If you have an online business or any other reason to accept credit card payments, you will need to get a merchant account. This article will explain what a merchant account is, how to get one, and what pitfalls to watch out for in the process.
With bank cards, credit cards and virtual cards, having the ability to accept credit transactions online can be a vital component to success for any online retailer. In order to accept credit card orders, your company will need a merchant account, along with a number of other considerations outlined below.
What is a Merchant Account?
Quite simply, a merchant account is an account that accepts and holds funds for credit card transactions. It is a relationship set up between the merchant and a financial institution. When you run your card through the machine at the gas pump, hand it over to the server at your local restaurant, or zip it through the box at the grocery store, the same process occurs. Your card is first authorized, and then merchant’s Merchant Account logs the record of the transaction. Depending on how they have their account set up there is either an instant charge on your credit card account, or a placeholder, with the actual deduction of funds occurring later. Most gas pumps work this way, with only one dollar being held as a place holder, just to make sure your account is active. Then, at the end of the day (or even a few days later,) the merchant sends a batch of receipts through their merchant account, which in turn finalizes the transaction on your personal account.
Risk
As with any relationship entered into with a financial institution, there is a risk factor to consider; that is, the institution is going to assess whether or not opening that account for your business is worth the risk. The risk itself is compounded when you move credit card transactions from the physical to the virtual. When a purchase is made online, there is no actual credit being physically scanned in to a machine.
Where to find a Merchant Account
When considering opening a merchant account for an online site, it is important to pick the right financial operation to use. If you have been in business for two years or more, approach your business banker. If you have been in business for less than two years, you might run into a brick wall with that route. Check with your personal banker, the one who handles your own personal accounts, and see if there is a way for them to set up a merchant account for you. Once you have tried both of these avenues, then try an ISO; fees are going to be higher, and ISO’s are not regulated the way banks are. That is not to say ISO’s are not safe alternatives than banks; just more expensive ones.
Preparing to apply
When getting prepared to apply with a bank or ISO, there are a few things you will first want to estimate your average order size, and the average amount that you expect will run through the account each month. You may be tempted to round up in order to impress the bank and improve your chances: don’t do it. Most of the time you will be required to keep either a percentage of that monthly figure, or even one full month’s worth, in the account in order to safeguard against fraud. If you’ve given an inflated number, you will have more of your capital tied up in the account than you needed to. Don’t worry if you’re monthly credit card receipts go beyond your estimates. If there is a problem, the institution will contact you to work it out.
Order forms
In order to accept orders online and have your customers pay using Visa, MasterCard, or any other credit card, you will need an order form. Order forms are usually build using HTML (HyperText Markup Language, the programming language used by the World Wide Web community.) The order for should be encrypted in order to safeguard your customer’s account information, and engender trust in your business. Encryption is often done using Secure Sockets Layer (SSL), which is a protocol developed by Netscape to transmit private documents via the Web. If you notice that a website you log onto has an URL that starts with https rather than http, that site uses SSL.
Where do I get SSL?
Don’t know how to use SSL? Your hosting company can set up SSL service for you (for a fee), as can your ISP (Internet Service Provider.) You will also need a SSL Certificate, purchased from a company like VeriSign. This quote from their website explains Certificates very well:
“An SSL Certificate consists of a public key and a private key. The public key is used to encrypt information and the private key is used to decipher it. When a browser points to a secured domain, a secure sockets layer handshake authenticates the server and the client and establishes an encryption method and a unique session key. They can begin a secure session that guarantees message privacy and message integrity.”
Payment Processing Software
In order to process all the payments you are expecting your credit card customers to produce, you will need payment-processing software. This software handles the transactions between your company and your bank. It is server-side software, meaning the program is not on your companies computers, but rather the servers of the software provider; in this way it is more of a service than a product you buy. You can buy the service outright, or lease it on a monthly basis. Some companies to choose from include VeriSign and Authorize.net.
How it works
Once your company is set up with a merchant account, order forms, SSL Certificates and an account with a payment-processing software provider, you will need to understand how the daily operations of accepting and processing credit card transactions works. When a customer places an order on your web site, the merchant account provider will be the one to receive their virtual payment. Typically this institution holds on to those receipts until the end of the day, at which point they deposit them into your company account (after deducting the applicable fees.) There could be more involvement between your company and the merchant account provider, depending on what ala carte style services you may have signed up for. Customer service, authorization, reporting, billing and settlement services are all a part of some providers suite of service offerings. They may outsource merchant services through third-party companies such as First Data Corp.
There are two methods to authorize payments, each with their own pros and cons.
Batching
Batching is the method most frequently used by smaller companies and involves grouping all the days receipts together and processing them by hand at the end of the day. Special machines and software can be used to do batching. Orders taken via online forms, by phone, or by fax can be collected during the day, and then entered after hours. While this can be time consuming, it does offer an extra level of protection against fraud, which is especially good for smaller companies who can not afford to absorb the cost of fraudulent transactions.
Real Time
Real Time authorization processing will approve or decline a credit card transactions immediately. This kind of authorization processing is especially useful if your company deals in a huge volume of online orders. If the numbers are not high, then the added cost and possible fraud risk may be too much for your company.
Which is better?
Which form of authorization processing is better depends a lot on your company’s size and style. The major difference between batch and real time is on the back end. It is a behind the scenes process that, in most cases, the customer will remain in the dark about. As long as the customer is given an order and number, then they will be satisfied that the transaction went through.
Merchant Fees
Running a business is a constant chess game of your bottom line versus your expenses; if you hope to help your bottom line win, you will need to know your opponent well. Merchant account providers have a variety of fees and costs associated with service, and they will vary from provider to provider. Depending on the volume of transactions and the amount of each, merchant fees could render your transactions profitless.
Discount Rates
Discount rates refer to the percentage of each transaction the financial institution will charge merchants for use of their service. The percentage is typically on a sliding scale, dependant on the average order size; larger order sizes means smaller discount rates, which average around two to three percent.
Intercharge Fee
The Intercharge fee is the amount per transaction that is charged to the merchant as a flat fee, and can range anywhere from a quarter to 70 cents and up per charge. If your business sells widgets at less than a buck, and your intercharge fee is 50 cents, half your potential profit is gone. Note that is before figuring in Discount rates and your own operational expenses.
Monthly Fees
The merchant account provider may charge a monthly fee to cover statements and the like.
Equipment
Purchasing or leasing equipment will have a cost to consider, as well as installation if relevant. One option to avoid this cost is to check with your hosting company for an e-commerce solution. This package deal could go along way to keeping initial costs down.
Reserve Costs
If contested charges occur there is typically an amount held in reserve by the bank to cover them. A percentage of anticipated monthly receipts, or even an entire month’s worth, could be held. If a dispute arises and is settled in favor of the card holder, there will likely be chargeback fees to consider.
Go shopping
Before signing up for a merchant account, it would be smart to do some comparison shopping. Be sure to compare apples to apples when looking at the costs of things such as equipment and installation (a bank may charge you, your web hosting company may not) and keep in mind that you need to be profitable first, and accessible to credit card holders second.
External Links:
VeriSign - For SSL Certificates and other security needs