Frequently Asked Questions - What is a Merchant Acount
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Can you explain what is a merchant
account is and why I need one?
a great first question and a great place to start. A merchant
account is a specialized account that allows a business to
process credit card sales and have those funds deposited
directly into a Merchants local business checking account
usually within 48-72 hours.
A Merchant Account is set up with a bank that is a registered
to offer credit card processing through Visa and MasterCard.
Merchant Banks usually contract with a Merchant Service
Provider (MSP) or an Independent Sales Organization (ISO) to
market services on behalf of the Bank. You can also sign up
directly with a Bank but this is not usually the best route
to take since most banks have tougher requirements to get
qualified for a Merchant Account. You will be charged a fee
for this service called a discount rate. Rates vary depending
on the type of business you have.
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Are there other options I can
are 3rd Party Services that will process Credit Card
Transactions on your behalf, however, I would advise against
going one of these routes. Problems with 3rd Party
Transaction Processors include higher discount rates
sometimes as high as 15-20% of your sales prices. Typically
you only get access to your funds twice or three times a
month, thus hampering your cash flow. Also, many customers
dispute items processed through 3rd Parties because they do
not recognize the company name on their credit card statement
when the bill arrives 30 days later. This can end up costing
you a significant portion of your revenue. If you get your
own merchant account, you can expect to receive your funds
between 2-3 days from the time of the transaction directly
deposited to your local business checking account and your
Company Name and Phone Number will be printed on your
customers Credit Card Bills. I strongly suggest setting up
your own merchant account so that you can control your money
and not rely on a 3rd Party.
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Do I really need to accept credit
today's market I do not know too many successful
businesses that do not accept credit cards. There have been
numerous studies showing if a merchant accepts credit cards
as a form of payment that the merchant can increase sales
dramatically. Depending on the type of business, increases in
sales can be anywhere from 15% to 100%.
Internet businesses have the largest increase because
customers want to pay immediately and not have to call or
wait for the merchant to contact them.
Some obvious reasons to accept credit cards are merchants
will move more expensive merchandise, have an increase in
impulse buying, and give your business credibility. Giving
customers the ability to pay with a credit card allows
impulse buying that will allow a merchant to move merchandise
that a customer's may not have funds available in their
checking account. If you want to give your business every
chance to be a great success, you must take credit cards.
Here are some more good reasons to take credit cards:
COMPETITIVE WEAPON -
Customers will buy from a merchant that offers payment by
a credit card and will often look to see if a merchant
accepts credit cards before shopping.
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How do I get the money from a
credit card sale?
COMPETE WITH THE BIG GUYS -
Accepting credit cards levels the playing field with
PEACE OF MIND - Customers
feel secure in using their credit card. If the service or
product is faulty, the use of credit card allows customers
to dispute a charge that protects them.
CONVENIENCE - Making it easy
for your customer to pay you is probably the biggest
reason to accept credit cards.
CUSTOMER LOYALTY - Customers
will often shop at merchants where they feel comfortable
or have shopped before. One important thing to remember is
to make sure to add credit card logos to any marketing you
do. Many potential customers looking for a service or
product will look at a merchant's advertisement to
identify and find the right merchant. If the customer has
little cash often the deciding factor in determining which
merchant to choose depends if the merchant accept credit
cards. This allows the customer to finance the sale and
make payments to their credit card company.
good question and here is how it works. When you, the
merchant, want to accept a credit card for payment, the
following process occurs (this is a brief summary):
You submit a Transaction to your processor using your
electronic terminal or Online Processing Software. Either
option works almost the same way. The terminal or Online
Processing Software communicates with the Visa/MasterCard
Authorization to ensure that the Credit Card is valid and
that the transaction amount does not exceed the
cardholder's credit limit. The authorization puts a
"hold" for the transaction amount on the
cardholder's credit limit. That way, the funds are
available to you when you complete the transaction. To
complete the transaction you will simply close your batch at
the end of the day with your terminal. By doing this, you are
promising the merchant account provider, sponsoring bank, and
issuing bank that you are prepared to deliver the goods and
services expected by the cardholder.
With Online Software, you usually do not need to close your
batch as transactions are processed Real Time. From the time
you close your batch, funds are directly deposited into your
bank account. This process usually takes 48-72 Hours.
