Your merchant account gives you the ability to accept credit cards at your business location. Since you are viewing this on the Internet we'll focus on that medium and the associated issues surrounding it.

Why is the Internet different? The Internet is different because most sales occur when the credit card is not present. "Card not present" imposes unique challenges to the issuing banks in terms of risk and fraud management, plus it presents some special challenges to you, the merchant, in accepting payments from you customers.

Many banks think of Internet commerce as just another form of business where a transaction does not take place at the point of sale. Similar to telephone catalog sales, mail-order, and television ads where the credit card is also not present but which have a good track history and some fraud protection systems already in place. Yet other banks view the Internet as an untamed frontier with huge risks to be considered because all of the expectations of exponential growth.

The success of obtaining a merchant account at a reasonable discount rate varies depending on which mindset the issuing bank has. We have tried to represent only those banks that have an understanding of the special needs of Internet merchants. We have found that if a bank is open to Internet merchants they are typically open to home-based and mail order/telephone order merchants as well.

What are some of the challenges unique to the Internet? Unlike retail purchases, where the merchant can request an alternate form of identification, there is no way to do that on the Internet. What proof positive is there that guarantees that the consumer is who they claim to be? None at this time. Because of this, there is a major risk of fraud in Internet transactions.

Most, if not all, credit card issuers grant their cardholders the
right to dispute charges that appear in error on their statements. If a consumer does this it results in a charge back. Eventually this charge back reaches your merchant account where there must be funds available to cover it. If funds are not available to cover the charge backs in the merchant's account then the issuing bank has to absorb the loss.

It is in the calculation of this risk that the amount to
charge in discount rates, transaction fees, statement fees, and
reserve amounts are determined.

Banks use many different criteria to determine the risks of taking on an Internet merchant account. Many banks try to minimize their level of risk by not issuing accounts to certain businesses that have proven histories of high charge backs. Some banks will require a cash reserve to be established for high-risk industries or new merchants.

Other banks may not issue merchant accounts to new businesses instead they will require a year or so of business history before accepting them.

Other banks may require a physical site inspection by an independent firm to reduce their loses. Some will even set limits on the amount of transactions that you can submit.

When we ask you for information about your business it's not because we are nosey. Believe me if there were a 'one size fits all' we would have it, but we don't.

We represent several different merchant banks and the more information we have the better we are able to match you up with the correct bank. We make our recommendations on the information you provide and combine it with our experience in the industry to get the best program for you.

Our Internet friendly banks offset these higher risks by charging higher transaction fees and higher rates than face-to-face transaction rates. In our rates you will see a 'swiped' rate chart, meaning the credit is physically present, and a 'non-swiped' rate, meaning the credit card is not physically present.

When you obtain a merchant account from one of our banks it is
important to understand that the risk management doesn't stop there.

It is ongoing. Most of the processing companies continually monitor for suspicious activity, perhaps a large increase in monthly transactions.

It is imperative that you know who your contact is and inform them of any changes in your business. If you are having a large sale and expect an increased volume in transactions for a short period of time just call them and let them know about it in advance.

Breakdown of merchant banking costs per transaction

Bank Application/Account Setup Fee $75.00 - $250.00
Transaction Fee/Processor's Fee $.25 - .75
Bank Settlement Percentage 2.4% to 5% (Internet rates)
Minimum monthly $20.00 to $100.00
Statement Fee/Support Fee $10.00 to $25.00 per month
Equipment/Software Prices $395.00++
Beware of 48 month leases

Then there are third party companies that offer additional security checking features or Internet gateways for real time on-line credit card processing. The development expense of interfacing with multiple networks, supporting all the various software and hardware platforms means that there will be additional expenses and fees involved if you wish to use these options.

We have programmed our shopping carts to work with a number of these third party systems making them available as solution for your e-commerce needs. Tell us your needs and we'll go to work for you in obtaining the best merchant account for your business. As you can see there is a lot that goes on behind the scenes and you need a company that can navigate your application through it.

Merchant account - A business bank account that allows a business to accept credit cards for payments.

Merchant acquirer - Can be either banks or third party processors who sign up merchants through existing relationships with banks. A merchant acquirer may be the merchant services division or subsidiary of a bank.

