Merchant Accounts

Accepting credit card payments is very important for your business. In fact, it's almost a necessity in today's marketplace. You need to establish a merchant account with a financial institution in order to accept credit card payments.

• What is a merchant account?
• What is merchant account processing?
• Type of merchant account providers
• Merchant account types
• How to qualify
• What banks look for in your merchant account application
• Fees and Rates

What is a Merchant Account?

A Merchant Account is an account set up between a merchant, like yourself, and a bank which allows the retailer to accept a credit card order from a customer, and in turn receive the money through the bank.

What is merchant account processing?

Merchant account processing services are provided by a bank or a third party processor (on behalf of the bank) to the merchant. These services include authorization of credit cards, settlement of funds through the bankcard associations (MasterCard/Visa), depositing of funds to checking accounts, merchant billing, and account activity reporting.

Types of Merchant Account Providers

One of the most difficult aspects of accepting credit cards is finding a merchant service that will handle your account. Complicating matters is the fact that there are several types of companies you can turn to. The good news is that getting merchant status is becoming easier, as more ISOs and third party providers are willing to accept small, start-up, online businesses.

• Bank
  Banks look more favorably on companies that have been in business for several years and have a proven track record. Their rules often require that they limit the number of merchant accounts given to high-risk businesses. If you have an established business, you'll get a better rate with your local banks.
  
  
• Inependent Sales Organization (ISO)
  An ISO is essentially a registered credit card merchant broker. They set up and service credit card merchants. Unlike banks, ISOs are generally more tolerant of high-risk accounts because they are not monitored or as tightly regulated. Independent agents known as merchant service representatives (MSRs) may also resell the ISO's offerings.
  
  
• Third Party Provider
  You can process your orders through a thrid party merchant account provider's name rather than your own, with higher-rate fees. Third party merchant services take care of different aspects of the transaction process such as authorization, billing, reporting, and settlement. This option is very convenient if you run a low-volume or start-up business.
  
  
• Financial Service Provider
  Unlike MasterCard and Visa that require you to establish a merchant account through an intermediary, American Express and Discover give you the option of applying directly to them.
  
  
• Association
  Small business and trade associations often offer credit card merchant processing at discount prices. They are a particularly good resource if companies in your industry historically have trouble attaining credit card merchant status.

   

Merchant Account Types

There are two categories of merchant accounts:

• "Card Present" Account
  This type of account requires the consumer and merchant to be physically at the same location during the time of the transaction. For a card present transaction, the credit card is typically swiped through a card reader (or physical point-of-sale terminal), and the consumer signs an authorization slip, or sales receipt.
  
  
• Mail Order/Telephone Order (MOTO) or "Card Not Present" Account
  In a MOTO transaction, the merchant and shopper are not in the same physical location, and there is no card swiped or signature received. This method of payment was originally adopted for mail order and catalog businesses. All Internet transactions are treated as MOTO transactions and require a MOTO merchant account.

If you currently accept credit cards but are not sure if you have a MOTO account, contact your financial institution to find out.

How to Qualify

The most important question that providers want to answer is whether your business is likely to have a high incidence of fraud or chargebacks. A chargeback is a reversal against a sale that was credited to the merchant's account. Chargebacks are usually the result of an error made by the cardholder's bank, a misunderstanding by the customer, or fraud. The merchant must provide proof that the goods and services in question were provided to the customer.

For the most part, tangible products are considered to be much safer than services. Also, offerings that deliver purchased goods immediately in exchange for payment are viewed as being less risky.

Providers will also consider the type of credit card transactions that your company performs. As a general rule, "card present" transactions that allow you to swipe the credit card and obtain a signature are considered to be much safer than "card absent transactions" that take place by phone, by mail or over the Internet.

Basic background checks are also a must. They include a thorough credit history review of the owners or officers listed on the application, in addition to credit references from two to three suppliers.

Finally, if you have accepted credit cards in the past, providers will require previous merchant statements to better gauge your charge and chargeback volume.

What banks look for in your merchant account application

• Your type of business
• How long you have been in business
• Your credit history both as a business and personally
• Your record with prvious merchant accounts
• Your current banking relationships

In addition, you they may want to know about your business's financing, track record, and sales projections.

Fees and Rates

Fees and rates will vary widely, based on the financial institution and the risks associated with the merchant and his or her business, including the:

• Type of products and services being sold
  
• Market in which the merchant competes
  
• Method in which products and services are being sold and delivered
  
• The prices of these products and services
  
• The expected volume of transactions
  
• What forms of payment the merchant will accept
  
• The merchant's credit history

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