Thinking About Accepting Credit Cards?

What you need to know about Credit Cards, Charging Credit Cards, and Merchant Accounts
And what the settlement banks don't want you to know.

What is a Merchant Account?

A merchant account is a special bank account that allows a business or organization to accept credit cards such as Visa, Mastercard, Discover, American Express, etc. This is also commonly referred to as payment processing, merchant account processing, credit card processing, a pain in the @#$, or merchant card processing.

Do I Need a Merchant Account?

1. Do you want to accept credit cards?
2. Do you want your customer’s credit card statements to read your business’s name,
    instead of some other random name (ie “Pay Pal - something@som...”)?
3. Do you want your money to be under your control, not someone else's?

If you answer those questions with a “yes”, then your answer is Yes. (Big surprise)

How do I find & Choose a Merchant Account Provider

Lucky for you, finding a merchant account provider is so easy it would make your head spin (though head spinning isn't popular anymore). If you're bored, you might try Googling "merchant account". You will get somewhere around 13,900,000 search results, many of which are waiting to take the shirt right off your back. There are tens of thousands of merchant account reps, working for card processing banks and offices world wide. Some providers have hundreds of regional offices, all with several account reps inside. Point being, it's a feeding frenzy out there because so many people need to accept credit cards, and there are so many ways the account providers can extort you make money by gaining your card processing. Therefore, to get the best deal, you need to understand the basics of how the merchant account providers rob you make their money.

How Merchant Accounts Make Money

I hope you're ready to drink straight from the fire hydrant, because this section gets a little spicy. There are 327 ways these people make money off you accepting credit cards. Actually it may only be 10 or 11, but with the feels-like-index, it's more like 327.

Each time you accept a transaction, think of that as a yummy piece of fresh baked apple pie. It's your precious little sale (or donation). Now imagine 10 people with their greedy hands in your pie. Not so yummy anymore.

Here's how they make their money:

  1. Monthly Fixed Fees - Statement, Account Maintenance, Customer Service, and whatever else they want to call it. A lot of times it sounds like they're throwing in the kitchen sink, to make it look like you're getting a lot for your monthly fee (normally $10-$40).
  2. Application Fee - Start up/setup fees, etc... This one is just a step under aggravated robbery. Always demand $0 start up.
  3. (Overpriced) Equipment - Terminals, card swipers, POS machines, virtual terminals, etc & bla bla bla. Do your research, and you'll find that the same machine can cost between $0 and $500. That's quite a disparity. On top of that, some may even try to charge you to "program" your equipment.
  4. Transaction Fees - some fixed amount they take out of every transaction, like 25 cents. You typically can't avoid this puppy, though you can fight to minimize it.
  5. Gateway Fees - If you're accepting online transactions, you'll get nailed with this one. More about the "gateway" later. They have their own bucket of warm water fees to assess.
  6. Auth fees - This is a fee for every attempted transaction, so whether it is approved or declined, they get the auth fee, anywhere from 5 - 35 cents.
  7. Batch fees - This is the fee they charge to move the money to your checking account, which can be every day, anywhere from 0 - 25 cents.
  8. Monthly Minimum Fee - if you don't process enough each month, they ding you with this fee. IE, $25 monthly minimum fee, means you have to produce $25 worth of discount rate fees each month. If you come up short, they'll make up the difference for you in the form of a fee (how nice of them).
  9. Account Termination Fee - If you decide you want to leave or switch accounts, your get hit with this bad boy. This could be a $100 or more. You can demand $0 on this one. If they don't give it to you, they're losers.
  10. Chargeback Fee - Even they hate this one. This happens if someone challenges a transaction to your business. Treat these like letters from the IRS (as in pay attention). If the challenge is uphold, you'll loose the transaction and get dinged for $25 (which is normal).
  11. DISCOUNT RATE - The Granddaddy of them all. This is a percentage that they take out of every transaction, more about that later.
If you're normal (ie: you have a pulse), you're probably thinking that's a lot of fees.
You're also right, it is. Your goal is to minimize all of them.

