If you own or run a business and you wish to accept credit cards as a form of payment, a merchant account is required. In today’s world of online shopping and plastic money, this is a necessity for a wide scope of businesses, whether they are small family run businesses or large corporations. However, there can be a lot of confusion regarding credit card processing and merchant accounts, especially for businesses that are new to this form of payment method. So, to help business owners of all experience levels understand merchant accounts a little better, we have created this guide which breaks down the basics and provides a general overview.
What is a Merchant Account?
In its most basic form, a merchant account is a specialty account which is provided by a merchant processing financial institution or service that enables businesses to accept real time credit card transactions. A merchant account is required to facilitate the transaction which in turn allows a business of any size to accept a range of payment methods such as Visa, MasterCard, and American Express, to name but a few. Depending on the merchant account type selected, businesses may also be able to accept other forms of payment such as PayPal.
Upon obtaining a merchant account, a business will generally sign a contract with the provider, whether they opt for an account from a large financial institution or a specialty service provider. Each merchant account provider has their own drawbacks and benefits and as such it is important to read the terms and conditions of the contract and ensure the provider you opt for is suitable for your business type.
Who Provides Merchant Accounts?
Merchant accounts can be obtained from a range of financial service organizations. Banks are a popular choice for merchant accounts, however, they often have strict regulations and a tough approval process. This can cause problems for small to medium sized businesses and for businesses that don’t have an excellent credit record.
Another option for merchant accounts are online service providers, such as EthosPay. There are many advantages to using an online service provider such as a more lenient acceptance process and cheaper fees for using the service.
A third option for merchant accounts are Independent Sales Organizations (ISOs) which are also known as third party merchant account providers. ISOs allow merchants to use their account for credit card transactions and charge a fee for this service. They tend to have much higher rates and lower recovery rates for situations such as chargebacks which can cost a business a significant amount of money. The benefits of ISOs are that they have more relaxed regulations for acceptance than banks, however, online service providers are generally the best option for small and medium sized businesses who don’t get approval at the banks.
What Are the Costs Involved With Merchant Accounts?
Every merchant provider will offer different charges, rates, and potentially hidden fees. There are generally two types of rates included in fees – fixed rates and variable rates. Fixed rates will include an annual fee, a termination fee, a monthly service fee, and an application fee. Variable rates could include a discount rate, which we’ll talk about below, a batch transaction fee, and a fixed transaction fee. Here is a breakdown of common costs and fees:
The discount rate is a term used to describe the main cost of processing a transaction and then having the funds deposited into your account. Discount rates are generally worked out as a percentage of the sale and are made up of:
• Interchange Rates – The full amount of interchange fees are collected by the merchant bank and paid to the issuing bank. Rate are determined by three criteria – the type of card used, the risk associated with the transaction, and the type of product being purchased. For these reasons, different rates can apply to different business types.
• Card Association Fees - The card association fees are the rates that go directly to Visa, MasterCard etc. They can be labelled as Assessments, International Fees, Dues, Access Fees, or something else along those lines.
• Processor Rates – This is the premium over the interchange or mark-up which is charged by the processing bank to cover tasks such as bad debt, administration, customer service, and monthly statements.
The discount rate is a combination of all three rates and fees mentioned above. The rates are also split into three different categories:
• Qualified Rates – This is the percentage that is charged when a merchant accepts a payment from a customer using a debit card, certain Merit cards, and a standard credit card. It is the lowest rate you can receive and is generally the rate quoted when merchants first enquire about accounts.
• Mid-Qualified Rates – This is the percentage that is charged when a merchant accepts a card payment that doesn’t qualify for the lowest rate. This may happen if a card is manually keyed into the terminal or when a business or rewards card isn’t presented.
• Non-Qualified Rates – This is the percentage that is charged when a merchant accepts a payment that doesn’t qualify for any of the lowest rates. This can happen when a card is manually keyed into the terminal, an address verification isn’t performed, some information is missing, or the authorization isn’t settled in due time. This rate can also apply to foreign cards, world cards, or government cards.
Other fees that can be charged with merchant accounts include:
• Chargeback Fees – These occur when the cardholder files a complaint with the issuing bank regarding a purchase. Merchants are charged a flat fee whether they win or lose a hearing and as such chargeback fees can be significant to the profits of a business. Utilizing a chargeback mitigation service, such as the one offered by EthosPay, can help significantly reduce chargeback fees.
• Address Verification Fees – On transactions where the card is not present, a merchant may be asked to verify the cardholder’s address to receive a better rate. A flat rate is charged for this whether the transaction is singular or in a bundle.
• Transaction Fees – These are the fees that cover the cost of transmitting data to and from the cardholder’s bank, the acquiring bank, and your bank.
The actual process of setting up a merchant account is not a difficult one, however, selecting the best merchant account provider is essential in reducing costs and fees. Check out the rates and services provided by EthosPay and see what we can offer you today!