Merchant Accounts 101
If you’ve even begun to look into the possibility of accepting credit cards on your website, chances are your mind is spinning. We get it. We’ve been there too. With so many options, even more technical mumbo-jumbo, and more fees and charges than you can wrap your head around, it’s an overwhelming process.
Merchant Mumbo Jumbo
Lots of terms you’ve never seen before, eh? No kidding. Here, let us translate for you.
Merchant Account: A way for businesses to accept credit cards. Also known as payment processing or credit card processing. A merchant account is acquired through a merchant account provider.
Payment Gateway: What “connects” your ecommerce shopping cart software to your merchant account. The equivalent of a physical POS (point-of-sale) terminal in retail stores. CKGold integrates with many popular payment gateways, including Virtual Merchant, Authorize.net, and LinkPoint.
Chargeback: The result when a customer disputes a transaction on their statement, the cardholder will issue a chargeback against the merchant’s account. The amount of the disputed transaction is then debited from the merchant’s bank account. Merchants have a set period of time in which they can dispute the chargeback, usually by providing proof of purchase by the cardholder. This could be a signature or proof of delivery. A fee is generally issued by the merchant provider for the handling of this dispute process, whether or not the merchant wins the dispute, the fee still applies.
Discount Rate: The percentage charged by the merchant provider for each transaction. Discount rates will vary depending on the type of credit card (corporate/rewards cards command a higher rate than regular cards, for example).
Look at Your Needs.
Depending on your business needs, your merchant account needs will be different as well. If you anticipate a gross monthly credit card income of $500-600 or less, your needs are vastly different than a business with more than $600 worth of credit card transactions each month. Keep in mind that the options for smaller businesses are usually less binding, meaning when your business outgrows them, it’s easy enough to move up to one of the options more beneficial for a larger volume of credit card transactions.
$500/$600 or Less
For now, you want a merchant account with lower monthly/annual fees, even if it means higher per transaction fees.
PayPal Standard. The best option for businesses just starting out. Not an actual merchant account, per se, but it has no annual or monthly fees and reasonable per transaction fees, plus integrates beautifully with our ecommerce system. The downside is that customers will be redirected to the Paypal website upon checking out, which can deter some people from completing their order. As your business grows, accepting credit cards directly is desirable as it helps to maintain a level of professionalism. Paypal can always remain a secondary payment option on your site as well.
ProPay. A low annual fee, and 3-3.25% transaction fees. Keep in mind these accounts often have transaction limits – meaning if you gross more than a certain amount in a month, you’ll need to upgrade to a higher plan. This solution does not include any sort of payment gateway – meaning you’ll need to manually enter the credit card numbers to charge the orders as they come in.
$600 or More
You, unlike the smaller businesses, will benefit from a merchant account with lower per transaction fees (since you’ll have more of them), though that usually means higher monthly fees. It’ll even out in the end though.
Your Bank. Sometimes this is the simplest solution. Purchasing merchant processing through your bank will ensure you get your money quicker. If your bank’s options are too expensive (as they can often times be), you can get a merchant account elsewhere.
Costco/Elavon. If you are a Costco member, they offer merchant processing through Elavon for some of the most reasonable rates available. If you’re not a Costco member, Elavon is owned by U.S. Bank, and their services can be acquired through them. You will also want to sign up for their payment gateway, known as Virtual Merchant, to allow real-time processing between Elavon and CKGold. This option does have strings – you must make a 2-3 year commitment. Cancel early and you will be charged a hefty fine.
PayPal Pro. If you like PayPal, their Website Payments Pro is a merchant solution that seamlessly integrates into your website. While the payment is technically made through PayPal, the customer will never leave your website, and cannot differentiate between this and a regular merchant account. The downside is it is pricey, the monthly fee alone puts it over even the more expensive merchant accounts. But it works well and can be integrated into CKGold.
Do the Math
Still not convinced? Let’s compare. Take two businesses. Business A is just starting out, and maybe has 10 orders a month averaging about $50 a piece. Business B has built up its business, and now averages about 50 orders per month, around $50 a piece. We’ll compare the annual costs for these two business using two merchant services, ProPay and Elavon, and their respective fees. The final total shows the total amount spent on fees per year, and the percentage of sales that those fees cost you.
