Getting a Merchant Account
April 29, 1999
Banks are famous for making their cost structures complicated,
so that you can't easily compare costs among different banks, and
merchant accounts are no exception. Most banks charge a percentage
of each transaction, called a discount rate, and a fixed
per-transaction fee. There is often a fixed monthly fee, a
monthly minimum order, and a one-time setup fee as well. A
payment-processing system, whether hardware- or software-based,
is an additional expense, as we shall see.
Fees for merchant accounts are like interest rates on loans -
they vary depending on the perceived level of risk to the bank.
Users of credit cards may refuse to pay certain charges for a
variety of reasons, ranging from returned products to honest
errors to fraudulent charges. Banks want to encourage the view
of credit cards as a safe and convenient way to buy, so they are
generally pretty lenient about allowing buyers to make
chargebacks, as they are called. The risk to the bank, of course,
is that chargebacks may occur after the merchant has already been
paid, and the bank could be left holding the bag. How favorable
a deal you get therefore depends not only on how large a company
you have, and how long you've been in business, but also on what
kind of business you're in. Banks have stats on the rates of
chargebacks and other hanky-panky in various different industries.
Somebody in the business once told me that porno Web sites average
over 50% chargebacks, meaning that over half of the charges made
don't get paid in the end.
Banks do several things to limit their exposure to chargeback
risk. They may ask you to personally guarantee the account
agreement, meaning that if your company ends up owing money to
the bank, you will be personally liable. Naturally, companies
in businesses that have a high rate of chargebacks, especially
those selling big-ticket items, will pay less favorable fees.
Banks will also hold back a certain percentage of your money
every month as insurance against future chargebacks. If you are
deemed to be a high chargeback risk, it could be months before
the customer's money makes it through the system to your bank
account. The bank's chargeback policy has a dollar cost, because
money in your bank account earns interest for you, while money
owed to you by the bank does not. Be sure to get all the details
of a bank's chargeback policy.
As with loans, insurance and other such financial services, some
banks simply don't offer accounts to businesses in their
"high-risk" categories, while others are happy to do business
with anybody, for a suitably high price. Some of the businesses
considered "high-risk" are what you'd expect - anything to do
with porno, gambling, MLM or GRQ (get rich quick). Weight-loss
programs, herbal remedies, and (don't ask me why) water
filtration equipment are considered slightly less risky. If
your business is on the official poo-poo list, you'll be forced
to deal with a smaller bank, and pay premium fees.
Whatever you're selling, an Internet-based store is automatically
in a higher-cost category than a traditional merchant. In a
traditional store, the customer's card is "swiped" through a
gadget that reads the data in the magnetic stripe, and transmits
that data to the card issuer, which either authorizes or declines
the transaction in a matter of seconds. The cardholder also
signs a receipt. Such "cardholder present" transactions present
little risk to the bank, and thus earn the lowest merchant rates.
Merchants doing transactions when the cardholder is not
physically present, whether over the phone or whatever, will
pay a higher rate. Merchants doing business over the Internet
will pay yet another slight premium, just for general purposes.
When you apply for a merchant account, the bank will ask you what
percentage of your transactions are "cardholder not present"
transactions, and offer you a rate accordingly (for Internet
merchants this will of course be 100%).
To sum up, these are the factors that banks use to determine
how good a rate to offer you:
- The percentage of "cardholder not present" transactions.
- The political correctness of the products you're selling.
- The average amount per transaction.
- Your projected monthly sales volume.
- How long you've been in business, and what kind of credit
rating you have.
- The kinds of cards you want to accept. American Express
charges higher fees than Visa and Mastercard.
Most banks offer credit card merchant accounts, but only a few
are suitable for the Internet merchant at the moment. Some
Luddite banks won't deal with Web merchants at all. Others
may be willing, but aren't knowledgeable about the Internet,
and will probably screw things up. If you go to the Web site
of any of the major payment-processing software makers, you'll
find a list of recommended banks. See:
CyberCash, Inc. and
Authorize.Net
What You Need - Plain and Simple
Accepting Credit Cards: Getting a Merchant Account
Payment Processing Options
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