Merchant Account Lowdown | CreditShout

Merchant Account Lowdown

By Kevin / January 20, 2009
Merchant Account Lowdown


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Are you a small business owner? Do you process credit card payments? Then it is time you got the lowdown on merchant account processing.

Having the diversity of payment options is a major plus to any small business or for an entrepreneur. And finding a merchant account that meets your needs as a small business owner may be easier than you think.

Merchant Account Options

In this day and age of entrepreneurship, more and more banks and credit card companies are creating merchant account programs that cater to small businesses and entrepreneurs.

If you are an internet only business, there are quite a few different options available for payment processing.

Many businesses opt for a third party payment processing service. This is not a merchant account. This company processes the payment. You normally pay a monthly or annual fee and a per transaction fee.

However, if you have a brick and mortar business, an internet payment processing company is not the way to go.

Don’t be fooled by the online processors’ offers of free equipment, discounts or waived fees. The information still goes through the internet and is subject to the same security issues as surfing the web does.

Many a small business owner has been surprised and dismayed when their customers start calling them to find out about massive overcharges on their credit cards, only to discover they were hacked.

The best way to ensure your customer’s security and that of your own as well is to acquire a merchant account that uses a direct line to the merchant account provider such as by phone line or cable. If the customer’s account is compromised after a transaction, the guilt falls to the merchant bank and not the business owner. Merchant banks are insured against such things and are better equipped to handle the situation.

Once you have decided to open a merchant account, the next thing is to find the right one. Many businesses opt to continue to work with the company they already have an account with.

Most companies where you have your business credit card can also handle your merchant account needs.

Other Merchant Account Considerations

Before you open your merchant account, you need to know what account type you qualify for. These account types determine what fees you will be charged.

Card-Present Merchant Accounts:

Card-present merchant account service includes all payment processing solutions that use physical payment terminals to read the account information from the magnetic stripe or chip of a card that is swiped through them.

Because the merchant is in actual possession of the card (hence, card-present) as the payment is being made, these merchant accounts are considered less likely to generate fraudulent transactions and enjoy lower processing rates.

Card-not-Present Merchant Accounts:

Included in the group of Card-Not-Presnt accounts are all payment processing services where the card information is manually entered into the merchant bank’s system, using a web browser or a telephone keypad.

The card itself is absent (hence, card-not-present). Because the merchant is never in possession of the card and the information is given to him or her, card-not-present transactions are considered more likely to generate fraudulent activity or processing errors and are processed at higher rates.

E-Commerce Merchant Accounts:

That’s right. E-commerce merchants get their own account type.

These merchant accounts are used by web-based merchants and enable consumers to enter their payment card information into a payment form on the merchant’s website. Once submitted, the payment details are automatically transmitted, via a payment gateway, to the merchant bank.

Mail Order and Telephone Order Merchant Accounts:

Also known as MO/TO merchant accounts, these payment processing solutions enable merchants to enter the payment information that is provided to them by their customers into a form on the merchant bank’s payment system’s website or, using a telephone keypad, to call it into the merchant bank’s system.

Processing Fees and Rates

Once you know what type of merchant account you will qualify for, you will have a better idea of what processing fees and rates you will incur.

First come the rates – which is the percentage of each transaction you run that the credit cards processing companies will take. This money is then divide up among your bank, the card issuer and your processor.

Blended Rates:

Blended rates combine both “Credit Card” and “Signature Debit Cards”, into a single “Qualified Rate”. The industry standard is between 1.69% and 1.84%.This rate structure is the standard for most merchant accounts. Just be careful of introductory rates.

Split Rate Options:

The merchant has the choice of splitting the “Credit Card Rate” and the “Debit Card Rate” into two totally separate rate tiers. One rate is for credit and another rate is for debit transactions. This option would lower debit card costs, but increase credit card costs.

An industry standard would be 1.39% for Debit Cards and 1.94% for Credit Cards .

This option could increase your overall cost.

Mid-Qualified Rate:

In general, a mid-qualified rate is a surcharge on certain card types, such as “Rewards Cards”. Standard surcharge rates range from 0.40% to 0.75%.

This can easily be overlooked by most merchants.

Non-Qualified Rate:

Another overlooked surcharge processing other card types, such as “Business Cards”, “Corporate Cards”, “International Cards”, or “Procurement Cards”. Also in this category is keying card numbers with a swiped account and failing to attempt AVS + CVV2 fraud controls on a keyed account.

Industry standard rates range from 2.75% to 4.33%. Now that you know, you understand why we say: Merchant beware.
And we are not done yet. one top of the percentage of each transaction you will pay to run a card, you will incur other fees.

Some common industry fees include:

Termination Fees:

Every merchant account agreement has a “Contract Term” within the contract. Associated with this term, is a “Early Termination Fee”. This fees off-set potential losses when a merchant closes their account before the contract term has expired.

The standard termination fee averages around $295 – $395.

Free Equipment Program:

Free equipment programs are true loaner programs, that require the equipment be returned to the processor, when the merchant account is closed. Equipment must be returned within 30 days, in perfect working condition, or the business owner will be charged a penalty. This fee is usually between $495 – $895, depending on the agreement.

The Lowdown on Why You Need a Merchant Account

Having the abiality to accept credit and debit cards safely and securely helps your business by expanding your customer base and faith in your business.

Having a direct line merchant account will also give you peace of mind so that you can go about your daily business without as much stress.

So, as much as you will not want to pay the processing fees associated with a merchant account, you will have to. The best you will be able to do is shop around, and find the best processor out there with the lowest fees.

The editorial content on this page is not provided by any of the companies mentioned and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are the author's alone. Additionally, the opinions of the commenters are not necessarily the opinions of this site


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