Charge back - A disputed purchase not directly resolved by the
merchant but by the Card Processor. It can be a result of fraud or a disagreement between the merchant and customer.

Credit card processor - Any entity that processes credit card
transactions -- it may be a third-party processor with bank
relationships or a division of a bank with its own processing
networks.

Transaction fee - This fee is usually comprised of a transport or
interchange fee that the processor is charged for going across other networks. This is especially the case if the processor is in a peer environment with other networks.

Bank Settlement percentage - The percentage fee a bank takes off the dollar amount of the ticket price as its fee for a transaction.

Clearing - When a bank acknowledges that the sale of an item is
complete. The transaction clears when an item has been shipped by the merchant. This is after approval and before settlement.

Now what were the first things you looked at or are currently looking at when reviewing a merchant account? What grabs your attention? What information is important? Ah, you look for the rates alone and ignore many of the other important points. Why is that?

Have you ever gone to your calculator and compared the real dollar difference between a 2.39% and a 2.49% discount rate?

On a $10,000 processing month it amounts to $10.00 – big deal. Yes, it’s important to get low rates but it’s equally important to get a merchant plan that fits with what you are doing.

Some reps will sell you a merchant account with a bank that isn’t
Internet knowledgeable. They may even have you set up on a watch program that will freeze your funds when a sudden surge of activity shows up. Unlikely to happen you think?

Maybe your web site makes someone’s ‘hot site of the day’ list or is mentioned in a magazine and your page counter hits the billions and orders come streaming in.

Would you pay that .1% difference now to have access to your frozen funds? Probably.

Some merchant accounts require a separate checking account with the sponsoring bank. They won’t let you use your own checking account. Why is having the funds directly deposited into YOUR banking account so important?

First it saves you money because you don’t have to purchase checks for another checking account, usually $15.00 to $30.00 per order plus shipping.

Second, consider when those funds become available to your business. Typically the credit card funds are deposited into this account within two business days. Then you have to write a check to yourself to get them into your business checking account, another two to three business days. So, maybe it’s a week later when you finally can use those funds.

Third, a hidden cost is the time it takes to reconcile another bank account. Couldn’t you make more money if that time was available for sales? And finally, has anybody ever put it in writing that the other required account will always be ‘free’? There may come a time when it isn’t.

One of the most confusing and often unanswered questions in obtaining a merchant account is how does the bank come up with the discount rate they charge.

First of all the bank only makes a small part of the rate that the merchant is charged.

One thing that has direct impact on the rate is RISK. The risk of
exposure the bank has to charge backs not covered by you. Bank card regulations state the processing bank is liable for any and all charge backs not covered by the merchant.

This is why there are different rates -- one for swiped in transactions, and a higher one for keyed in, or non face to face transactions. The reason being is there is a higher risk of a customer charge backs when a card is not swiped
through a terminal.

This is the main reason for the difference between the retail swiped rate and the mail order, phone order, and Internet rates (keyed in).
This is the way banks cover the extra losses it anticipates by having these type of merchants on board. So if you are on the Internet, and an account rep offers you a really low rate, make sure that it is for Internet sales (keyed in), not the retail (swiped) rate.

The way it works is if your monthly fees (discount rates and
transaction fees collected by the bank) go over $20.00 for that month, there is no monthly minimum fee. You just pay the amount you are charged. If your fees for the month do not exceed $20.00, then you would be charged the difference.

You can determine a rough approximation of your break-even threshold by dividing your monthly minimum by your discount rate. A monthly minimum of $20.00 divided by a 2.49% discount rate yields a break-even of $803.21. If you process more that this amount each month you will have covered your monthly minimum.

If you don’t you’ll be charged the difference. Your transaction fees count toward the minimum but have been ignored in this example.

If you receive too many you’ll risk your merchant account being
terminated with cause.

These may be additional discount rates, per transaction fees, a straight monthly hosting amount or a combination of all. In any event they are justified as an added convenience for both you and your customers.

Consider what you receive for these additional fees and you may see the costs are not out of line. With on-line real-time processing you do not key in your sales thus saving you time. With on-line processing your customers enter their own personal and payment information.

