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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.

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Published 20 August, 2008 by Patrick Oak

82 more posts from this author

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Andrew Nesbitt

Andrew Nesbitt, Developer at Forward Internet Group

Also bear in mind that the merchant banks can take quite a long time to approve you, unlike paypal or google checkout which you can be up and running in a few minutes, a proper merchant setup can take upwards of a month or more.

about 8 years ago

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amartin

Can Google Checkout's approval process be completed in a few minutes? From memory it takes about a week.

about 8 years ago

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Patrick Oak, Blogger at Econsultancy

Yes Andrew that is true because a merchant account is really a line of credit whereas services like PayPal and Google Checkout are not.

For merchants accepting a high volume of payments, controlling your own processing is usually not only more cost-effective, but safer.

Example - I met an owner of an ecommerce business once whose account at one of the popular third-party payment services was put on hold when his sales volume spiked due to media coverage.

It quickly turned into a nightmare and while he struggled to resolve the issue, he ran into cash flow problems because he didn't have access to the money from his sales. It nearly drove him out of business.

Something like this is far less likely to occur when you have a merchant account and a direct relationship with a credit card processor/merchant bank.

about 8 years ago

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Paul Mobley

One thing mentioned about PayPal but excluded from the conversation about other merchant accounts is the "integration". Prior to going to your bank you first need to identify the needs that you have for the data management. To me this is more important than the fees, discount rates, etc.

When looking into integration it gets pretty technical so you may need to consult with your marketing agency or web development firm. Basically, you'll need an API to communicate between your shopping cart software and the bank. Your cart will not work with all systems. An those that do handle things differently.

Before reviewing merchant accounts based on price you should find out that it is: (a) compatible with your cart system; (b) fits your processing needs like recurring monthly transactions; (c) the reporting and search tools work well; (d) their customer support and documentation is solid.

about 8 years ago

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Patrick Oak, Blogger at Econsultancy

Hi Paul,

One thing to note about your comment: the technical/integration issues you speak of occur at the gateway level. There is no direct communication between your website and the acquiring/merchant bank. The gateway is the intermediary.

If your credit card processor bundles a gateway service with your merchant account, you obviously will need to make sure the credit card processor provides a gateway that you can work with. If no gateway service is bundled with the credit card processor's service, you should be free to go with any qualified gateway service.

about 8 years ago

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Sue

What if the company collecting your organization's money claims they are having cash flow problems and are currently paying clients' charges that were made 3 months ago?

almost 8 years ago

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jerrialchristian

Now it happens in business to have all the transactions online or by credit cards.And it seems very easy process and less time consuming.

over 7 years ago

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Ron

Accept-Credit-Cards-Online.com set my website up to accept credit cards. I was approved in 1 business day and my funds are in my bank account in 2 days. I've run transactions from $10-$10,000 and never had a problem. Only $15 a month.

over 7 years ago

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Donna


They are top notch personal people who go the extra mile to help you understand the process.

over 7 years ago

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Lucas Robinson

BudgetMailboxes.com is an Authorized Internet Retailer for Architectural Mailboxes, Auth-Florence, Blomus Mailboxes, Bluegrass Woods, Inc, Bobi, Brandon Industries, Curbvault Mailboxes, Dahlhaus, Dvault, Ecco Mailboxes, Gaines Manufacturing, Good Directions, House Art, Knobloch, Mayne & Salsbury, Mayne & Whitehall, Mayne Post, New England Woodworks, QualArc, Salsbury Industries, Streetscape Inc Mailboxes, Still River Designs, Whitehall Products, Mail Keeper— and every other brand we offer.

over 7 years ago

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sam @ merchant account

Hi.  This is Sam.  Are you in need of a merchant account?  http://bit.ly/8WHRf8 or call 1-866-348-7926

over 6 years ago

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