How you accept online payments will determine the scale of your online profits. So when selecting a merchant account provider, more than just a degree of circumspection is required. Information is critical – and too many e-businesses have paralyzed their potential for growth and profit with a hasty or careless business decision. Choosing the wrong merchant account provider is surely one of the quickest ways to derail your online business.
What is a Merchant Account?
In a nutshell, a merchant account enables you to begin accepting credit card payments over the Internet. It’s a ‘liaison’ account linking your customer’s credit card account with your own business account, functioning as a clearinghouse for credit card transactions. Sounds simple right? So what’s the first critical error many online businesspeople make? They assume that all merchant accounts are alike.
Of course, this faulty assumption has led to much e-commerce frustration – and more than one e-business crisis. Ask any merchant who’s spent a day on hold trying to resolve a simple chargeback, been drained by vampiric fees, or attempted to reach an elusive customer service department about increasing a monthly limit (while business grinds to a standstill online).
Here, building a sound business foundation means finding the best merchant account for your business model, and for the types of goods you sell. Though the rates of some merchant account providers can give you vertigo, many of the cheaper solutions will end up costing you more in terms of poor service, inflexible limits, technical difficulties, or inept customer care. The key is finding the right balance.
First, competitive rates and reasonable fees are important, so make sure you do some rate comparison. Here’s what you have to look at:
A transaction fee is a fixed charge for every online transaction performed online. If you are selling a moderate number of high-end, high-margin products, the transaction fee is going to be basically irrelevant. However, if you’re selling low-price, low-margin items, a high transaction fee has the potential to take a sizeable chunk out of your profit.
A discount rate will be a flat percentage charged to you for every online sale you transact. Remember: by itself, a low discount rate means nothing. Look at a merchant account’s entire rate and fee schedule, as well as other service features. For card-not-present merchant accounts, you can expect to pay a discount rate of between 2.2 and 2.9%.
Chargeback Rates and Rolling Reserves:
Chargebacks stem from repudiated purchases and often can be traced to fraudulent transactions. Chargeback reserves are implemented to protect the merchant account provider in the case of a repudiated transaction. Your chargeback reserve will “hold” a percentage of your total monthly sales on a rolling basis. The specific percentage is determined by your chargeback rate: what kind of product or service you sell, risk-assessment of your business model, as well as your credit and chargeback history. Different merchant account providers have different chargeback policies – and there are some that will not impose rolling reserves on your business
Some merchant account providers will charge you a fee for every chargeback you incur. If your business typically receives a disproportionately high amount of chargebacks, then chargeback fees – compiled with a rolling chargeback reserve – can hit you hard. Look out on this one – many merchant account providers have high chargeback fees and reactive policies that will establish monthly limits on your business or impose more stringent chargeback rates.
As a precaution, many merchant account providers will impose limits on your monthly revenue intake. However, other merchant account providers have policies with generous limits or no limit at all. If you expect to do serious business on your website, then you need a serious merchant account flexible to your needs.
When researching a prospective merchant account provider, you need to make sure that you are selecting the right merchant account for your business model and unique business needs. In short, make sure that your merchant provider does not subject you to a one-size-fits-all approach. While significant, rates and fees are still just the tip of the iceberg. You need to balance rates with the best overall fit for your company. Here are more important factors to evaluate.
Do a meticulous analysis of the chargeback policy and find out where you merchant account provider stands. Chargebacks are becoming an increasingly touchy issue with credit card companies and merchants alike, and the dynamics of card-not-present transactions have pushed merchant account providers to ‘deduct’ an increasingly high percentage of transaction proceeds. So evaluate policy, plan for contingencies, and select a provider that will help your business grow without the threat of punitive policies.
Underwriting and Risk Assessment:
Before you are approved for a merchant account, the merchant account provider will underwrite and perform a risk assessment of your business and business model. To leverage your chances for approval, applying for a merchant account through a security-minded payment processing company is good way to get better results on risk assessment. You will also be in a stronger position to receive a merchant account tailored to your specific business.
Communication is critical. Make sure your merchant account provider has the customer care platform to swiftly and reliably answer questions and resolve problems. Integrity is important – and the flight-by-night providers don’t like to answer the phone.
Online Experience and Personalized Treatment:
Make sure your prospective merchant account provider has extensive experience working with a wide spectrum of different card-not-present business models, both Internet pure-play and ‘brick and click’ enterprises. Some merchant account providers specialize in – or won’t touch – certain online business models. Look for a merchant account provider who will personalize the experience and won’t impose a commodity solution on your business.
