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It's
a phrase that's often batted around by auction sellers in chat
rooms and on message boards. But what the heck is a merchant
account, really? How do you get one? Moreover, why do you
need one? Our tip answers all of the above, discussing both the
pluses and minuses of using a traditional or online merchant
account.
The
Basics
Essentially, a merchant account is a bank account, allowing a
retail or online business to accept credit cards from its
customers. In the past, merchant accounts have been reserved for
retail businesses with physical stores. Furthermore, traditional
banks have been slow to embrace e-commerce and offer their
merchant services to small Web-based businesses. Though some
retail banks, such as Wells Fargo, are joining the online
revolution, odds are that your local bank will not have a
merchant account tailored to your individual e-commerce needs.
To fill the void, a new breed of online merchant account
companies has emerged, dubbed Independent Sales Organizations or
Merchant Service Providers by the banking industry. Partnered
with traditional merchant banks and online credit card
authorization providers, such as Signio,
Cybercash,
and Authorize.net,
which license the use of their "virtual terminals,"
ISOs and MSPs allow online sellers to apply for a merchant
account and process unsigned, non-swipe credit card transactions
through their computer and the authorization provider's network.
With a merchant account, you will be able to service your
customers immediately and get paid within 48 hours. Also, your
company name will appear on your customers' credit card bill.
Complicating
Factors
There is a catch. Regardless if you obtain a merchant account
via your local bank or an online ISO, you'll have to jump
through some hoops. Number one, you will have to fill out an
application and pass a tough personal credit check. In providing
a seller a merchant account, the ISO or traditional bank is
essentially offering the merchant a line of credit. As a
merchant account provider, the merchant bank is initially
responsible for bad sales and customer charge-backs from the
credit card companies (Visa, Mastercard, American Express). The
merchant bank requires a credit check so it knows you can
reimburse it if one of your sales goes south. Also, some states,
such as California, require that you have a fictitious business,
listed with your city hall, before you can obtain a business
account and subsequent merchant account.
Once you pass the credit check, you'll also have to decide
how you are going to process your transactions. Whether online
or in a retail setting, merchants pay a setup fee for a physical
processing terminal or access to a virtual terminal. As
mentioned above, the physical or virtual terminal facilitates
authorization of the customer's credit card. For online
transactions, setup fees can run between $400 and $1,000. Also,
note that non-swipe online transactions (mail order, telephone,
and Internet) have a higher "discount rate" than a
retail credit card transaction using a physical swipe terminal.
Online merchants pay 2.3 to 2.9 percent per sale and a 35-cent
transaction fee. (This money is divided between the ISO, bank
partner, and credit card company, which sets an
"interchange rate"--its percentage.) The merchant
account rate on an offline retail transaction is considerably
lower at 1.7 percent.
The ISO, bank, and credit card company are assuming greater
risk on an unsigned, non-swipe transaction and thus charge more.
Why? Unsigned transactions are not binding. Customers can ask
their credit card company to "charge back" the
transaction. In this situation, the credit card company will
charge back the sale to the ISO and bank, and you will have to
cover the charge and a service fee. Also of note, if a merchant
has a 1 to 2 percent charge-back rate the bank will likely
terminate its client's merchant account. The merchant might also
be included on Visa or Mastercard's Terminate Merchant File
(TMF). Once you are listed, the likelihood of obtaining another
merchant account is slim to none.
What
to Look For
If you do decide to sign up with an online ISO or MSP to obtain
a merchant account, be aware that prices vary from provider to
provider. Understand the setup costs and reoccurring monthly
fees. Also, be wary of leases on "virtual terminal"
setup fees. (Currently, the market low on setup is $400.) These
leases look reasonable on the surface, but feature outrageous
terms, such as $29.95 for 48 months. Also in regard to fees,
make sure the ISO or MSP does not charge obscene charge-back
rates, daily closeout/batch fees, monthly statement fees, and
more. In essence, shop around and do some price comparison.
Moreover, make sure the site has real content, such as
tutorials and service overviews, not just a simple splash page
with seemingly attractive rates. Along the same lines, be sure
there is a contact name and phone number so that you can talk to
a representative. Finally, check if the company is a member of
the Better Business Bureau. That's always a reassuring extra.
Competing
Solutions
Another way to go is to use a third-party credit card processor,
such as Amazon.com
Payments, CCNow,
and iBill.
Essentially, they allow you to piggyback on their merchant
accounts. They authorize and process payments from your
customers, take a commission from the sale, and then pay you in
lump sums on a bimonthly or monthly basis.
There are some trade-offs, though. First, the name of your
business won't appear on your customers' credit card statement,
which can cause confusion. Also, your sales revenue goes to a
third party before it goes to your bank account. Moreover, the
money will arrive slower, at least two weeks after a sale.
Finally, the percentage you pay per transaction will be
higher--from nearly 5 to 10 percent. Of course, there is no
setup fee with a third-party processor. For more information on
third-party processors, see our tip on accepting
credit cards.
Back to Auction tips &
tactics
by Vendio Services
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