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Merchant Account Fundamentals

Updated on December 5, 2008

Merchant Accounts

A true merchant account is set up when the merchant's sales agent applies to a processing bank for the right to create an account dedicated specifically to the merchant's business. The merchant is 100% responsible for this account and only he can use it.

The merchant account is a direct line to the credit card providers such as Visa and MasterCard and the merchant must abide by certain rules to maintain the account.

Some sales agents and processing banks offer a gateway as part of their bundled merchant account services. If this is not the case then it is up to the merchant to select and install a Payment Gateway

The Pros and Cons of Merchant Accounts

With a merchant account the merchant is able to process large volumes of sales and has total control. The checkout process is transparent and a more professional image is conveyed with only the business concerned appearing on web sites and customer statements. The merchant can also negotiate better rates.

These are all good reasons for having your own merchant account. But there is a downside. For one thing, a credit check is performed before a merchant account is offered. And where the merchant has a history of bad credit or (even) low sales volumes, this history will place the merchant in a higher risk category where he will be required to pay higher rates and/or sign a multi-year contract to minimize risk on the part of the provider. Also, a merchant account cannot be used for personal business.

When To Consider a Merchant Account

If you’re an Internet Marketer or Online Merchant, you’ve likely considered the need to accept credit cards for online payments. Most Internet merchants, except perhaps the smallest ones, use true merchant accounts with payment gateways.

Let's look at some of the reasons why:

The Need to Process Large Volumes of Orders

Third party providers such as PayPal are paid a discount rate as high as 6.00% per transaction. Using a merchant account can cut these fees in half.

True merchant accounts charge additional fees, but those merchants who enjoy large sales volumes will certainly pay less because of the difference in discount rates. As a merchant's sales grow, his merchant account savings will also grow. Merchants with very large sales volumes soon discover how their merchant account contributes to the financial growth of their company.

Gaining Total Control Over Your Account

Many Internet marketers prefer to use a merchant account because of the control it affords. Your business name appears on customer statements, your processor provides direct support to you with no third-party involvement, and usage rules are less restrictive.

When you choose a merchant account offered through a third-party, you'll soon find that the provider tends to take the rules and make them tighter to suit their own purposes and reduce their risk.

Transparent Checkout Simplifies the Payment Process

When a merchant account is used, all payment transactions take place on the merchant's web site. This is not the case when a third party provider is used. Some customers may be confused or concerned by the sudden appearance of the non-merchant payment screen, potentially leading to a lost sale!

Using a merchant account and staying on the merchant’s web site helps to maintain the customer’s confidence right through to the end of the transaction and prevent them from walking away in the middle of the purchase.

Professional Image

To foster customer confidence in your products, it is crucial to portray a professional image. Most customers have an idea of what seems professional to them, and this undoubtedly includes pages that mimic the tone of the rest of your web site, as well as completing the entire ordering process without sending the customer to off-site pages. One way to do this is to provide a transparent checkout utilizing the API of a gateway from your merchant account.

Other Merchant Account Considerations

  • Credit checking is included
  • Merchant accounts cannot be used for personal business
  • You'll pay higher rates if you're a high risk business
  • You may be able to negotiate rates
  • You can choose your own payment gateway
  • The name of your business appears on customer’s statements
  • You may be forced to sign a multi-year contract
  • Generally, funds will be deposited within 1-3 business days

Comparing Merchant Accounts

What is the most important factor in deciding which merchant account is right for your needs? Cost. Of course, other factors have an impact, but cost is by far and away the most important. Few merchants have endlessly deep pockets, in fact most ecommerce startups operate under excessively tight budgets. So what fees and rates should you be comparing in order to reach the best decision?

This is an area that will take considerable investigation on your part. To make a successful comparison, start by determining the following :

  • Setup Fee - What is the fee to establish your account?
  • Discount Rate – What percentage of the sale will the processor take as his fee?
  • Transaction Fee – Is there a flat fee per transaction?
  • Monthly Fee – What is the monthly cost to open the account and be ready to accept transactions?
  • Gateway Setup Fee – How much will the merchant charge to set up a gateway for you?
  • Gateway Monthly Fee – What does the gateway provider charge monthly for the use of their payment gateway services?

Each of these items will have an impact on the type of account you choose, so be sure to gather this data from your merchant provider.

Now, only two further pieces of information should be gathered before reaching a decision:

  • Average Transactions per Month - How many transactions do you realistically believe you will process each month?
  • Average Ticket Size - What's the average customer's expenditure on your site? Not all sales are the same and some customers spend more than others, but you'll need an average.

Note that these attributes can also be used in comparisons between true merchant accounts and the various 3rd party providers such as PayPal.


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