Integrated’ E-Commerce Providers:
If you need more than a merchant account, look for an e-commerce service and payment processing company that can integrate your merchant account needs with your payment processing, hosting, and shopping cart requirements. Integrated solutions mean you keep your infrastructure tight and your customer service centralized.
Remember, rates and fees are simply a part of the big picture. Getting a wider perspective on initially intangible items like sensible policies and superior customer service is essential in choosing the best provider for your unique business needs. Look for the details that distinguish one provider from next. ‘First-step’ decisions like choosing a merchant account provider need to be among your most intelligent strategic moves.
Factors to Consider When Selecting a Merchant Account
Of all the elements of e-commerce, the Internet merchant account remains the least understood and perhaps most delicate component of building an online business. At the same time, there is a lot at stake in selecting a merchant account provider, and making a poor choice can result in numerous complications and unexpected long-term costs. When it comes to accepting credit card payments online, there’s much more than meets the eye – and it pays to understand the wider issues and nuances before committing with a provider.
Often, businesspeople new to the Internet will focus on one merchant account issue: discount rate. The discount rate is the flat percentage taken from each credit card transaction by your merchant account provider. A reasonable rate is important. Unfortunately, many merchants never look beyond the discount rate to analyze other charges, fees, and limits. Nor do they reflect on issues like customer service, provider reputation, or how a provider performs risk assessment on your business.
With some ISOs offering shady solutions and many other providers pushing one-size-fits-all commodity merchant accounts, selecting the right provider – one that balances integrity and affordability – can be a daunting task. You don’t have to travel far on the Web to find an unwary merchant who, seduced by a too-good-to-be- true discount rate, effectively sabotaged business by choosing a disreputable provider.
Complaints lodged against merchant account providers all have a familiar ring: sudden rate increases, long term lock-in contracts, undisclosed fees and add-on charges, high monthly-minimums, heavy rolling chargeback reserves, punishing chargeback fees, and surprise limits imposed upon your monthly revenue intake. A common adjunct to these problems is, quite logically, the inability to contact a customer service department when limits or complications grind business to a halt.
Ultra-low rates rarely equate with merchant friendly policies. Rather, scrutinize such rates critically and look at the total picture – from chargeback policies to monthly minimums to transaction fees. Look for hidden costs in the small print and look for ways a provider can ‘pad your bill’ with add-on fraud protection charges or ‘gateway’ fees. And make sure their rate structure corresponds comfortably with your business model and pricing strategy.
Overnight approval, unsolicited e-mail ads, and greedy pop-up application forms should also serve as warning signals. In most cases, reputable merchant account providers do not act impetuously. In fact, merchant account application should entail evaluation – and the rates, limits, and charges you pay will depend on variables like your business model, your credit history, and how long your business has been in operation.
‘Risk assessment’ is performed to determine rate structures. Certain products and services are rated differently than others for risk. Factors like a credible, professional web presence can influence the underwriting process – as can an application submitted under the auspices of a security-minded payment processing service. Here, being associated with a trustworthy e-commerce ally can strengthen your position. Merchant account approval (and favorable results on risk assessment) can be leveraged by the fact that your credit card transactions will be consistently reliable and processed through several levels of anti-fraud protection.
For new companies or businesses with imperfect credit histories, it can be especially helpful to apply for a merchant account through a reputable payment processing company – one that is partnered with reputable banks for merchant account services.
While merchants can go directly to banks or ISOs for merchant accounts, they may end up facing the headache of putting together – piecemeal – all the other e-commerce components of their website (like credit card processing and catalog and order systems). Or they may end up saddled with a commodity payment processor that is resold by the ISO for profit. This means that the reliability, security, and scalability of your payment processing can come down to a dice throw.
In other words, ‘holistic’ e-commerce solutions (that integrate payment processing and order management systems with the merchant account) forestall much of the turbulence that comes from coordinating a merchant account and e-commerce platform with numerous vendors. Perhaps more importantly, vendors offering integrated solutions depend on a healthy ongoing relationship with their clients. It does not serve their long-term interests to align your business with disreputable merchant account providers.
Still, it always pays to ask questions, to take a hard look at your merchant account and e-commerce vendors before you sign on with them. Move beyond price to evaluate security protocols, reliability of provider, and the degree of customer care you will receive. Analyze policies and determine the right merchant account provider for your business model.
In the final analysis, these factors – not a tenth of a percent difference in discount rate – will determine the scale of your online profits.
Recommended Readings on Accepting Credit Cards Online:
- Square: Making it Easy to Accept Credit Card Payments
- How to Accept Payment Online for an Ecommerce Site
- How to Protect Your Small Business from Credit Card Fraud
- Accepting Credit Cards Online: 10 Red Flags For e-Fraud
- What is a Payment Gateway?