualified fee or if any termination or cancellation fee is imposed. The inability to disclose all rates is tantamount to lying by omission. Many people forget to also consider the criterion of customer service. Reliability and responsiveness become important if problems arise in the future. If you are not receiving exemplary service before you have signed on with a merchant account provider, do not expect such service to improve after you do. Indeed, reward ethical, honest and responsive companies with your patronage.
Andy Lax has worked in the credit card processing industry for over five years and is now an Account Manager at IntelliCollect, a merchant account provider that enables business owners to accept credit cards and electronic checks.
