Guidelines for Obtaining a Merchant Credit Card Account for Web Sales
Web Commerce Today, Issue 17, December 15, 1998
One of the first things you need to do to sell over the Web is to obtain a Merchant Credit Card Account. This account with a bank sets up a relationship between your business, that bank, and a credit card processing house (processor). The account is configured so that funds from credit card sales made on this Merchant Account number are deposited in the bank account of your choice, after subtracting fees.
Before we talk about a Merchant Account, however, you ought to take a look at how you'll be connecting to the processor. Your connection method has a lot to do about how much you'll pay for an account, since the same people that help you set up an account will also want to sell you other hardware and software, and it's important that you understand exactly what you need -- and don't need.
Processor Connection Methods
You connect to the processor in one of four ways:
| Connection Device | Method | Class |
|
1. Card imprinter for paper slips. |
Turn into your bank. This is the obsolete and expensive way to handle credit card purchases. The bank transmits the paper slips directly to the processor who keys them in. |
Card Present |
|
2. POS (Point of Sale) Terminal (Card Swipe) |
Modem is connected directly to your processor for immediate authorization. This is commonly used by brick-and-mortar retail stores, but not for mail order, phone, or Internet sales. |
Card Present |
|
3. Computer Software. |
Credit information is keyed into a desktop computer program such as ICVerify, PCAuthorize, etc. after the order is received. A modem connects your computer directly to your processor for immediate authorization or funds settlement. This is used by mail order merchants and some Internet stores. |
Card Not Present |
|
4. Internet "Gateway" |
Internet stores can obtain real-time credit card authorization at the time of sale. Their online ordering system connects via the Web to a "gateway service," which, in turn, has a modem connection via phone line to the processor. When the gateway services receives authorization, it relays acceptance via the Web your site and notifies the customer that the sale is complete. |
Card Not Present |
Assessing Risk
A Merchant Credit Card Account is a calculated risk for the "acquiring bank," the financial institution that carries your account. Sure, they make money if you have lots of sales. But if you were to go out of business without fulfilling your orders, they might have to refund money to all your customers.
Your credit history will probably have something to do with the rates you pay. If you've been in business for more than six months and have a good credit history, all is well. If not, the bank may need to set aside a reserve fund to help cover their risk.
Some companies are considered by banks (and their underwriting departments) as higher risks than others for chargebacks, where the customer disavows knowledge of the sale, or changes his mind. A chargeback requires the bank to refund the customer's money, and paperwork costs are expensive -- for the bank and for you, the merchant. Some higher risk businesses include: travel, subscriptions, pre-paid services, memberships, seminars, multi-level marketing, entertainment, and pornography. Since these businesses are harder to place with banks, they tend to pay higher fees and require higher discount rates and perhaps a reserve fund.
If you have a brick-and-mortar store your discount rate might be 1.5% for a "card present" sale (where you scan the actual card and get a physical signature), while an Internet business, a sale is classed as a "card-not-present" or MOTO (Mail Order/Telephone Order), and might pay a discount rate of 2.5% or more.
Some US banks that specialize in Internet businesses include:
- Wells Fargo, San Francisco, California
- First Financial Bank, Atlanta, Georgia
- First National Bank of Central Florida, Longwood, Florida
- Humboldt Bank, Eureka, California
- Redding Bank of Commerce, Redding, California
- Tehama Bank, Red Bluff, California
- American National Bank, Rosemont, Illinois
- Michigan National Bank
- Heartland Bank, St. Louis, Missouri
Many of these sign up Merchant Credit Card Accounts through agents (sometimes called Independent Sales Organizations or ISOs).
What Fees Are Charged?
You'll find a wide variation in fees charged to set up a Merchant Credit Card Account. This makes it hard to compare costs. If you are able to set up directly with your own bank, however, you may bypass some of the fees.
Set-Up Fees
1. Application Fee. Expect to pay an application fee. With my local bank this consisted of about $40. Where an agent helps place you with a bank, part of their commission is likely to come from the application fee, so it is likely to be higher.
2. Equipment or Software Fees. This is where you'll find a large mark-up, and where you may be able to save a lot of money. Remember the four ways a business may connect to the processor: (1) paper slips, requiring a imprinting machine, (2) card-swipe terminal, (3) computer software, requiring PCAuthorize, ICVerify, or the like, or (4) an Internet "gateway" service. If your business is entirely on the Internet you only need one of these, and that probably ought to be the Internet "gateway" approach. If an agent were to lock you into a multi-year lease for a POS terminal that you don't need, you won't be happy. The computer software will probably cost $350 and up (though you might be able to get the same kind of functionality for half that price if you could purchase it independently). I am guessing that agents get a nice commission here, so be careful. Please understand, I'm not against commissions, only for selling you what you don't need.
Recurring Fees
3. Discount Rate. This is a percentage of the total sale that goes to the acquiring bank and the processor to cover the processing service and the risk incurred. Rates depend upon the average amount per purchase, the total amount of purchases per month, the riskiness and newness of the business, etc. Expect to pay from 2% to 4%. Of course, the lower the discount rate, the better, all other things being equal.
4. Transaction Fee. This is a flat amount you pay in addition to the discount rate. Some accounts don't require this, others charge 25 to 30 cents or more per sale.
5. Statement Fee. This covers the cost of producing a monthly statement. It could be $10 or under, though some banks don't charge this fee.
6. Monthly Minimum. If the discount rate and transaction fees in a given month don't add up to the monthly minimum, you pay the minimum anyway, perhaps $25.
7. Chargeback Fee. The amount you pay if a customer successfully reverses the charge (and customers are usually successful, especially with online merchants who don't have a signed sales slip). Expect to pay $10 to $25 for each chargeback.
Reserve Funds
8. Reserve Account. If you're a new or risky business, or have a bad credit history, you may be required to set up a reserve account that consists of perhaps 15% of your first 90 days' sales. You want to avoid this if possible, so shop around.
First Things First
Your first task, however, is not to obtain a Merchant Credit Card Account. You don't want the tail to wag the dog, or your Merchant Account to determine how you do business on the Web. First, determine what store-building software or order-taking system you need to run your online store. Second, determine what Internet gateway system (if any) you'll be using, and what processors they support. Third, get a Merchant Credit Card Account with a bank that supports that processor.
Whom Can I Trust?
The tough thing about setting up a Merchant Credit Card Account is finding someone you trust to guide you. If that person or company has a financial interest in the advice they give you, take that into account. Unfortunately, there are some few agents that don't have your interest at heart, and may sell you services, hardware, and software you don't need. Be careful!
I encourage you to talk first to your local banker. They may contract out the process of setting up a Merchant Credit Card Account and providing hardware and software, but they will probably be careful about the company they outsource to. But before you sign on the dotted line, compare their discount rate and other charges to what you can get elsewhere.
While I don't have any financial interest at all in this process, and can't make any recommendations whatsoever, I've tried to include some sources you might want to check out in your search for an agent (http://www.webcommercetoday.com/research/iso.htm)
Best wishes as you set up a merchant account.
