Merchant Accounts

A Merchant Account is necessary to be able to accept money from credit card purchases. Ecommerce merchant accounts can be gotten from most banks and many other financial institutions. A Merchant Account is a relationship you have with a bank. The bank agrees to allow you to charge people’s credit cards for goods and/or services you provide. The bank in turn, has the responsibility for debiting the funds from the customer(s) and depositing it into your account. When you acquire a merchant account from a bank, you are expected to uphold your promises to your customers by fulfilling your end of the business transaction in a timely manner.

There are charges for a merchant account that may vary widely from one bank to another. You will definitely want to do some comparison-shopping before deciding on a merchant account.

Merchant accounts for an Internet only business may be more difficult to get. Internet anonymity is both a blessing and a curse. Anonymity is blessing to users who just want to satisfy their curiosity. But, banks and financial intuitions are usually pretty conservative and are leery of doing business where the merchant never meets the customer, no signatures are collected and no physical credit card is presented. So, banks tend to see anonymity as a curse because it can provide an entry point for fraud. Therefore, an internet only business will be charged considerably more for a merchant account than a brick and mortar store that also sells their products on a web site.

There are several fees involved with setting up and using a merchant account, such as:

  • Application Fee - some providers charge you an application fee that may or may not be refundable if your application is turned down

  • Chargeback Fee - a fee for any successfully disputed or fraudulent transactions. This is in addition to any money that is refunded to the customer.

  • Discount Rate - a percentage of the sales amount charged for each sale. The higher your sales volume, the lower the rate you can get. Rates typically fall in the 2-10% range.

  • Gateway Access - If the secure gateway provider is separate from the merchant account processor, they may also charge a separate fee although most are included in the transaction fee.

  • Monthly Minimum Fee - minimum fee charged each month regardless of sales volume. Sometimes there is also a processing limit. That means if you do more than a specified amount of business you will be charged an additional fee.

  • Reserve - a minimum account balance required by some providers to cover refunds and chargeback fees. The amount of the reserve required and the length of time it will be held vary from company to company.
  • Statement Fee - a fee for issuing a detailed monthly transaction statement.
  • Transaction Fee - a flat fee charged on each transaction in addition to the discount rate.

Which One Should You Choose?

Bank or Financial Institution
The advantages to having your own Merchant Account with a bank are:

  • Payments are deposited in your bank account within 48 hours. This period of time between when your customer made a purchase and you actually receive the funds is called a Settlement Time.

  • Billing statements received by your customers have you business name on them.

The disadvantages to having your own Merchant Account with a bank are:

  • You usually have to provide your own payment gateway, shopping cart software and software installation.

  • Normally you have to have been in business for at least two years.

  • Either the business itself or the business owner must have a very good credit rating

Third Party Processors
The advantages to having your merchant account with third party processors are:

  • They provide quick, easy and cheap setup.

The disadvantages to having your merchant account with third party processors are:

  • The settlement time is longer and payments are only deposited in your bank account periodically (from 2 to 28 days or longer).

  • The fees charged are usually higher than those charged by banks.

  • Billing statements received by your customers have the credit card processor's business name on them rather than your business name in most cases.

For the totally Internet business a third party processor (also called an independent billing service) may be a better choice for obtaining a merchant account. Most of these companies have more lenient requirements than banks.

Should you opt for smaller monthly fees and higher transaction fees? Some business owners would rather pay a large up-front fee and not be bothered by monthly fees while other prefer the smaller monthly fees. Considering the complexity of merchant accounts, it might be cost-effective to hire a financial consultant with experience in obtaining merchant accounts to help you select your provider if you are new to accepting credit cards.

Are You Considered a High Risk Business?
High-risk businesses have a hard time getting merchant accounts. A high risk business is a business that based on industry experience has a high probability of experiencing large number of chargebacks. Most banks and financial institutions consider the following business as high-risk businesses.

  • Computer network/information services
  • Travel and related
  • Mail order
  • Direct marketing
  • Computer programming
  • Internet only businesses
  • Adult related
  • Psychics
  • 900 pay-per-call services
  • Phone card sales
  • Online casinos
  • Internet Auctions

It is usually best for a high risk business to use a merchant account provider to obtain a merchant account for you. They will know any necessary fees or cash reserves needed to obtain these types of accounts. A good merchant account provider representative will already have a relationship with financial institutions willing to accept high risk businesses and will be aware of all the hurdles you will face in obtaining a merchant account and be able to guide you through the process.

You can expect discount rates and transaction fees to be as much as two or three times as higher than other businesses. But don't worry, you can still get a merchant account.

Click here for information on two shopping cart providers that can help you get a merchant account that can be used both off and online.

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