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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.

About the Author: Betsy Scuteri

Betsy Scuteri is the Sr. Director of Audience Marketing at Business.com. A mother, and digital fanatic, Scuteri is in charge of traffic acquisition of the companies owned and operated domains. For the past 10+ years, Scuteri has been leading the [...]