Merchant Account Boot Camp

Learn all about Merchant Accounts

What is a Merchant Account?

A Merchant Account is required for any business to accept credit cards as a form of payment for their products and services. A Merchant Account includes a banking relationship to handle the transfer of money from the cardholder’s bank to the merchant’s deposit bank account and a processor relationship to handle the logistics of the transaction such as reporting, chargeback monitoring, merchant statements, customer service etc.

Sometimes the Bank and the processor are the same. A Merchant Account Provider or Independent Agent, handles Account Acquisition and Account Management on behalf of the Bank and/or the processor, very similar to the way an Insurance Broker brings clients to the company underwriting the Insurance.

Whether you get your Merchant Account directly from a “big household name” bank, a processor or a Merchant Account Provider, rates are always based on, what is known in the industry, as Interchange.

Each of these channels has their own advantages. If you are a Fortune 500 company, a big bank may be best for you, from an image point of view. If you are a small or medium sized business, a Merchant Account Provider has 4 distinct advantages:

  • Ability to offer same pricing and rates as the "big banks"
  • Ability to handle multi-bank solutions
  • Ability to provide better back end services and customer service
  • Ability to bundle hardware, software, service and rates into one package
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A Merchant Service Provider acts as an advocate on behalf of the Merchant between the card associations, processors, and merchant bank. Often viewed as an extended sales force for the Acquiring Bank, Merchant Service Providers are responsible for setting up your account with a Processing Bank and arranging either a compatible Gateway or a Point-of-Sale (POS) Terminal.

Merchant Accounts are underwritten by a bank and thus the owner’s credit is checked. A frequently asked question of new merchants is, “Why do I need my credit checked, where is the risk?” We are all aware of the risk at the consumer level through unpaid bills, stolen credit cards or stolen identities. However, unscrupulous merchants will establish a Merchant Account, sell vast amounts of product, but never ship anything and then disappear. The bank pays the merchant in advance. 30 days later the consumer notifies their bank, the charge is removed from the consumer’s bill and the Merchant Bank is left with the bad debt!

Today, accepting credit and debit cards is a must. Offering credit cards as a convenient form of payment can make the difference between making the sale and losing it to one of your card-accepting competitors. Credit cards not only increase the consumer’s impulse purchases but increase the average sale amount. Despite the obvious advantages, accepting credit cards brings fees, regulations, and requirements. Educating yourself on industry terms, the payment process and the fees will save you time, money, and a lot of turmoil down the road.

Rates and Fees

DISCOUNT RATE: The discount rate is the primary cost for processing of a transaction and having the funds deposited into your account. The discount rate is a percentage of the sale. The discount rate is made up of:

  1. Interchange Rates – One hundred percent of all Interchange fees are collected by the Merchant Bank (Acquiring Bank) and are paid to the Issuing bank (The bank that issued the card to your customer). Rates are determined by the Card Associations and are based on 3 variables. A. The type of card presented B. The risk associated with the transaction and C. The type of product are service being sold.
  2. Card Association Rates – These fees go directly to Master Card, Visa and Discover. These fees can be labeled as Dues, Assessments, Access Fees, International Fees and the like.
  3. Processor Rates – The mark up or premium over interchange charged by the Processing Bank to cover administration, risk, bad debt, monthly statements and customer service.

Your Discount Rate is the combination of all three of the above mentioned rates. Your rates may be lumped into 3 distinct categories:

Qualified Rate: This is the percentage that’s charged whenever a merchant accepts and processes a transaction using an approved processing solution when the customer has presented a Debit Card, Standard Credit Card or certain Merit cards. This is usually the lowest rate you can receive, and often the one quoted to a merchant inquiring about rates.

Mid-Qualified Rate: This is the percentage that’s charged whenever a merchant accepts and processes a card that does not qualify for the lowest rate. This may happen when a card is manually keyed into a terminal instead of being swiped or when a Rewards or Business card is being presented.

Non-Qualified Rate: This is the percentage that’s charged whenever a merchant accepts and processes a card that does not qualify for any of the lower rates. This may happen when a card is manually keyed into a terminal versus being swiped, address verification isn’t performed, information is missing, or the authorization is not settled within the allotted time frame (usually 48 hours). Certain Foreign Cards, Government Cards or World Cards may also qualify for this rate.

Merchant Accounts are underwritten by a bank and thus the owner’s credit is checked. A frequently asked question of new merchants is, “Why do I need my credit checked, where is the risk?” We are all aware of the risk at the consumer level through unpaid bills, stolen credit cards or stolen identities. However, unscrupulous merchants will establish a Merchant Account, sell vast amounts of product, but never ship anything and then disappear. The bank pays the merchant in advance. 30 days later the consumer notifies their bank, the charge is removed from the consumer’s bill and the Merchant Bank is left with the bad debt!

Today, accepting credit and debit cards is a must. Offering credit cards as a convenient form of payment can make the difference between making the sale and losing it to one of your card-accepting competitors. Credit cards not only increase the consumer’s impulse purchases but increase the average sale amount. Despite the obvious advantages, accepting credit cards brings fees, regulations, and requirements. Educating yourself on industry terms, the payment process and the fees will save you time, money, and a lot of turmoil down the road.

OTHER FEES:

Association Fees: These fees are set by the Card Associations, Visa, Master Card, Discover and American Express. These fees go to each Card company for the purposes of Brand marketing, overhead and, of course, profit. They “should be” pass through costs.

Chargeback Fees: The cardholder has up to 60 days from the statement date to dispute a charge. When the cardholder files a complaint with the issuing bank, you will be charged a chargeback fee of $20 – $35, whether you win or lose the ruling. It is important to offer good customer service and have your return policy clearly stated in writing.

Address Verification Fees: For transactions where the card is not present, the merchant may be required to verify the cardholder’s address to qualify for the better rate. All processors charge a flat fee per transaction for this verification that is either listed separately or bundled with your rate.

Transactions Fees: All transactions are charged a transaction fee to cover the cost to transmit the data to and from the cardholders bank, the acquiring or merchant bank and finally your bank.

Regulations:

There are many regulations you need to be aware of when accepting credit cards. Ignoring these guidelines could lead to fines or the closure of your Merchant Account.

  • Don't run your personal credit card through your own merchant account or use it to provide cash to yourself or a friend.
  • Don't place minimum or maximum limits on your transactions. Regulations stipulate that if you are going to accept credit cards, you must accept them for any transaction.
  • Don't charge any sort of usage fee for credit card transactions to offset the cost of accepting credit cards.
  • Don't split a transaction into smaller transactions. You may open yourself up to a chargeback.
  • Don't request a credit card to guarantee a check.
  • Verity the identity of the cardholder
  • Truncate the account numbers on your receipts. Each state has its own laws governing what can and cannot appear on the receipt.
  • Take every measure possible to prevent duplicate transactions.
  • Make resolving customer issues a priority.
  • Maintain the proper account for your business. Trying to process an Internet transaction with a "Retail" merchant account can lead to serious fines and even the loss of your merchant account.
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