Business A – 10 orders per month @ $50/each |
||||
| Monthly Fees | Transaction Fees | Setup | Total | |
|---|---|---|---|---|
| ProPay |
$34.95/year
|
(3.50% + $0.35) $21/month
|
$0
|
$286.95 (4.7%)
|
| PayPal Pro |
$30/month
|
(2.90% + $0.30) $17.50/month
|
$0
|
$570.00 (9.5%)
|
| Elavon |
$10/month
|
(2.14% + $0.20) $20/month(fees would only be $16.28, but there is a $20 a month fee minimum)
|
$200
|
$560.00 (9.3%)
|
Business B – 50 orders per month @ $50/each |
||||
| Monthly Fees | Transaction Fees | Setup | Total | |
| ProPay |
$59.95/year
|
(3.25 % + $0.35) $98.75/month
|
$0
|
$1244.95 (4.1%)
|
| PayPal Pro |
$30/month
|
(2.90% + $0.30) $87.50/month
|
$0
|
$1410.00 (4.7%)
|
| Elavon |
$10/month
|
(2.14% + $0.20) $63.50/month
|
$200
|
$1082.00 (3.6%)
|
According to this table, Propay is going to be the best option for Business A, while Elavon is the most economical choice for Business B (and keep in mind, after the first year this fee amount will go down even more, as the setup fee only applies to the first year).
Hidden Fees
There are lots of fees associated with processing credit cards, and you’ll want to be sure you know up front what you’re being charged for. Don’t be afraid to call a potential merchant provider and ask them to list these, one by one. Fees are unavoidable, but you want to know what you’re in for so it doesn’t surprise you later.
Monthly/annual fees: Expect to be charged a monthly or annual (or both) fee for your new merchant account.
Statement fees: Another fee often charged in addition to the regular monthly fee, for sending you your statement each processing cycle.
Gateway fees: Another monthly fee, if you’re using a payment gateway such as Virtual Merchant or Authorize.net. The gateway itself is a separate service, sometimes with a separate company, and thus commands extra fees. Sometimes a gateway will also charge its own transaction fees in addition to the ones your merchant provider will charge.
Setup fees: Fees to get your account up and running. This is a one time fee, and while it’s included in the cost calculations above, it’ll only be a factor the first year. Keep in mind there are often setup fees for BOTH the merchant account AND the payment gateway.
Transaction fees: For every card you charge, the provider will take a cut of it. It’s usually a flat rate ($0.20 to $0.35), plus a percentage of the total charge. Also called your discount rate. The lower the percentage, the more money you’ll save in the long run. Keep in mind most providers charge different rates based on the type of merchant. With your website, you qualify for the internet rate, usually significantly higher than the retail rate. The discount rate also varies depending on the card type, corporate, international, or rewards cards, for example, take a higher percentage than other cards.
Amex fees: If you decide to accept American Express cards, you’ll have to pay an additional monthly fee and transaction fee for all amex transactions. Typically $5.95 per month, plus a slightly higher discount rate and an additional $.05-$.15 cents per transaction. However, keep in mind that in general, amex customers tend to place larger orders. It’s up to you, not all businesses accept amex, but we find the extra cost to be worth it for those that do.
Application fees: Some merchant providers will charge you a nominal fee just to apply for a merchant account with their company. Supposedly this fee covers the cost of processing the application.
Cancellation fees: If your provider requires you to sign a contract and commit to using their services for a certain period of time, chances are there will be a nasty fee if you cut out early. Be sure you know this up front and are ok with those terms.
Monthly fee minimum: Many providers specify a monthly minimum, or the minimum amount of transaction fees you have to pay each month. Say your minimum was $20. If you had a slow month and only had a few charges, you’d still have to pay $20 even if your fees only totaled $10. Once your business grows, this usually isn’t an issue to meet this every month.
Chargeback/Retrieval fees: Should you ever have a chargeback, not only will you lose the money from that charge, but you’ll also get hit with a penalty fee. Never a good thing, and we always try to do everything we can to avoid these altogether.
Transfer/Daily Batch fees: Yes, sometimes providers even charge you to get your own money. Whether you have to transfer it to your bank account, have your daily batch of charges transferred automatically, or get it in another way, many providers will charge nominal fees every time you do this. It adds up.
Voice Authorization fee: Some providers give you the option to phone in a card transaction (say you’re at a craft fair, for example). You can do this, but you’ll usually get charged another fee. How nice of them.
AVS (Address Verification Service) fee: If you charge card-not-present transactions (meaning you don’t physically swipe the card yourself), you might be charged extra to verify the billing address matches that on the account. Some providers charge extra for this, though other times it is already included in the transaction fee.
PCI Compliance fee: If your merchant provider is holding you to PCI security standards (not applicable to paypal/propay accounts, but very likely with any other merchant account), expect to have to pay to uphold this compliance. You’ll usually need to sign up for a service to scan your website monthly or quarterly for vulnerabilities ($100-$300 per year). If you are found to be PCI non-compliant, your merchant provider will charge a non-compliance fee, usually $20/month, every month, until you are compliant.
3rd Party Processors
Be wary of 3rd party/discount processors. While their services might seem cheap, they make their money by subcontracting out their services to multiple other companies. We’ve had experiences where the company you signed up with was completely different from the company who sent your statements and also completely different from the company that sent your transactions to your bank account. If you had a problem, it was your best guess as to which of the three or four different companies you should call, and often times you’d be bounced from one company to another and back again. Merchant processing is already confusing enough, you don’t need to add another layer to it.
