HOW MERCHANT ACCOUNTS WORK


If you're serious about selling on the Web you need to be able to accept payments from your customers.  While there are many different payment methods, the most popular include accepting credit cards and in order to do so you'll need  to set up a merchant account. A merchant account is a commercial bank account established to allow your business to accept credit card transactions. By accepting major credit cards you can increase your credibility, customer convenience, and best of all, your sales. Statistics show that accepting credit cards can increase sales by 100%.


















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The terms and conditions of your merchant account are between you and your bank or merchant provider, and should be consulted for specific information related to your merchant agreement with your bank or merchant provider.

A merchant account is required to accept credit cards using QuickCommerce. A merchant account is a special account with a bank that is a member of the Visa and MasterCard associations. Such a bank has been certified by Visa and MasterCard associations and can provide you, the merchant, with all of the services related to your merchant account.

Within 48 to 72 hours (usually), the funds associated with the batch you settled are deposited electronically into your business bank account. Typically, the discount rate you pay to your merchant account provider are deducted from the deposit before it transferred to your bank account, resulting in a "net deposit" of funds.
At the end of the month, your merchant account provider will mail a statement to you, detailing the credit card activity for the month and the associated fees you have been charged for such.

Understanding your merchant providerís rates and fees

All banks and merchant providers require "transaction fees" from you for accepting credit cards. Typically, these fees are broken down into 3 categories: a discount rate, a transaction fee, and monthly fees. For the bank's purposes, a transaction is usually defined as any communication between you and the processing network. A "credit" transaction is treated the same as a regular transaction. Settling a batch is usually considered a transaction as well, as it involves communication with the processing network.

Discount Rate
This is the percentage of the total transaction amount that the bank will usually deduct prior to transferring your deposit into your bank account. Typical discount rates range from 2.5% to 5%, depending on your type of business and other factors. A higher rate may be charged on individual transactions if the transaction doesn't conform to certain qualifications, as described by your bank or merchant provider. For instance, accepting a "Visa Business Card" credit card may cost you 1% more than regular transactions.
The reasons for these non-qualified transaction surcharges and complete details on all transaction qualifications should be discussed with your bank or merchant provider. Address Verification (AVS) may also fall into this category when not used properly. Address Verification (AVS) is described below.

Transaction Fees (Intercharge fee)
This is a flat amount that you pay for each transaction. Typical transaction  fees range from 30 cents to 70 cents  per transaction. Discounters selling  lots of low-cost  products could get  killed in transaction fees.

Monthly Fees
These are fees charged for other  account related services, such as  customer service, your monthly  statement, network access fees, and minimum monthly fees.

Equipment and Installation
These costs  include hardware/software, set-up and programming.
If you're purchasing an e-commerce solution from your Web  hosting company, you may be able to  avoid these costs altogether, or they  may be bundled into your hosting fees.

Reserve Costs
Some banks hold back a percentage of merchant transactions to cover contested charges. Chargeback fees can also be charged when disputes are settled in favor of credit card holder. Fraud often takes the form of disputed charges, which, in the U.S., are almost universally settled in favor of the card holder. This means that in addition to losing the amount of the sale -- after the product has been shipped -- the merchant loses the $20-50 that the bank charges in chargeback fees. Also, if the merchant has too many chargebacks, he's at risk of losing his merchant account. Merchants who think they're going to set up shop without a customer service phone number will likely lose more than the cost savings of no 800# in chargebacks. High chargebacks also result in an increased reserve requirement. Begging your banker to let you keep your merchant account is much worse than begging to get him to give you one.
The good news is that depending on your provider, these fees can greatly differ, and most can be negotiated. E-tailers need to do research compare rates and services, apply these to their specific costs, and then make an informed decisions. Many merchant account providers offer cost information on their sites.
Provided you do your homework and shop around, you should be able to offer your customers the ease of credit card payments without adversely impacting your business.

All the fees and charges are required to be disclosed to you prior to your commitment to the merchant agreement between you and your bank or merchant provider, and are usually enumerated carefully to you in the merchant agreement itself.

