E-Commerce

Email this article Printer friendly page

How to Shop for a Merchant Credit Card Account Dr. Ralph F. Wilson Web Marketing Today - Sep 15, 2009

---

Having a merchant credit card account enables you to accept online payment through credit cards (unless you go through an alternate payment system such as PayPal (discussed in a previous series of articles). Actually, a merchant account isn't an actual bank account, but a line of credit which is extended to you, the merchant, by the bank that handles your credit card transactions (known as the "acquiring bank").

Definitions to Clarify

Frankly, the terminology is pretty confusing, so let me offer a few definitions. I'll be speaking from the standpoint of you, the merchant.

Independent Selling Organization (ISO) is an outside company that markets merchant accounts to you on behalf of a bank (the "acquiring bank"). ISOs are paid either by an immediate commission from your application fee or "on the back end," as a small percentage of your transactions -- or both.

Acquiring bank. The bank that offers you a merchant account "acquires" or accepts credit card transactions on your customer's credit cards issued by another bank (the "issuing bank"). Your bank bears the risk that you will remain solvent over time. Potentially your bank could lose money if you have too many chargebacks (fraudulent transactions or returns) or have to issue refunds without enough money to cover them. The acquiring bank has a processing relationship with both VISA and MasterCard, and is responsible to enforce the rules they impose on their member banks.

Issuing bank. The bank that issues the credit card to your customer.

Payment processor. This organization, under contract to the acquiring bank, provides authorization services and "settles" payments, that is, moves payment between your customer's bank (issuing bank) and the merchant's bank (acquiring bank). These days some payment processors are employing ISOs to market merchant accounts directly.

Payment gateway. A secure, Internet interface between your shopping cart and a payment processor. Your cart will transmit sensitive credit card information to the payment processor and receive back an approval code and details that might alert you to possible fraud.

Chargebacks. If a customer doesn't recognize (or claims not to recognize) a transaction that shows up on his monthly bill, he will contact his issuing bank, which will open an investigation that may result in the merchant returning his money -- known as a "chargeback." Chargebacks are most common with products and services that experience high fraud levels or high levels of customers denying making the transaction (such as is the case with porn sites).

Fees Associated with Merchant Accounts

The marketing of merchant accounts is ripe with potential to scam unsuspecting merchants. Things have been cleaned up some, but you have to be on your toes to make sure you get the best deal. I've listed some typical fees below -- though I doubt that ISOs will list fees online. You'll probably need to fill out a form and get information on the phone from commissioned agents.

Application Fee. This could be $100 or $200, which goes directly to the ISO as an up-front commission. However, many ISOs aren't charging an application fee these days. They take residual payments on the "back end," out of month-to-month fees. Occasionally you'll be assessed an "account set-up fee." That's another name for an application fee.

Discount Rate. The discount rate is the largest of the fees -- a percentage of the transaction. In the US, this is typically 2.0% to 2.2% (perhaps up to 2.5%) for most online purchases. Brick-and-mortar stores that swipe a physical credit card (a "card-present" transaction) pay significantly lower discount rates. Factors that affect the discount rate include time potential for chargebacks and the types of cards used in the transaction.

Actually, the discount rate isn't just one figure. Typically a bank will have slight adjustments for various types of transactions -- rewards cards, business cards, debit cards, sales from customers in other countries, etc. Some ISOs offer three-tiered pricing, with separate rates for qualified transactions (regular cards), mid-qualified transactions (rewards cards, business cards), and non-qualified transactions (foreign cards, required fields not entered, etc.). Some ISO quote "Interchange Plus Pricing." They use the rates charged by Visa and MasterCard and add on a small percentage and transaction fee. If the Interchange Rates for "CPS/e-Commerce Basic are 1.85% + $0.10 transaction fee and your Interchange Plus quote is + 0.20% + $0.11, then the rate you as a merchant will pay is 2.05% + $0.21 transaction fee. This is a more transparent kind of pricing, but may not save you much money unless you have a lot of mid- or non-qualified transactions.

Transaction Fee is assessed each time a transaction is made. Typically this is 20 to 25 cents.

Monthly Fee or Statement Fee (this is called different things) will be charged at statement time each month. This could be $5 to $10.

Monthly Minimum Fee. If you don't process enough business in a month to generate sufficient fees, some merchant accounts may assess a minimum fee of $15 or $25. They'll get their pound of flesh somewhere.

Payment Gateway Fee. Most e-commerce merchant accounts come bundled with a payment gateway -- usually Authorize.Net for $10 per month. You'll probably get a better price for a payment gateway bundled this way than trying to purchase it separately. Note well: Make sure that the shopping cart you have selected has a built-in interface to the payment gateway offered in the bundle. If not, shop elsewhere.

Early Termination Fee. You must sign an agreement to get a merchant account -- which is exactly the same thing as a contract -- even if they say "no contract." Be aware that some ISOs try to sell you a one to three year contract, with a hefty cancellation fee, perhaps $300. If you're just getting started with an online business that ends up failing, this fee could really bite you -- so be careful.

Chargeback Fee. All merchant accounts assess the merchant a chargeback fee, typically $15 to $30 per event.

Other charges might include a customer service fee, set-up fee, annual fee, and batch fee. For example, you'll see some ISO that change an annual fee of $99. Some ISOs charge a PCI Compliance Fee of $50 or more per year -- so ask if this will be assessed.

Advantages of a Merchant Account

I see four advantages of having a merchant account over using an alternate payment method:

1. Customer Confidence. With third-party alternate payment methods, the transaction takes place on the payment site, rather than on your own site. This can create identity confusion, since the payment site looks different than the website where the purchase was initiated.
2. Flexibility. With the order system on your own website, you have much more control of the ordering process. You can even write code to customize your ordering system to maximize sales.
3. Cost. While PayPal is ideal for new mom and pop Internet merchants, when you get up to $3,000 per month in sales revenue, you're at the point where you can probably save money with a merchant account, even with the various fees associated with an account.
4. Order Management and Fulfillment. Most order management systems work best when managing credit card transactions through a merchant account. Even though they have adapted to work with PayPal as an alternate payment system, they probably work best with the full flexibility of a merchant account.

How to Get a Merchant Account

First, contact the bank where you have an account. Ask them how to set up a merchant account. They probably have a department (or perhaps an ISO) they'll put you in touch with.

Second, search Google for "merchant account" to see listings for many ISOs. You'll have to fill out a form to have them contact you. Ask them to e-mail or fax you their exact fees. Make sure you read their agreement or contract very carefully to avoid hidden fees.

Third, put the various fees in a spreadsheet so you can compare offers between one ISO and another. You'll see some big differences in costs if you're observant.

Fourth, don't let anybody "snow" you! If you don't understand what a particular fee is for, keep asking until you're sure.

Finally, search online for complaints about any ISO or company that you consider doing business with. It could be an eye-opener. And good luck!

Dr. Ralph F. Wilson is an e-commerce expert. He has built stores for dozens of clients (including a prominent Internet Retailer 100 company) and has written extensively on e-commerce. He is the author of The Shopping Cart Report (Second Edition, 2004). He is the founding editor of Web Marketing Today.