A merchant provider is associated directly with a financial institution in order to provide you funds for your credit card transactions. A 3rd party processor is a company that will contract its services with another merchant provider. Think of them as a ‘reseller’ of the merchant services. Wouldn’t it be easier just to go directly to the source? Elavon, who we use for our merchant processing, is owned by U.S. Bank. We have one phone number we call should we need any assistance. Support is hugely important with something as technically complex as merchant accounts. Just keep in mind that price is only part of the equation.
Credit Card Security and Avoiding Fraudulent Charges
The reason processing credit cards on the internet costs more than doing it in person is the risk. Internet fraud is running rampant, and banks have to charge enough to recover their losses in case of fraudulent charges. Cardholders are protected. If their card is stolen and used to purchase something on your site, guess who foots the bill? You. As an internet merchant, you are responsible for the security of your credit card transactions. And most of what can be done to prevent internet fraud is just a matter of common sense.
Use SSL (Secure Sockets Layer). If you plan to accept anything other than PayPal Standard, you will need an SSL certificate on your site. SSL is an internet protocol that encrypts information sent over the Internet. You should never send any personal information over the Internet unless it is over a secure connection, signified by an https:// domain name and a secure lock icon display. Basically, an SSL certificate prevents hackers from intercepting this information and using it in fraudlent ways.
Use AVS (Address Verification Service). Part of your merchant package, AVS will check the billing address on the order against the billing address on the cardholder’s account. It will return a response code with each transaction, letting you know if the address matches or not. Many merchants will still approve orders with partial or even no AVS match, but that is your call. AVS is not a surefire way to prevent fraud, but it’s all we’ve got. International credit cards are not supported by AVS, so it is up to you whether or not you’d like to accept these at all.
Compare the Shipping and Billing Addresses. It’s not uncommon for someone to have a different billing and shipping address. Maybe they get their credit card statements at home but want their order shipped to their work. It’s also not uncommon for an order to ship to a different person altogether, maybe it’s a birthday gift. However, keep in mind that a non-matching billing and shipping address is one of the first signs of fraud. Especially watch out for shipping addresses in other countries (billing to Utah, shipping to Vietnam? I think not). Bottom line, if it looks suspicious, proceed with caution.
Get a phone number. It’s always a good idea to require a phone number from your customers. If there is a problem with their order, it’s the best way to get in touch with them quickly. And in the case of a fraudlent or suspicious transaction, you can give the customer a call to make sure they did indeed place the order. Check to see if the phone number is even in the same state as the billing/shipping address. If the phone numbers don’t match up, do a whitepages search for the cardholders’ name (as their name and address might be the only accurate information you have).
Watch out for Free Email Addresses: I’m not saying not to accept an order placed with a free email address (ie: @hotmail.com), but if the order already looks suspicious, a free email address is another red flag.
Beware of multiples. Internet scammers don’t usually care what they buy, they just buy it. That order you got for 14 of the same necklace? Unless it’s a wholesale customer, ordering multiples is not normal customer behavior.
Hold off. If you’re unsure about an order, don’t ship it immediately. Credit card charges take a few days to show up on the cardholders’ account. You can give them a bit of time to see the charge, and give you a call if they didn’t authorize the charge (your phone number is listed on all your transactions as it should be, right?)
Don’t store credit card information. Once you’ve shipped an order, you have no reason to keep the credit card number. Especially on your website. CKGold will purge this information for you once you mark an order as shipped.
Use your insctincts. If it sounds fishy, it probably is. Trust your gut, and if an order makes you uncomfortable, look into it more. Call the customer. Or, if nothing else, just cancel it. One lost order isn’t worth the hassle of dealing with a fraudulent charge.
PCI Compliance – Yes it applies to you, too.
PCI Compliance is a set of data security standards created to help merchants avoid credit card fraud. These standards are more and more being imposed on smaller and smaller merchants, so don’t be surprised if your merchant account holds you to them. These standards include business practices and internet security. It’s a complicated process to become PCI Compliant, but in the end it will make for a more secure ecommerce environment. This is something we’ve been through ourselves, and are available to help you along the way. For more information visit https://www.pcisecuritystandards.org/
A Final Word
We know the prospect of all these costs as fees is intimidating. But keep in mind that credit cards are what make the ecommerce world successful. Without credit cards, ecommerce websites would cease to exist. It’s a cost of doing business, and is better than doing no business at all.
If you’re just starting out, PayPal Standard is the best way to begin. As your business grows, you’ll want to give your customers more flexibility in how they pay, and give off an image of professionalism by having the payment & checkout seamlessly integrated into your site. This is when moving up to a merchant account will be beneficial to your business. From personal experience, there are many people who don’t like or don’t trust paypal. When we switched our ecommerce site from just PayPal, to a choice of credit cards or PayPal, business jumped. Now, nearly 95% of our transactions are paid via credit card.
Just something to keep in mind.