Setting Up An Account
Merchant accounts are accounts  that accept and hold credit card  transaction monies.
These accounts can be established  through merchant service providers  (MSPs) such as banks or via  independent service organizations (ISOs).  See ECG's Payment Solutions resource  section for more information.
Banks are  generally viewed as secure  and reliable,  but are generally more  selective when  deciding for whom they  will open a  merchant account.  ISOs tend to be more  flexible but are  willing to accept more risk,  since they are  neither monitored nor  regulated. However,  they charge a  premium for accepting the  risk associated  with your business, so be  prepared to pay more.

A merchant account for online business is similar to a merchant account for mail order business; the risk is associated with the fact that you don't have the physical credit card to scan. It used to be that banks were reluctant to open merchant accounts with businesses that hadn't been in operation for at least two years with all sorts of other stipulations, but today, most banks will open merchant accounts even for new businesses, if they have a history with you. If you haven't been in business for two years, talk to your personal banker -- where you have your own checking and savings or mortgage accounts -- to see if they can give you a merchant account. If you've been in business for two years, go directly to your business banker and apply with him. Don't contact ISOs until you've been turned down by your bank, because the fees are higher in the beginning, and for the life of the account.

When you apply for a merchant account, you'll need to supply the bank with the average order size and the average monthly amount that you expect to be running through the account. Estimate conservatively. You may be asked to keep a percentage (or even a full month's estimated order total) in an account to cover fraud. If you round-up to impress the banker, you're going to end up paying more in tied-up capital. Tell him what you expect to be processing the first or second month. If by the sixth month you've far exceeded that amount, he'll find you to discuss increasing your reserve, but you've got your account, and you've got a thriving business.

What You Need
In addition to procuring a merchant account for credit-card acceptances, e-tailers also need an order form on their sites. The form can be built using HTML, and can be set to use a CGI script (written in a language like ASP, ColdFusion, PERL, server-side Java, etc.). Preferably the form should be encrypted using SSL (Secure Sockets Layer). Your ISP, hosting company, or WPP can set you up with SSL for a small fee. You also need a certificate from an organization like VeriSign. Prices vary depending on the service, so check Verisign's site to find the right certificate for you. The ordering page is then placed on a secure server.

You will also need payment-processing software to handle transactions between you and your bank. The software is more of a service than a product and information sits on that company's server rather than yours. Options include buying or leasing software on a monthly basis. There are many companies to choose from; some of the best known are Authorize.net and Verisign (which purchased Cybercash).

How It Works
Once a relationship with a merchant account provider or acquiring financial institution is set up, the institution then deposits daily credit card sales into the merchant's account after deducting certain fees. Some financial institutions also conduct merchant services, either in-house or out-sourced to third parties. Such services include customer service, billing, authorization, reporting and settlement services. Third-party companies offering these merchants services include First Data Corp. and MerchantConnect, from Nova Information Systems.

What Kind of Authorization Process Do You Need?
E-tailers need to anticipate how many transactions will occur on their site. There are two types of authorization processing: batching and real-time. Batching, used frequently by smaller merchants, is done by hand offline. Once orders are sent by customers, through phone calls, faxes, or online forms, they are processed manually. This can be accomplished through several methods such as swiping through a terminal or using PC-based authorization and settlement software. Since fraud is such a problem online, and because small merchants are least able to bear the cost of fraud, small merchants should consider batching payments, taking steps to guard against fraud, before assuming they need real-time processing.

By contrast, real-time authorization provides credit card purchases to be approved or declined immediately. Some e-tail sites use this method to try to save time and money through automating the process, but many sites, especially smaller ones, don't need real-time authorization and its added expense. Wait until you see large volumes of inventory or products ordered electronically (such as content or software downloads), before investing in this solution. It sounds like less trouble, but it requires constant monitoring because any downtime in the payment processing is time during which you can't accept orders! You must determine your needs along with your customers. If done properly, a customer won't even know whether their payment is being processed in realtime.
As long as you give your customer an order number on the thank you page, they will think their order has been processed. You have every right to *begin* the fraud/credit limit check at that point. Customers aren't entitled to your products until they've proven they can pay for them.

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