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Can I go to a bank to get my
you can but banks have tougher requirements for approval and
do not generally like new businesses. I suggest obtaining a
merchant account with a company that specializes in offering
merchant services. These organizations, known as Merchant
Service Providers (MSP), specialize in providing merchant
accounts for new businesses. MSP's usually have less
stringent approval requirements, lower fees, better
understanding of risk issues and customer service departments
that only handle inquiries about merchant accounts. You will
probably not deal directly with a Merchant Service Provider,
but rather an ISO that contracts with a MSP. These
independent sales organizations specialize in marketing to
new businesses soliciting merchant accounts. The ISO's
focus is selling you a terminal or software that will allow
you to process credit card sales. The MSP also compensates
ISO's but the focus of the ISO is usually selling
equipment or Software. There are many reputable ISO's in
the bankcard industry but a few bad apples. I will explain
how to choose the right MSP and ISO shortly.
Risk is the main concern of any bank or merchant service
provider. Banks are more conservative and are highly
regulated which gives the MSP and ISO an edge. Internet,
mail, telephone or any business that does not see the credit
card usually must use a MSP or ISO because banks will usually
not approve these types of businesses. In addition, many
MSP's and ISO's offer a number of associated
services, especially to online businesses, such as shopping
cart capabilities and website design.
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How do I find the right
merchant service provider for my business?
Remember I said ISO's were the marketing arm for merchant
account providers. Well, they will find you. You only need to
ask the right questions to ensure the merchant service
provider fits your business needs.
Now here is where most problems start that could adversely
effect your business. ISO's employ sales people to sell
their service and like all sales people make their living
from making a sale to earn a commission. Most have no
interest in your success and do not receive any additional
money from the ISO. The industry is competitive and sales
people will sometimes not identify fees, risk issues, and
other important issues that can affect your ability to accept
credit cards. I will not identify specific instances that I
have witnessed and please do not think all ISO's or sales
people use deceitful tactics but it is worth saying to
convince you to read and understand any contracts you sign
and understand how the process works because ultimately you
are responsible for your business. Therefore, all these
ISO's are trying to promote their service as the best
including the lowest price on terminals, the lowest discount
rate and the BEST service.
It is easy to get distracted in this whirlwind of who has the
lowest price and the "best deal" and base your
decision on cost alone. One problem with using the lowest
cost as your deciding factor to determine who you choose to
be your merchant account provider is and process your credit
card transactions is that processor is also handling your
money. That is right, your money. Price is important but
should not be the only factor when choosing a credit card
processor. Credit card processors are not all the same.
Processors may take all types of businesses but specialize in
one specific field. For example, there are processors who
specialize in Internet businesses while other have better
expertise in retail businesses. Of course, you want to work
with a processor who specializes in your type of business and
will provide you the best service. Here are some good points
to remember in choosing a merchant account provider.
Educate yourself on how the entire process works.
Understanding how it works will allow you to ask the right
Every business is unique. The credit card processor only
receives information on your business that you supply. Be
sure that the processor understands what you are selling,
where you are selling and how you sell. Seems simple but
some merchant's have discovered the hard way that the
processor did not understand their business.
Find a bankcard professional. Someone who asks questions
about your business explains fees, how the service works,
what equipment best fits your needs and why.
ASK QUESTIONS. There are no dumb questions when it comes
to your money.
Read your Merchant Agreement. If you do not understand
something, ask to have it explained.
Asked to have all fees identified and explained. Read the
contract to identify all cost involved.
Do not decide on a processor based on the "best
deal" on fees or equipment cost. All processors are
very close in fees. For example, the difference between a
discount rate of 1.79% and 1.89% on $10,000 in credit card
sales is $10. Saving a few bucks and picking a processor
that does not fit your needs could cost more in the long
When you decide that a terminal or online software program
fits your needs understand that they all do one thing,
verify credit cards. Do not be sold on bells or whistles
that you may not need. Never lease equipment. Low cost or
even free credit card terminals are available.
Customer Service. A professional bankcard person will
provide good service and be there to help you when you
need it. You will eventually need assistance with some
type of issue. When you call your sales representative,
will he answer the phone or ignore your need for help?
Processors use guidelines in approving accounts. Sales
representatives know this and will sometimes not disclose
information about your business if he or she believes this
may effect whether your account is approved or not. Some
representatives are only concerned with making a
commission and not the success of your business.
Understand you are not usually dealing directly with the
credit card processor. The processor only receives an
application you sign filled out by a sales representative.
The Processor assumes the information supplied about your
business is accurate. The processor uses this information
in approving and managing your account. If there is
information that is not correct there is a high
probability your merchant account will be suspended or
Understand fraud and security issues. Your processor has
material on these two issues. This will save you money,
guaranteed. Although very important, do not be too critical
in evaluating processors. You will know which one is right
based on your instinct and what feels right. Aside from
logic, your intuition - that voice within you - may just lead
you to the right vendor.
