How To Set Up a Merchant Account For Your Business

It is an established fact that accepting credit cards enables a significant increase in sales.

Increases range from 10% - 100% after getting a merchant account.

If your sales are made by mail, you can expect to total sales volume to go up 15% to 30% just by offering credit card purchases. Whereas, if your business uses the telephone as a sales tool, offering credit card payment options could increase sales by 200% - 300% over current levels.

So, what exactly is a merchant account? Well, the short answer is… it depends on the type of business and credit card processing needs.

If you run a "brick and mortar" store then you'll need a merchant account that accepts point of sale (POS) transactions. Where the buyer or merchant actually ‘swipes' the card at the time of purchase

If you run a mail order or telephone sales business, then you'll need a MOTO (Mail Order/Telephone Order) merchant account. This is also the type of account required for Internet sales as well.

The difference between a traditional POS merchant account and a MOTO merchant account is the amount of risk undertaken by the underwriting bank.

Mail Order/Telephone Order transactions are referred to as ‘cardholder not present' (CNP) transactions. Because there is no one to verify the cardholder's identity, the incidence of fraud is higher for CNP transactions. Therefore, a MOTO account tends to be more expensive.

Typically, there are two options for merchant accounts; either through a bank or through an Independent Sales Organization (ISO).

If you are an established bricks and mortar business who wishes to do business online, it will probably serve you best to start with your local bank. You've already got an account and an existing track record with them.

Banks are known for security and stability, but tend to be more selective about the type of businesses to which they grant merchant accounts; while ISO's are more flexible about offering merchant accounts to high-risk businesses. However, ISO's will usually charge more in return for their leniency.

First we'll look at what transpires during a credit card transaction. Then we'll look at the participants and their roles, industry standard terms, what kinds of fees to expect, and finally, we'll take a look at some of the more competitive ISO options available.

Additionally, if you have trouble getting a merchant account, we'll look at some alternatives

that may meet your needs.

An online transaction in progress:

1. The Cardholder shopping your website found an item she wanted, placed it into the shopping cart and clicked the "check out" button

2. After choosing "credit card" as the method of payment, the browser connects to the website host's secure server and brings up the secure payment form.

3. The customer enters her card and billing information and clicks the "submit" button.

4. The secure server connects via a Secure Payment Gateway to the Acquiring Bank Processor

5. The Acquiring Bank Processor sends a request to the Card Issuing Institution to verify the the customers billing address and the availability of funds

6. If successful, an approval code is sent back to the Acquiring Bank Processor, who then

forwards the approval via the Secure Payment Gateway back to the Merchant's web server, which then triggers fullfillment.

7. The Merchant's web server then sends the customer's browser a confirmation receipt.

8. The funds are transferred from the cardholder's bank to the Acquiring Bank Processor, who then transfers the funds to the Merchant's primary checking account in 24 - 72 hours

The participants involved in the credit card transaction above are:

The Cardholder – This is the owner of the credit card and normally the shopper. But if you've ever given your credit card to someone in order to make an online purchase, you would be the cardholder and they would be the shopper.

The Merchant – This is the store owner at whose site you are shopping.

The Acquiring Bank Processor – This is the institution with which the merchant has a merchant account. There are many different Acquiring Bank Processors to choose from, and we will get to know some of them.

The Merchant Bank – This is the institution at which the Merchant conducts regular business banking.

The Secure Payment Gateway – This is the entity that creates an on-demand encrypted link between the Cardholder and the Acquiring Bank Processor. This is done using a SSL certificate either on the Merchant's web server or within the Secure Payment Gateway (if the Merchant doesn't have a secure page). There are a number of Secure Payment Gateways to choose from.

The Card Issuing Institution – This is the bank or charge card company that issued the card to the Cardholder. Each institution has its own policies and procedures. However, it is typical for Visa institutions to pay merchants within 24 hours after a transaction, while Master Card

institutions take from 24 – 72 hours.

When a Merchant Bank agrees to accept credit card transactions, the merchant must open a Merchant Credit Card account. This is an account established to enable the merchant to accept credit cards from customers where the funds will be deposited.

It is important to note that the Acquiring Bank Processor must be compatible with the Merchant Bank and vice versa.

Because of the risk involved in card fraud and chargebacks, the Merchant Bank will require that the business or the ownership meet certain criteria before it grants a Merchant Credit Card

Account:

Either 1. The business owner(s) will have to have good personal credit. Particularly in the case of high risk businesses, this goes a long way toward making a bank feel more comfortable. OR 2. The business needs to be an established concern with strong financials.

