Merchant Account Services

Ecommerce 101

Everything You Need to Know to Get Your Online Store to be Sccessful


Author: Jim Conners ()

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Accepting Payment

To qualify as an ecommerce website you need to accept payments for products or services through your website. Otherwise you really are just a fancy brochure website. Accepting payments through a website is not simple regardless of your level of experience as there are many aspects and details that need to be reviewed and calculated before you can implement such a system. While the details of accepting payments would require an article itself, we can provide you with enough information to point you in the right direction.

Merchant Account

To process payments through your website you will need a merchant account of some kind. There are different types of merchant accounts available so you will need to determine which is best for your business. There is no such thing as a free merchant account so you will need to be aware of the fees associated with having a merchant. Below are the basics of merchant accounts.

You should read our merchant account blog for more detailed information on merchant accounts.

Types of Merchant Accounts

There are two different types of merchant accounts that a merchant can apply for. Although they both serve the same purpose in allowing a business to accept payments, how they go about it differs tremendously. These differences will affect how your merchant account affects your business.

True Merchant Account

A true merchant account is just that, a "true" merchant account. You, the merchant, apply with a processing bank, usually through a sales agent, to have the right to have a merchant account dedicated solely to your business. The merchant account is for your business alone and you are responsible for it in every way. You will also be responsible for providing a gateway as it is not included with the merchant account (some processing companies or sales agents will have one bundled with their merchant account but technically they are separate and you are usually free to use your gateway of choice). Basically, your merchant account is direct with Visa and MasterCard (and American Express and Discover Card if you choose to accept their members' cards) and you must abide by their rules.

Third Party Processors

A third party processor allows your business, or even you as an individual, to use their merchant account to accept credit card payments. You apply with the third party processor and they make the decision based on their own set of criteria as to whether or not you will be allowed to use their services. The third party processor's bank doesn't even know you exist. A form of a payment gateway is automatically included as you must process all sales through their system. The third party processor holds all of the cards as they make all of the rules that you must obey. They are held responsible for the merchant they are allowing you to share through them and they hold you responsible for how your transactions affect it.

High Risk Merchant Accounts

In some circumstances you or your business model may be flagged as a high risk merchant. Various factors go into defining a high risk merchant type. Typically high risk falls into 2 or 3 categories: Chargeback Risks, Reputational Risk, Credit Risks. Chargeback risks are where the merchant is typically in a business model with higher then normal chargeback ratios. For example telemarketing companies who do outbound unsolicitied calls may be have higher chargeback ratios due to the nature of the business. Reputational risk examples include gun stores, adult businesses and gentlemans clubs. Credit risks involved business owners with bankruptcies or poor personal credit histories. There are some processors who will underwriter the higher risk merchants but you should expect to also pay higher fees for a high risk merchant:

For an in depth comparison of true merchant accounts and third party procesors, be sure to read our article Merchant Account Comparison which compares a true merchant account to three third party processors and offers a calculator to see which is better for your business.

What to Expect

Merchant Accounts are fairly complex even though they are greatly simplified by the time a sales agent knocks on your door. How a merchant account provider sets their rates and presents them to a merchant varies from provider to provider and makes doing an apples to apples comparison very difficult. The best you can do is to look at the core fees to get an overall idea of what your costs will be with each provider and base your decision on that.

Rates & Fees

Like most things in life accepting credit cards is not free. Each time to accept payment via credit card a small fee is charged for the privilege of accepting that credit card. How that fee and how all of the fees you pay overall are based on fees established by the major credit card issuers and determined by your merchanrt account provider. Rates and fees can vary tremendously so it is not possible to give an exact guide as what to expect. However there is not commonality amongst providers that you can know enough to avoid surprises when your first statement arrives.

  • Qualified Rate

    This is the percentage rate you will pay for the majority of your credit card purchases and as a result is the rate you see advertised by merchant account providers. This rate will vary from provider to provider and also by your style of business. Retail businesses will pay as little as 1.49% per transaction and non-retail business will pay as little as 1.99% per transaction. Because this fee is percentage based fee how much it costs per transaction will vary depending on the size of your sale. The larger they are the more this fee applies.

  • Transaction Fee

    This is a flat fee that is charged for each transaction your business makes. This fee is fixed so the size of the transaction is irrelevant.

  • Surcharges

    Not all credit cards are created equal and thus not all transactions are created equal. Some credit cards cost more to accept and as a result will never be chatrged at your qualified rate. The rates you will pay for these cards will vary from provider to provider. The amount can be anywhere from 25% to 100% more per transaction. Typically you will see these fees if you accept special credit cards like rewards acrds and corporate credit cards. These fees can also occur if you do not process your regular consumer credit cars properly (i.e. you do not perform AVS on your transactions).

  • Statement Fee

    The statement fee is charged each month and covers the processing bank's cost for issuing a paper statement to their merchants. This fee typically includes technical support and customer service but does not always do so. In the cases where it does include technical support and customer service electing to not receive a paper statement will not remove or reduce this cost.

  • Annual Fees

    This one is fairly straight forward although it may go by several different names. Other names it may be referred to as includes membership fee and club fee. Regardless of what name it is given it is charged once per year. This fee is not required by Visa and MasterCard and typically is an extra charge added by the merchant account provider.

  • Monthly Minimum

    The monthly minimum fee is basically a fee that guarantees that a merchant will pay a minimum fee every month even if they don't process any credit cards. It can be tricky to explain but we have already done so in our blog post The Monthly Minimum Explained.

  • Other Fees

    While some of the more important and common fees are listed above, there are other fees that factor into accepting credit cards payments for your business. Some of them are common fees for common services such as a voice authorizations. Others are very rare and only occur once if the lifetime of a merchant account and sometimes not even that often so they are not even worth discussing. Others are sneaky ways for merchant account providers to nickle and dime a merchant. When seeking a merchant account always find out what fees you are subject to before signing on the dotted line.

Scruntiny & Risk

The greatest single factor affecting almost every aspect of accept credit card payments is risk. Primarily risk to the merchant account provider. When fraud or other problems occurs and money is lost, the merchant account provider is often the one who has the most exposure to the potential for loss. As a result from the moment an application is submitted for a merchant account until the last transaction is processed for a business, merchant account providers must weigh the risk vs margins they see for every merchant.

Not all businesses have the same exposure to risk as others. As a result there are many factors which determine whether establishing a merchant account is easy and inexpensive or difficult and pricey. Business that attract fraud are obvious high risk businesses but businesses that have low margins or a high rate of failure are just as problematic. Basically any business that has a high probability of chargebacks or failure will be considered high risk.

One thing you absolutely want to avoid is having your merchant account shut down by your processing bank for security issues. This ultimately will result in some of your miney being held for a minimum of six months and your business never being allowed to accept credit cards again.

To learn more about terminated merchant accounts the Match File read our blog post What is The Match File?

The underwriting guidelines of process banks will vary but there are some general guidelines common to most if not all processors. To see a list of things you cannot do with a merchant account read What You Can’t Do With Credit Card Processing.

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