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What does my business need to
open a merchant account and get set up to take credit
only requirements to open a merchant account are the
following unless your business falls into a high-risk
category. I will explain high risk in a moment but here are
the basic requirements to have a merchant application
approved. A. Business checking account B. A web site or
physical location C. No open bankruptcy D. A product or
service that is not on a restricted merchant list Many
processors will work with you if you are willing to submit to
special conditions if you have less than perfect credit or a
risky type of business.
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What makes a business risky to
are a few reasons why a processor would consider a business
risky and possibly decline the application. I have listed
reasons below that would lead a MSP to consider a business
High monthly sales volume - Merchants who process large
ticket items (those over $500) and/or have a High Monthly
Sales Volume (usually over 25K per month) pose a special
problem to merchant service providers and to the merchants
themselves. Merchants that fall into this category need to be
aware that Merchant Service Providers will be more thorough
on reviewing Merchant Applications because of the high
potential for Fraud and potential losses. They usually ask
for more documentation up front including copies of Tax
Returns and Financial Statements. This additional
documentation helps legitimize your business.
Derogatory credit - In the not too distant past, it was
virtually impossible for a person with a poor credit history
- or no credit history at all - to receive a merchant
account. Heavily regulated banks are subject to strict
controls over their activities; rarely saw fit to grant
merchant accounts to those without a sterling credit history.
Today, it is much easier to find a company willing to give a
Merchant Account to a Merchant with a poor personal credit
history or even no credit history. The requirements and terms
of service may vary a little from ISO to ISO. If you fall
into this category, expect to pay a slightly higher Discount
Rate and be prepared for Reserve Account.
Type of business - Each merchant service provider restricts
certain types of business that they have had problems with in
the past. There are too many types to list here but your ISO
will know if your business is restricted. Some types of
businesses that may be on a MSP's list are adult related
businesses, international merchants, higher ticket items that
are not sold in a retail environment, business opportunities,
credit repair and multi-level organizations. MSP's
consider these types of business risky due to the high
possibility of chargebacks. There are some MSP's
specialize in higher risk accounts but will charge higher
rates, require a reserve and or delay fund deposits for 2-3
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I am starting to understand how
all this works but I am going to open an online Internet
stores are extremely popular these days. Merchants can
continue to work at their day job and work on their online
store in the evenings. This allows merchants to ensure their
store is a success before quitting their jobs. There are a
couple of ways to accomplish this but perhaps the most
efficient, convenient way - and, depending on the
circumstance, the most cost-effective - is to use real-time
processing via a gateway. This process entails your customer
inputting his/her credit card information on a secure
(SSL-encrypted) site, and in real-time. The MSP receives this
information from the gateway. Just as cars use a tunnel to
get from one place to another, the gateway serves as that
tunnel to transmit information from the customer to the
credit card processor. At first, within seconds of the
customer submitting his/her credit card information, the
acquiring processor either authorizes the transaction or
declines it. Receiving an authorization code only reduces the
credit limit of the card but there is not a charge to the
card. Subsequently, the approved customer's information
becomes "captured" resulting in the customer's
credit card being charged for the authorized amount. This
capture becomes part of the merchant's batch, and travels
trough the gateway again. The acquiring processor then knows
to finalize and settle the transaction. Settlement takes
place as funds resulting in a credit to your checking
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Will I also be able to accept
check payments on my web site?
make sure that the merchant service provider knows your
interest to offer this important payment option to your
customers, and can accommodate this service. On the web page
order form, you can have one section where the customer may
put in his/her credit card information and another section
where the customer may put in the check information required
(e.g., routing number, account number, etc.). The merchant
service provider can tell you all the checking information
that is necessary to collect from your customers. The
checking information goes through the payment gateway just
like the credit card information travels.
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While I now understand the
components involved with online credit card payment
processing, how do I actually implement this on my web
have designed your website, you can easily add another page
called the "Order Form". If you rely on the
expertise of your web designer, the designer can do this in
fifteen minutes or less, unless you need special
customization that may entail more time. However, an order
form is relatively simple to add. Remember, you still must
have a secure server with certification, a gateway, and a
merchant account. The shopping cart software is optional
(though highly recommended) and can be integrated into your
website by you or your designer with the instructions
provided by the shopping cart provider.
Here is the good news, by choosing the "right"
merchant service provider; you can have access to its secure
server and its gateway. There are merchant service providers
who have their own secure server, their own gateway and their
own shopping cart, and do not rely on other companies to fill
those needs. In other words, you can find a "one-stop
shop" solution. It is essential that you ask any
merchant service provider if they have their own gateway or
outsource it to another company. If they depend on another
company for the gateway, you will be dealing with at least
two organizations (i.e., the merchant service provider and
gateway company), and they must work together.
Horror stories abound about the lack of coordination between
service companies, leading to lots of headaches, heartaches,
and possibly, financial woes for you. Use one merchant
service provider that provides all the essentials.
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