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An Example Of Why Merchants Find It Hard To Get Good Information

While aimless wandering the Internet I stumbled upon a brief article that titled, “Shopping for a Payment Gateway and Merchant Account“. Seemed like another harmless attempt to explain the basics of accepting credit cards over the Internet that reiterated the basics that are pretty available from any website related to the topic.

It started off okay and did a decent job of summarizing the basics. The term “hybrid solutions” was a little odd to read considering that the terms “third party processor”, and to a lesser degree “Internet Payment Provider”, are already very well known names for companies like Paypal that provide the ability to process credit cards through their merchant account. But it wasn’t bad name to use if you didn’t know about the more common names for them.

Then is started to go downhill.

The first piece of information that was disappointing to read was:

If you are setting up a new online business then it is unlikely that your business will have a positive credit history. Under these circumstances it can prove difficult to gain access to a merchant account.

What this basically says is that if your business is new, its lack of credit history may make it difficult to establish a merchant account. While not entirely untrue, it is misleading. While having established business credit is a positive thing, it can be easily overcome in the vast majority of cases. In fact, most merchant accounts are established based on the credit of the owner(s). A bigger factor in preventing a new business from establishing a merchant account is the product they are selling and the environment they are selling it in. A business selling t-shirts in a retail stores is very low risk and would have to go out of their way to prevent a merchant account from being established for them (in other words, it would be really hard to be turned down). However, a business selling high end electronics over the Internet would find credit playing a larger factor due to the increased exposure to fraud and chargebacks they would face due to the nature of their products.

The next section that caught my attention discussed the fees associated with payment gateways:

Unfortunately, fees can be complicated with some accounts. It may be necessary to pay a setup fee, and you will also be required to pay a percentage of any transactions, generally equivalent to between 1.5 percent and 2 percent. A fixed fee per transaction that’s usually less than 50 cents may also be required as well as a monthly management and administration fee, which could be anywhere up to $100.

Different accounts offer different options and your sales figures will determine the right choice for you. If you sell a small number of higher value items then you should try to find a payment gateway that charges a fixed fee. In contrast, if you sell large amounts of items for minimal cost, then you should avoid this fixed fee and concentrate on accounts that offer fees based on a percentage of transactions.

Where do I begin? It seems they have confused the rates associated with a merchant account with that associated with a payment gateway and even then I am not so sure about some of the fees they mentioned. Although there are various payment gateway providers, there is generally a common set of fees charged and the major gateways (Authorize.Net, Verisign) are no exception. When establishing a payment gateway it is typical to encounter a setup fee (although it is not uncommon to have this waived), a monthly fee (typically around $10 - $20), and possibly a flat transaction fee. Payment gateways typically do not take a percentage of your sales. This is typically done by third party processors or hosted ecommerce solutions like Yahoo Stores. The monthly management and administration fee is alien to me. I am assuming that they are referring to an entirely different service and are once again confusing it with the services offered by payment gateways. If you know what they are talking about please comment below.

Payment gateways that do not require a merchant account do generally incur greater costs, because they combine the two required aspects of processing a payment. While some services charge as much as 50 cents per transaction plus a 4 percent to 5 percentfee, PayPal is one of the cheapest available options with a 30-cent and 1.9 percent to 2.9 percent fee on all transactions. With no set-up fee and no gateway fees. this makes PayPal genuine value for money. Similar services like NoChex offer similar rates. Another point worth noting is that services like these do not tend to charge refund fees, monthly or annual fees or regular administration fees.

Individual merchant accounts have similar fees to PayPal but they also generally require a set-up fee and a monthly payment. Ultimately the choice is yours and while PayPal does offer good overall value, it is more difficult to integrate into a Web site despite recent additions to its merchant tools section.

The statements above are mostly fair. But it should be noted that Paypal, while clearly the best third party provider for those it is available, isn’t always the best choice for a merchant. Many factors come into play. Our article Merchant Account Comparison goes into much more detail about that. But it should be noted here that few merchant accounts nowadays require a setup fee. This is usually reserved for very high risk businesses nowadays. Plus, as covered in our article, although true merchant accounts have a monthly fee and most third party processors do not, this does not mean they will cost more or that third party processors are the best option, even not considering integration issues.

What bothered me the most is their conclusion:

For convenience and affordability, hybrid solutions tend to offer the best option. They work out much cheaper because the payments are combined and with competition heating up in this area, things are only likely to improve in the future. PayPal is one of the most widely used of the hybrid solutions because its rates are among the cheapest available.

This is based on the incorrect information we dissected above and poor assumptions. As outlined in the Merchant Account Comparison article there are a lot more factors to be considered and a merchant account can be cheaper then Paypal quite easily.

I applaud the author for trying to offer information to merchants. It clearly was unbiased which is refreshing. Unfortunately it was inaccurate and may only confuse merchants or worse, cause them to make a bad decision for their business.

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