If your business needs to accept credit card payments online, chances are you may have started out with a service like PayPal because of the low costs and the ease of integration.
But when you "outgrow" such a service, it's time to step up to a merchant account.
I recently helped a friend get set up to accept payments online using his own merchant account, and I thought it would be worthwhile to share some basic information about this subject.
The business accepting credit card payments is referred to as a merchant.
To accept credit card payments as a merchant, a merchant account is needed. A merchant account is actually a line of credit that is established with a bank for the sole purpose of collecting the proceeds of credit card payments, and seeing that these proceeds are paid to the merchant.
Banks that offer merchant accounts are called acquiring or merchant banks. Because a merchant account is a line of credit, merchants must usually provide certain financial information and sometimes a credit check is required.
Merchants acquire their merchant accounts through a credit card processor. These third party services not only assist the merchant in setting the merchant up with an acquiring bank, but actually handle the actual processing of the credit card payments from authorization to settlement.
When accepting payments online, credit card information provided by customers needs to be submitted to the credit card processor. This is where payment gateways come in. Payment gateways "link" your website to the credit card processor and handle the transmission of data from your website to the processor. Some offer value-added services, such as reporting and fraud control solutions.
In short, to accept payments online, you'll need:
- A credit card processor.
- A merchant account (acquired through the processor).
- A payment gateway.
Some service providers offer everything in a single package.
So what are the costs? There can be many:
Merchants are assessed a discount rate on each transaction. This comprises a number of fees and is essentially a percentage of the payment. This rate depends on a number of factors, including the type of business you run, but typically falls into the range of 2-4% although it can be higher or lower. Additionally, there are typically different rates depending on the conditions under which the payment was made and usually, internet merchants have higher rates because they are taking payments in a "card-not-present" environment, which increases the risk of fraud.
Credit card processors typically charge a transaction fee and authorization fee. Transaction fees are usually in the range of 20-30 cents per transaction. Authorization fees are incurred each time an attempted payment is made, even if it is declined. These fees are usually 5-10 cents per authorization.
Some credit card processors also have monthly processing minimums and may charge set-up fees, statement fees, and regular maintenance fees. Additionally, some require commitments of a certain length and charge early termination fees if a contract is terminated early.
- Payment gateways typically charge set-up fees as well as transaction fees.
- Other fees are associated with things such as chargebacks.
When looking to set up a merchant account, it is very important to research service providers and to get quotes from multiple service providers as certain costs and rates are often negotiable.
I highly recommend asking your bank if they offer credit card processing solutions. Many major banks do and oftentimes they will offer competitive rates to existing customers in order to keep them from taking additional business elsewhere.
While getting set up with a merchant account can seem daunting and complicated, for many businesses, having a greater level of control over the processing of credit card payments is very beneficial.