If they make a mistake in entering their card number they are given another opportunity to correct it, you do not have to take the time to call them or track them down and request the correct information.

Entering sales may be ‘fun’ at first but as the volume grows it soon becomes very tedious and slow. Consider the time involved in just accurately entering 100 sales per month and you start to see the benefit of letting your customers do it.

You also receive a secure web page for orders. You will not need to obtain your own SSL certificate thus saving you money while at the same time giving your customers the convenience of secure ordering.

Another added benefit is you can process credit card payments from anywhere you have an Internet connection.

When all of these benefits, the time saved in data entry, the money saved on a digital certificate, the secure ordering convenience, and processing through the Internet, are considered you may ask yourself how you could afford to do it any other way. It sure is less expensive than hiring a part-time employee for data entry.

Always ask how long the approval process will take. We have terminated relationships with organizations that have taken 8 weeks or better to grant approval. Those are lost sales that will never return.

With a properly completed and documented application we can usually receive an answer within 2-5 business days after our receipt of your paperwork. If a site inspection is required add a few more days. If that’s not quick enough ask for our express service. We will overnight an application to you. If a site inspection is needed we will order their 2-day service for you.

Once we receive your completed paperwork we will express it to our approval department requesting 48 hour approval. Once approved your processing equipment/software is sent directly to you.

Additional costs are associated with express service but if you’re in a hurry we can certainly make it happen.

The second most popular way a merchant can get hit with a charge back is by stolen or fraudulent credit cards. Some of this can be avoided by going through the Address Verification System (AVS) and getting a signed delivery receipt or when at all possible getting a manual imprint of the credit card. Or when possible, swiping a card through a terminal or a card reader if you are using processing software on your PC.

The best way to protect yourself against a charge back is to make sure that the address that the customer gave you is the address on file with his or her credit card bank by the use of AVS.

By using AVS, when you get a credit card approval, you also get an indication if the address the customer gave you matches. If it doesn't match, you need to find out why (or at least you should find out why) before sending out your product. If you received an address match and then get a signed delivery receipt at that address, you have a good chance of fighting any attempted charge back by your customer.

AVS is standard on our PC software. If you do mail order, phone order, or Internet sales you MUST use Address Verification.

If you get a couple of charge backs due to sending to bogus addresses, you could have your account terminated, and you will never again in your entire life be able to accept credit cards.

Do not ever process mail order through anything other than our PC or MAC processing software, or a terminal programmed with an AVS application.

After making all of your lease payments do you own the processing equipment? Nope! Most times you must pay a fair market buyout, which is usually 10% -15% of the monthly payments. Thus, a 48 month lease for $3x.xx per month really ends up costing you well over $2000.

Typically these are non-cancelable leases personally guaranteed by you so you still have to keep making the lease payments even if you go out of business

1. Which program below costs you less out of pocket?
This is our introductory question from the top of this article.

Merchants Accept Credit Cards Now!
No Application Fee!
Zon XL terminal only $499.00

Internet Merchants Accept Credit Cards Now!
Application Fee $150.00
PC Processing Software $395.00

It's a trick question. The Zon will not do address verification so it
will not be able to process Internet sales, only card swiped sales.
You won't be told that until they have your approval already in hand and you've wasted a week or two in the process.

Then you'll be told it's an additional $200.00 to $400.00 for a
terminal that does do AVS and manual entries. Do you say okay or do you start all over again? They are betting you pay the difference.

The second choice has a lower out of pocket up-front cost.

Merchants Accept Credit Cards Now!
Qualified rates of only 1.50%
Non qualified rates only +1.75%

Internet Merchants Accept Credit Cards Now!
Discount rates of only 2.50%

There appears to be a huge difference in the rates offered by these two choices. The difference is $75.00 per month based on our criteria established above.

The second choice is again the cheaper one. A qualified rate means you have your customers credit card in hand and swipe it through your terminal. It's the typical retail credit card transaction. It poses the least amount of risk and is the least expensive.

Non qualified means you do not have the customers card available to swipe, an Internet sale, and poses more risk so it's rate is an ADDITIONAL 1.75%. Did you see the + in front of the 1.75%. The total rate an Internet merchant would be charged is 3.25% by going with option number 1. The discount rate under option number 2 is 2.50% well below the 3.25%.

