How Merchant Services Work
Businesses that accept credit cards are a distinct advantage when it comes to attracting customers. With over 3/4 of the American population using some form of plastic to pay for regular purchases, you can’t afford not to offer a credit card payment option.
Merchant Account Basics
In order to accept credit card payments, you’ll need to open a merchant services account. The merchant account is the go-between that links your customers’ payments to your own business bank account. The merchant account provider checks credit card information, verifies balance amounts, and transfers funds from a customer’s account into your merchant account. At the end of the business day, transactions are “settled” and later transferred to your business bank account. A merchant account can work using a credit card terminal or swipe machine, or using specialized software to process payment information, as is the case with most online transactions.
Qualifying for an Account
Since the merchant account provider is responsible for chargebacks (when payments are returned to the customer, either as a refund or in the event of fraud), they’ll need to make sure your business is a good financial “risk.” The approval process isn’t difficult- almost all but the riskiest (think those headquartered in Caribbean islands or online businesses that deal in adult industries) businesses will be approved for an account. However, the best rates are reserved for those companies with reliable financial histories and good credit records. Even if you don’t qualify for the best rates when you first apply, you may be able ask for more preferable terms as your business becomes more profitable and your build a solid credit history. Be wary of online merchant account providers who brag that “Everyone is approved!” This isn’t a good thing- make sure you are able to obtain rates that are within your operating budget.
Rates and Costs
Rates will vary depending on your credit history and the type of credit card processing you require. Many online-only services charge a specific dollar amount per transaction, or a percentage of the total transaction cost- usually anywhere between 1 and 5% of the total sale amount. Rates for swipe machines are generally less expensive, and there’s no need to purchase or lease the “gateway” software necessary to process transactions online. If you use a swipe machine, you’ll need a credit card terminal- these can be purchased, or even lent to you by the merchant account provider. Keep in mind that the terminal itself can be usually be purchased for around several hundred dollars.
What to Look for in an Account Provider
Choose a merchant account services provider whose rate structure suits your business. For example, if you have a large amount of small dollar amount transactions, you’re better off choosing a provider that charges a percentage of the transaction amount only, rather than a dollar amount fee- it wouldn’t make sense to pay over a dollar to process a transaction for 99 cents. Beyond budget concerns, you should choose a credit card processing provider that offers the services you need-whether online or otherwise- that provides good customer service. Ask for referrals from other businesses, your bank, or a vendor locator service.
May 29th, 2009 at 5:03 pm
StartupNation also provides an excellent series of how-to articles on establishing merchant account services and accepting credit cards. it’s located here:
http://www.startupnation.com/series/122/9244/credit-cards-welcome.htm
i also just did a podcast on this topic, which is a quick-and-easy tutorial on how to do this right. it’s located here:
http://www.startupnation.com/media/episodes/9448/website-credit-cards.htm
June 11th, 2009 at 2:29 pm
Good starter info. Business owners must take payment processing/acceptance more seriously. If you don’t ask the right questions, then any answer you get will do and won’t matter. Once you find out the right questions to ask, start avoiding Sales Reps/Companies who give you no answer, evasive answers, or ’smart’ sounding answers that further confuse you. If the beginning of the business relationship does not fit, then it won’t get better by adding time and especially being locked up in multi-year contracts.
Also, don’t get bullied by high pressure sales tactics because a good deal today will be a good deal next week.
Also, do they have any happy customers? Dozens and dozens of Customer Reviews/ Tesitmonials?
June 14th, 2009 at 11:52 pm
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June 18th, 2009 at 6:30 pm
[...] How Merchant Services Work [...]
August 18th, 2009 at 7:02 am
Hi,
Just found your blog on Technorati & Digg upcomming news feeds and read a few of your other posts.
ISeems good contents,Keep up the good work. Look forward to reading more from you in the future.
Thanks,
Michael
September 12th, 2009 at 2:00 am
Very informative article on how merchant services work.Thanks
February 27th, 2010 at 7:56 pm
Hello,
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March 12th, 2010 at 12:16 am
Great post! You really went through everything step-by-step.
September 10th, 2010 at 12:26 pm
Thank you for the information regarding credit card processing
December 6th, 2010 at 11:02 am
Great information you really made this easy to understand
June 21st, 2012 at 11:07 am
Thank you Betsy
Great article. My blog discusses similar issues I think many merchants feel over charged by their payment services providers because it is difficult to guaranty rates and rates fluctuate depending on what is basically risk it doesn’t help that many payment services providers seem to take advantage of their customers.
August 15th, 2012 at 8:06 am
Good article although for the Maritime Provinces in Canada things are quite different.Unless you have solid credit you won’t get approved for credit cards but probably would for Interac debit cards and that’s alright ’cause 80% of transactions here are done through Interac.
If frm Canada, please check out our small familly owned merchant account services provider at http://www.merchant-account-services.ca for all your Canadian needs.