Discount Rate

This is the single most important fee in your now abusive merchant account relationship. The Discount Rate is a percentage that they take out of every transaction. This could be anywhere from 1.6% (good) to over 5% (terrible). Part of the discount rate fees go back to people like MasterCard and Visa. MasterCard and Visa have their interchange rate table (which happens to be more complicated the nuclear brain science), then merchant accounts add a little sprinkle on top and wa-la, that's your discount rate. So if your discount rate is 1.6% (unlikely), just assume 1.3% is going back to the card company (MasterCard), and 0.3% is kept by the merchant account. Now imagine your discount rate is terrible, like 5.5% (in the case of 2CheckOut). In that scenario, you're giving close to 4% of every transaction to your merchant account company, which is basically criminal assault & battery.

Discount Rates have two main categories.

  1. Card Present - Also called Retail or Face to Face. This is where the transaction is in person. You can swipe the card, hold it, sniff it, admire it, and further more handle the transaction right there on the spot, in person.
  2. Card Not Present - Also called Mail Order, Telephone and Internet transactions. This is where the transaction originated from mail order, telephone, or from the internet (like an e-store or online donation).
Whichever category most of your transactions fall under will determine what kind of discount rate you get. Now, you must understand that merchant accounts love to advertise their "card present" rates, because they're lower. They're like teaser rates. It's taunting you, "Ooohhhh, look at the low 1.6% over here, it's so nice and low, sign up with us... 1.6%... what's not to like...?" Then you'll realize down the line that you won't get 1.6% you'll get 2.3%. You have to pay attention here.

Normal card-NOT-present rates are over 2%. The closer you get to 2% the better. Anything over 2.19%, don't walk, RUN away.

Normal card-present rates are less than 2%. 1.6% is good.

Regardless if you are a card-present or card-not-present merchant, you will have to deal with rate downgrades. They call these mid-qual and non-qual rates/fees. If your merchant account contract sets your discount rate at 2.19%, you'll get that rate on all "fully qualified" Visa and MasterCard transactions. Fully qualified means they are basic, normal cards, no rewards or thrills. It also means that everything matches up at the time of the transaction. IE: address match, zip code match, card code match, etc. Depending on who your target market is, you could have up to a third of your transactions paid for by some type of rewards card. These are cards that give the card holder rewards like cash back, frequent flyer miles/points, etc. All corporate and rewards cards will very (very very very) likely get downgraded by your merchant account, which means you'll pay the "Mid-Qual" or "Non-Qual" rate for that specific transaction.

If your "Qual" is 2.19%, your "Non-Qual" could be anywhere from 3% to 5%. Mid-Qual simply sits between Qual & Non-Qual, and typically applies to retail merchants who "key in" the transaction (or type in over the internet). You must make yourself aware of your Non-Qual rates before signing on the dotted line with your merchant account, because this is the nasty little secret they like to keep. You need to know your worst case scenario (Non-Qual) for any transaction. In their world they run around saying things like, "yeah, I got XYZ Corp on board with 2.2% on the front and 2.1% on the back.". That's merchant account speak for a Qualified discount rate of 2.2% and a Non-Qual rate of 4.3% (2.2 + 2.1). In that scenario, 4.3% is the non-qual rate, because they piggy back 2.1% on top of the qual rate. You better understand this, or you'll get slaughtered out there. Good Non-Qual is less than 1%.

What is a Gateway?

A Gateway (or Payment Gateway) is what authorizes a transaction over the internet. It acts like a bridge, taking the place of a card swiper for online (keyed) transactions. It receives the encrypted transaction from the merchant server (online store), authenticates the merchant, decrypts the payment information, and send the transaction data to the merchant account for settlement.

Who Has the Best Merchant Account

The Million Dollar QuestionMerchant account providers all compete with each other. Some have lower discount rates and higher monthly fees, and some have lower monthly fees and higher transaction costs. You have to evaluate a few to get to the bottom of what your best option is.

If you're putting a shopping cart program on your website, most shopping carts will recommend a certain merchant account. This should serve as the 1st example of who NOT to go with. It's like asking the car repair man, "what all needs to be replaced under the hood?" Whatever they tell you is typically the more expensive option.