The first ad plays on terminology that most people would not
understand until it's too late.

Internet Merchants Accept Credit Cards Now!
Discounts rates of only 2.49%

Which is cheaper now?

Obviously choice number 1. But is it line with the rates offered by other companies for Internet transactions? No, it's completely out of line with what others are charging.

Did you just find the deal of your life time? Perhaps but then again perhaps not.

Typically in the spring of each year Visa/MasterCard adjust their base rates, the rates they charge the major provider banks. All merchants are informed of the rate adjustment and it's explained as an adjustment made by Visa/MasterCard.

It is also the perfect time to raise your 1.99% rate to something much higher and pass the blame on to the Visa/MasterCard yearly adjustment.

It could even go higher than the current rates offered by others. Yes, there are some companies that do just that.

One of our banks guarantees that they will only pass along the actual changes each year. They will not raise your rates just to line their pockets.

Internet Merchants Accept Credit Cards Now!
Discount rate 2.59%
Transaction rate $0.35
Statement fee $12.00
Monthly minimum $25.00

In option #1 our monthly cost would be.

$10,000 x 2.49% = $249.00
400 x $0.45 = $180.00
Statement fee $ 10.00

A total cost of $439.00

In option #2 our monthly costs would be.
$10,000 x 2.59% = $259.00
400 x $0.45 = $140.00
Statement fee $ 12.00

A total cost of $411.00

How many of you figured option #2 was $28.00 per month less?

Another one I just ran across claimed...
No application fee and NO set-up fee for Internet merchants plus they will pay anybody $175.00 per referral. I got to thinking if they don't charge an application fee and there isn't any set-up fee and they pay out $175.00 where does the money come from?

I started digging. I found many pages touting the virtues of their program, their corporate longevity and the claims mentioned above. On the bottom of one page I found the details; only $30.00 per month plus a $30.00 per month gateway access fee.

They never indicated what the first $30.00 per month was for or what you got for it but you had to pay it. But it turned out to be a 48 month lease at $30.00 per month. A $1,000.00 profit making deal for the selling company.

Let me get these simple facts out in the open. I have repped for 6 different banks. I am contacted weekly by others asking me to rep for them. NEVER, EVER, never ever once has there been one that said we don't charge an application fee or we don't charge for equipment.

The facts are there is an application fee and there is a charge for
your processing equipment whether it's a terminal, software or an Internet gateway. No ifs, ands or buts about it. Does everybody understand that now?

Guaranteed approval is another attention grabbing headline. Once again I caution you to read the fine print. We offer guaranteed approval to merchants falling into specific business categories. We just don't mislead people into thinking it applies to everyone or make them search for the fine print.

The only way to protect yourself is through education. When you enter a web site offering merchant accounts look for these telltale signs.

Are their rates posted or do you have to fill out a form and have someone call you back? Be very careful if they do not publicly post their rates. What are they hiding? Do you really want a high pressure sales call?

Is their web site geared towards the benefits of using their services? The benefits of accepting credit cards? The length they've been in business? If so you'll need to be careful to make sure they don't use any of the misleading tactics exposed in the questions asked above.

Do they make unrealistic claims? Use common sense. This industry is very competitive and the buy rates are very close from bank to bank.

If an offer looks too good to be true it probably is.

Are they offering a large commission for joining their referral
program? If they are and you purchase a merchant account from them you just paid someone that large commission. How do you feel about that?

On the other hand we provide useful information on our web site in the Merchant area. We try to educate my visitors so they can make an informed decision and obtain what will benefit them the most the first time they purchase. We provide tips on how to calculate the true monthly costs of a merchant account, more on the scams I've seen played by others, how to protect yourself from fraud, the steps involved in obtaining your merchant account and much, much more.

Plus on display fully explained with no hidden traps are the merchant programs we offer from three or more banks. This is one of the largest and most informative merchant areas on the Internet. Stop by and get informed.

Thanks for taking our class. I hope you found it informative.

If you would like to rep for us please email the author.

End of Class

Keith R. Johnson
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