Home » Secure E-Commerce » Merchant Services » Merchant Accounts 101

Merchant Accounts 101

» Types of Merchant Account & Providers

» What You are Charged

» Tips on What to Look Out For

Q: Types of Merchant Account & Providers

Having your own merchant account is the way to go regardless of your type of business. Most companies are merchant account providers (ISO/MSP's). They are responsible for setting up the merchant account through an acquirer and a payment processor. Most providers handle the daily/monthly tasks such as sending out statements, customer service, in house underwriting, assuming the associated risk with your account, etc

Another option is to use a company the industry calls a third party merchant account provider. These are companies that allow you to accept credit cards on their behalf, using their merchant account. Here are a few reasons why this option may not be your best choice:

• Higher Rates - the discount rate can range from 3% to 15%!
• No control - there is no written contract, giving you no legal rights. If they were to freeze your account today, what would you do?
• Potential Loss of business - When it comes to the Internet, large majority of consumers are fearful when placing orders online. By sending a customer to another company for payment collection, it may not present a professional, secure environment to the customer. They could be concerned about whom they are giving their personal information to. Take Tigerdirect.com as an example. They currently sell over 400 million dollars worth of product each year. They have added Paypal as an alternative payment option within the past few years and has resulted to be less than 10% of their sales.
• Reputation - You can find many horror stories on the web regarding these type of companies. Do a search for the particular provider you had in mind and see what you can find.

Q: What You are Charged

Have you ever wondered who is involved when pricing the discount rate and transaction fees as it varies from one company to another? This section will answer those questions and much more!

Visa & MasterCard operate their own International network processing system known as Interchange.

No matter how large or small, every company has the exact same buy rates from Visa & MasterCard.

The two major rates you are charged on every dollar processed is the Discount Rate and Transaction fee. There are multiple companies involved when adding to these rates:

• Interchange (Visa/MC) Fee
  1. Discount Rate - a percentage taken off every dollar (ex: 2.39%).
  2. Transaction Fee - a flat per transaction fee.
• Payment Processor - a fee that is added to the transaction fee.
• Merchant Account Provider (ISO/MSP) your provider will add their own markup to the transaction fee and discount rate for providing you the service and assuming the associated risk with the account (liability is similar to an unsecured loan).

The discount rate you see advertised is referred to as your qualified rate (ex: 2.39%). For the transactions to go through the qualified rate, it must meet the criteria set by Visa & MasterCard. There are certain actions or inactions that will cause your transactions to downgrade to a more expensive rate. When this occurs, merchant providers pass the cost on by adding a surcharge called Mid-Qualified & Non-Qualified to your main discount rate.

• Mid-Qualified Rate

  This surcharge will not normally apply to merchants that are keying in their transactions (Internet, Mail/Phone Order, etc.)

• Non-Qualified Rate

  This surcharge applies to certain types of credit card transactions, such as business and corporate cards. Other situations will also cause your transactions to automatically downgrade to this rate, such as you didn’t use AVS on all transactions or failed to batch out within 24 hours of processing a charge. Merchants can expect to receive anywhere from 10 to 50% of their transactions as downgrades.

  Example: Discount Rate is 2.39% and Non-Qualified is 1.60%, then your rate on those particular transactions becomes 3.99% (2.39% + 1.60%).

Q: Tips on What to Look Out For

Merchant accounts with a long contract and termination fee has become a standard in our industry. The general commitment is one to three years with a termination fee ranging from $250 to $550.

Take extra caution when a company's offer seems to be out of the ordinary as it may only be an introductory offer. Your first instinct may be to go with the company that gives you rock bottom prices, but what happens when a problem occurs? Will you be left standing without any service? It is important you have a rock solid relationship with your merchant provider as you will need their assistance from time to time. Other possible reasons are as follows:

• Since Visa & MasterCard is constantly increasing their rates, all providers reserve the right to increase your pricing at anytime. There are a number of ways a company can mislead you with pricing, such as claiming to have fixed rates.
• If the relationship goes sour, your personal credit can suffer along with the risk of being put on MATCH. MATCH is a national list that contains every merchant that has been terminated for various reasons across the country. Once you are added, you must have the original company remove you or it will be almost impossible to get another merchant account.
• A few unforeseen problems have come up and you are not able to cover your chargebacks.
• If you reach a large enough volume each month, you may be able to renegotiate your fees.
• As your business continues to grow, you may want to increase your limits.
• You may need to open up another merchant account.

It is best to notify your provider when circumstances may arise that will affect them or your account, such as:

• Your sales have picked up; therefore, you may exceed your monthly volume limit.
• You want to add a product or service to your line that may affect your monthly volume or average ticket size.
• Your product(s) or service(s) have changed substantially since the account was opened.
• The holiday shopping period may put you over your monthly limits.
• You desire a permanent increase in your monthly volume or average ticket size.
• You feel that a charge has been disputed unjustly and want to contest.
• A change in your company has affected your average ticket price.
• You want to renegotiate your contract for better rates.

It is ideal to treat this account like any other financial relationship.

• The customer was not satisfied with the product(s) or service(s) delivered.
• The amount they were charged was not correct.
• They did not recognize the company name on the credit card statement.
• The product(s) or service(s) were never delivered.
• The merchant processed a fraudulent order.

Most companies fail to educate their merchants on this subject, as the majority of chargebacks can be avoided! When a transaction is disputed, the merchant will receive a retrieval request in the mail stating which transaction and the date by which the merchant needs to respond. You have two particular options at this time. You can try to win the chargeback by providing the needed documentation or proof for the claim on the dispute. However, the majority of the time you are not likely to win. If you fail to respond to the retrieval request and the customer does not reverse the dispute, then it will automatically result in a chargeback and is non-reversible per Visa/MasterCard’s regulations.

The other option you have is when you receive the retrieval request, contact the client and handle the situation directly. In many cases, you will be able to easily fix the problem with the customer and have the dispute reversed. A retrieval fee is charged when you have decided to contest the dispute by sending in the requested information.

To help merchant account providers offset the risk they will be assuming with some merchants, such as chargeback fees and default risk; they may require an account called a "Reserve Account" or "Rolling Reserve." The requirements for a reserve for each provider will vary, but may include things such as if a merchant has poor credit and or a high average ticket price (ex: $1,000 or $1,500). Reserves are returned to the merchant after a predetermined timeframe. A rolling reserve is held every month for usually six months. On the seventh month, the first month’s reserve is released to the merchant and so on.

All merchant providers put in their contracts the right to hold any funds they see necessary at any given time. A merchant provider with a good business practice will only require a reserve based on the assumed risk from the application submitted unless the account changes and becomes riskier after the initial setup. Such changes can be you are experiencing a high ratio of chargebacks to sales volume, you went over your allowed monthly volume, etc.

There is a lot of controversy over future delivery (such as subscriptions, web hosting, etc.) and allowing a merchant to charge for services for an extended period (ex. 6 or 12 months in advance). For example, you have a web hosting company that charges their clients 12 months of service upfront. They bill 1,000 customers on January 1, 2004 for $100. It is now November 31, 2004 and the hosting company has filed for bankruptcy.

You will now have 1,000 unhappy customers as they didn't receive their full 12 months of service and will file a dispute with their credit card company. You will then have $100,000 coming in chargebacks. Since the hosting company has filed for bankruptcy, the merchant provider will have to cover the $100,000. If you did not know, the customer has the legal right to dispute the charge up to approximately six months after the last day of paid service. As you can see, there is huge risk for the merchant provider to take on these merchants.