Documentation and prerequisites needed: * A business checking account – this is a must

* "Two forms of ID" for the business – a business is a legal entity just like a person. As such, you will need to present documentation from the state or federal government with the business name on it (such as the certificate of incorporation from the state, and the IRS letter with the business' EIN)

* A completed website that includes the following:

i. The business name displayed prominently ii. The customer service number prominently displayed (preferably on every page) iii. A clearly stated return policy iv. Standard delivery method posted prominently so the customer knows what to expect v. A privacy statement, preferably in big bold letters on the front page as well as next to the submit button; at the very least do NOT make the customer click over to an isolated page to read your privacy statement. (how will you use visitor information? Will you sell or lease it to a third party?) vi. All pricing must be displayed in US Dollars. You can list any currency you wish, but US Dollars must be included vii. Clearly display the products and their description viii. A secure page from which the customer can order. This means that you will either have to buy a secure certificate (offered by most serious web hosting companies at a reasonable cost), or your customer's will have to be redirected to a secure page provided by the Secure Payment Gateway.

Commonly used terms you may encounter:

Merchant Account Provider – The institution that sets you up with Merchant Account (usually at a bank with which they are partnered) in to which your transaction funds are deposited; they also

provide the hardware and software needed in order to process credit transactions. Additional services include debit card processing and online check acceptance.

Merchant Processor – This is the company that processes the credit card transaction.

Secure Gateway Provider – This third party provides the secure transmission of data between the customer's browser and the Merchant Processor.

Virtual Terminal – This is the program that allows you to enter a credit card number into your browser window. It is included when you purchase a Real-Time Processing Solution.

Merchant Account – The account into which the proceeds from your sales are deposited after processing the transaction; you may be able to open a merchant account with your local bank. However, not all merchant accounts are compatible with internet transactions, and the ones that

are will probably be limited to just a few Secure Payment Gateway providers. The reason for this is simple; systems and software compatibility. Make sure that all the providers in the chain from your website to your bank account will work together.

Real-Time Processing – When you make a purchase from a website and see the results of your transaction immediately. There are two key advantages to Real-Time Processing:

1. If the customer makes a mistake while entering their billing information, they are notified immediately will correct the error. This occurs in approximately 2% of the transactions that take place. However, when you use deferred processing, it is hours before the customer is aware of such a mistake. Do you want to take the chance that their desire to purchase has cooled? 2. Real-Time Processing allows you to automate your business workflow, rather than having to set

aside time to download the day's orders from your web server (where they must be encrypted for security) and enter them manually.

*If you opt for a Real-Time Processing solution, you must use a Secure Payment Gateway.

Typically, providers of this service are not Merchant Processors. So an additional vendor account will be required. Be a very careful shopper as gateway companies will charge pretty hefty software and licensing fees, plus a monthly gateway access fee.

Some Merchant Processors own their own gateway service and include it at no additional charge.

Other Merchant Processors have ongoing partnerships with one or more gateway companies, which will allow them to offer significantly reduced setup fees.

Deferred Processing – If your products or services are not delivered via the internet, Deferred Processing may be a viable option to consider. Deferred Processing also offers advantages which

may be important for you: 1. You are able to examine and correct any orders before they are shipped 2. When you process the transaction, if there are mistakes, or if the credit card issuer's network is down (more common with offshore providers), you have the opportunity to correct the mistakes or try again later without losing the sale.

If Deferred Processing is right for you, POS software programs allow you to connect to a merchant account just like a hardware POS terminal. So if your volume is relatively low, this may be the most cost-effective method of accepting credit card transactions.

If your business sells both at retail and Internet, and at sufficient volume, it may be advantageous for you to set up both a Real-Time solution for Internet Sales as well as a Retail merchant account.

This will allow you to take advantage of the lower fees offered for in-person transactions, while still having an internet sales channel.

*If you opt for POS software to process online transactions, you MUST identify Internet orders as such. Otherwise Visa and MasterCard will hit you with significant fines.

*Use the Address Verification type Authorization Requests for Internet transactions. It increases security and reduces fraud. Additionally, if you don't, Visa will tack on an additional .17% to 1.25% to your online transactions.

Common Fees – There are many merchant providers out there, and when shopping around, the one thing that influences people the most is cost. Banks and financial institutions have elevated fee-taking to an art. So make sure you read the fine print, there may be some "hidden" charges

not mentioned elsewhere. The good news is that the industry is becoming ever more competitive, so while the fees are still there, they are beginning to come down and negotiation is possible.

* If a provider is not willing to budge, go somewhere else.

What follows is a list of common fees and the ranges within which they typically fall. While every effort has been made to ensure accuracy and completeness, please READ THE FINE PRINT BEFORE YOU SIGN ANY AGREEMENT!

Application fee – usually ranges between $0 -$100; some providers charge it up front, while others add it into the hardware/software or monthly leasing costs.

Hardware or Software – if you purchase your hardware/software, costs will start at about $100. If you lease, expect to pay $20 or more per month. Keep in mind that if you enter into a lease agreement, you'll end up paying significantly more than if you purchase your equipment. Additionally, there are hefty fees for breaking a lease, so avoid getting locked in.

Programming fees – This fee is usually ranges from $0 – $100; most often seen when you switch providers. If you shop carefully, you'll be able to find vendors who will waive this fee.

Discount Rate – 1.5% - 4% per credit transaction; expect the rate for your retail Merchant Account to be lower than the rate for your MOTO Merchant Account

Per Transaction Fee - $0.10 - $0.50 per credit transaction. As with the discount rate, expect the transaction fee to be lower for retail establishments.

Address Verification System $0.0 - $0.05 per credit transaction. This service verifies that the billing address entered matches the billing address of the cardholder. NOTE, this service is not available for cardholders outside the US.

* Remember, if you do not use the AVS, VISA and Master Card will increase your Discount Rate by .17% to 1.25% for online transactions.

Gateway Access – This fee will range from $0 - $25 monthly. In most cases, the gateway provider is a separate company who has partnered with the merchant provider to insure compatibility of systems. You can avoid this fee if you find a merchant provider who owns their own gateway.

Monthly Minimum Fee – This fee will range from $20 - $25 per month. If the combination of Discount Rate fees plus Per Transaction fees does not add up to the monthly minimum, you will be charged the difference. As with all the other fees, some providers do not charge a monthly minimum.

Monthly Statement Fee – This ranges from $0 - $20 per month and, just like it sounds, is a fee charged for your monthly statement. Usually the statement is not a hard copy; it is posted on the provider's website under your secure account.

Chargeback Fee – $5 - $25 each occurrence; when a customer finds a charge on their statement that they disclaim, or, in some cases, want to avoid paying the charges, they dispute the charge with their credit card company. VISA (among others) has made a selling point out of their practice of not holding a customer liable for more than $50 of fraudulent charges.

* Too many chargebacks and your account could be cancelled. Additionally, you will be placed on a Watch list (essentially a black list) that all merchant providers have access to. That will make it very difficult for you to open another merchant account for several years.

The best way to mitigate risk on your part is to subscribe to the Address Verification System. Since a large percentage of fraudulent charges are originating from certain parts of the world, you may consider not transacting with cardholders from high-risk areas.

Reserve Fees – In many instances, particularly if your business falls into what is considered a high risk category, your merchant provider may elect to require an amount in reserve to cover the cost of any chargebacks that may occur.

Due Diligence – As with any service, when shopping for a merchant provider, make sure you read the fine print, identify all the fees and ASK QUESTIONS. * Ask for references, not just company names, but specific e-mail or web addresses that you can use to contact current customers. * Get all terms and fees in writing – this is important, if you don't do this, you will have no protection if there is a misunderstanding. * Find out what level and availability of phone support is available * Ask how long it will be before funds are available, if it's more than 3 days, it's a concern. * If your merchant provider partners with a bank to offer a merchant account, who is that bank? And are they FDIC insured? * Do they require a reserve account? * Are they registered with VISA and Master Card? * Find out if they are members of the local Chamber of Commerce and/or Better Business Bureau; if so, check them out. * Find out if they are members of the Electronic Transactions Association (a trade organization promoting fair and ethical business practices).

Real-Time Processing concerns – software and systems compatibility are details that can cause big

headaches. * Make sure your web hosting provider supports the Secure Gateway Provider and Merchant Processor * Make sure that the shopping cart software available through your web hosting provider is compatible with the service you want to choose. If not, find out what it will take to either make it work, or install shopping cart software that will work. Integration costs are expensive,

if there are problems, it may be more cost effective to switch hosting providers. * Make sure all fees are specified in writing on the provider's website. * Make sure that the Gateway offers a Virtual Terminal and Online Reporting

Merchant Provider Options: Below, are some of the merchant providers available, this is not a complete list. However, the companies that are shown here were chosen because they consistently received positive customer reviews. Additionally, all of the providers listed below have extremely competitive rates and fees.

www.echo-inc.com (Electronic Clearing House, Inc) – Offers a full range of services; they also own their own Payment Processing Gateway as well (so there is no gateway access fee). If you elect to choose them for your Internet Merchant Account and use one of their partner web hosting companies, they will include shopping cart software as part of the deal.

www.merchantexpress.com – If you sign up for an account with them, they will give you a copy of their "search engine friendly" shopping cart software (Xpresscart) at no extra charge.

*their rates do not include Payment Processing Gateway charges. However, they have partner agreements with the more prominent providers, and you should be able to get a discounted rate on setup

www.electronictransfer.com – A basic shopping cart is included with the service, gateway charges are reasonable and they have 24x7 phone support.

www.charge.com – Very highly reviewed, claims to have free setup, application, shopping cart software and more. A caveat… the Gateway fees are advertised at $29.95/month which is a recurring charge.

www.paynetsystems.com – there is a wealth of information on the website and they offer special rates for high monthly-volume customers. They use their fees as a selling point, saying that all the fees are posted "boldly on the first page" of their merchant agreement. Paynet uses the Skipjack payment gateway system. The charge is about $20/monthly or $200/yearly

www.monstermerchantaccount.com – Lots of information on the website, although the links aren't easy to see. Monster offers a complete e-commerce solution that includes hosting and a shopping cart for about $80/month.

*NOTE – keep in mind while shopping for a merchant, everyone will charge a discount rate and a per transaction fee. You must decide which combination works best for your business. If you sell a lot of lower priced items, it may cost less for you to pay a higher discount rate and a lower per transaction fee; while the opposite holds true for low volume, high ticket items.

What to do if you can't get a merchant account?

So you want to process credit card transactions, but you are unable to get a merchant account.

Well, the market has seen the demand and risen to meet it.

The most basic definition of a merchant account and all the associated systems is simply a service that enables a customer to purchase your products with a credit card.

There are many companies out there who, for whatever reason are unable to get their own merchant

service, but still needed to process credit card transactions. As is often the case a market has sprung up to fill that need.

Alternate Processing Companies (also known as 3rd party processors) are companies who have one or more merchant accounts and who have made a business out of processing credit card transactions for other merchants for a fee.

Since a 3rd party processor still has to pay the same rates to their merchant providers, you can expect to pay a higher per-transaction fee (significantly higher) However, if you don't have the credit or the capital it may be the perfect fit for your requirements. Additionally, all of the administrative work is done by the 3rd party processors, so you will save a certain amount of management time as well.

Available Options – what follows is a list of the most well-known providers. This list is not complete, but it includes the most well known options.

www.ClickBank.com – ClickBank provides billing services to merchants whose only products are available for immediate download via the internet (i.e. files of one sort or another). Their rates and

fees are a one time $49.95 activation fee and $1.00 plus 7.5% for each transaction. They do not provide billing services for physical goods. As with any provider, there are certain transaction types that they will not handle, all of which are listed on the getting started page.

www.iBill.com – iBill offers 3rd party merchant services for companies who sell both tangible and intangible goods via their website. Their discount rate starts at 15%, if your volume is over $10,000/monthly, they begin to discount their rate marginally at increasing revenue amounts.

There is a $15 chargeback fee, 10% reserve requirement to be held for six months (on month #6 the 10% withheld from revenue in month #1 is released to the customer… and so on). iBill forwards all client revenue, less fees, once per month.

www.CCNow.com – Their focus is the online sale of tangible products. Their agreement with you, the reseller, stipulates that when a customer makes a purchase, what actually happens is that CCNow buys the item from you for immediate resale to the online purchaser. Rates & Fees: $9.95 per month, plus 9% of any sales over $100.00/month. All customer revenue is paid on the 1st and 16th of each month.

www.2CheckOut.com – 2CheckOut allows you to sell any product that is legal for sale in America.

However, there are products that they will not provide billing services for. Additionally, there is a short list of products which, while 2CheckOut will bill for, require additional information (included in this list was lingerie and adult toys). Rates & Fees: a one-time $49 setup fee and 5.5% discount rate plus $0.45 per transaction.

Conclusion

My goal in writing this report has been to give useful information about setting up a merchant

account for your small business. Please don't hesitate to contact me if you have any questions,

or if you have any suggestions that would help to make this information more useful.

Comments? Questions? Email Here

© HowtoAdvice.com

How to Advice .com