Merchant account
A merchant account allows a business to accept credit cards, debit cards, gift cards and other forms of payment cards. This is also widely known as payment processing or credit card processing.
Merchants, or business owners who receive credit card payment for their goods or services, must apply for a merchant account typically through a merchant bank or MSP (Merchant Service Provider). The merchant account will typically be established based on several factors. Merchants who own businesses with poor or no credit may find it difficult to establish a merchant account through traditional routes
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Rates and fees
Merchant accounts are not free - a variety of charges are involved. Some fees are charged on a monthly basis but most are charged on a per-item or percentage basis. All of the monthly fees are at the discretion of the merchant account provider but the majority of the per-item and percentage fees are passed through the merchant account provider to the issuing bank according to a schedule of rates called Interchange fees, which are set by Visa and Mastercard.
Each transaction is categorized into an interchange category depending on the kind of card that was used for the transaction and the circumstances of the transaction. For example, if a transaction is made by swiping a card through a credit card terminal it will be in a different category than if it were keyed in manually. If a transaction is made using a rewards card it will fall into a different category than a standard card. The permutations add up - in total there are about 130 categories, each with a different rate.Merchant account providers usually group the 130 categories into 3 or 6 categories and apply a single rate to that entire bucket. This includes Retail, Mail Order / Telephone Order and eCommerce or Card Not Present. They base that rate on the average interchange rate that they expect for that category plus a markup for themselves.These tiers describe costs for different kinds of credit cards when processed under different kinds of circumstances. For example, a check card costs less than a consumer credit card which costs less than a business card. The method of how a credit card is processed changes which tier of Interchange is applied. For example, a swiped credit card costs less to process than one keyed into a credit card terminal.
Interchange Based Fees
3-Tier Pricing
3-Tier Pricing is the most popular pricing method, although 6-Tier Pricing is gaining in popularity quickly. In 3-Tier Pricing, the merchant account provider groups the transactions into 3 groups (tiers) and assigns a rate to each Tier.
Qualified rate
A qualified rate is the percentage rate a merchant will be charged whenever they accept a regular consumer credit card and process it in a manner that has been defined as "standard" by their merchant account provider. This is the lowest rate a merchant will incur when accepting a credit card. The qualified rate is also the rate commonly quoted to a merchant when they inquire about pricing. For example, for an internet merchant, the internet interchange categories will be defined as Qualified, while for a physical retailer only transactions swiped through or read by their terminal in an ordinary manner will be defined as Qualified.
Mid-qualified rate
Also known as a partially qualified rate, the mid-qualified rate is the percentage rate a merchant will be charged whenever they accept a credit card that does not qualify for the lowest rate (the qualified rate). This may happen for several reasons such as:
- A consumer credit card is keyed into a credit card terminal instead of being swiped
- A special kind of credit card is used like a rewards card or business card
A mid-qualified rate is usually 1.50% - 2.50% higher than a qualified rate. Interestingly, the kinds of transactions that are usually grouped into the Mid-Qualified Tier only cost 0.30%-0.50% more in interchange costs, so the merchant account providers make much of their profit from these transactions.
With the prevalence of rewards cards it is not uncommon for 15-40% of transactions to be mid-qualified.
Non-qualified rate
The non-qualified rate is the highest percentage rate a merchant will be charged whenever they accept a credit card. All transactions that are not qualified or mid-qualified will fall to this rate. This may happen for several reasons such as:
- A consumer credit card is keyed into a credit card terminal instead of being swiped and address verification is not performed
- A special kind of credit card is used like a business card and all required fields are not entered
- A merchant does not settle their daily batch within the allotted time frame
A non-qualified rate is usually 2.00% - 2.50% higher than a qualified rate (and only cost 0.50%-1.50% higher in interchange costs).
6-Tier Pricing
As a result of the Wal-Mart Lawsuit and to compete against Pin-Based debit cards (which are processed outside of the Visa and Mastercard networks), Visa and Mastercard lowered the interchange rates for debit cards well below those for credit cards. Merchant Account providers have gradually had to pass the savings on to their customers. Consequently, each of the 3 original tiers have been divided into Debit and Credit, for a total of 6 tiers.
Interchange Plus Pricing
Larger and more sophisticated merchants usually have their merchant account services priced on an interchange plus basis, which means that they pay a specified markup over and above the interchange costs.
Other Fees
The Authorization fee is charged each time a transaction is sent to the card-issuing bank to be authorized, usually between 10 and 20 cents each. Even if the transaction is declined this fee is assessed.The statement fee is a monthly fee associated with the monthly statement that is sent to the merchant at the end of each monthly processing cycle, usually a flat $5 or $10. This statement shows how much processing was done by the merchant during the month and what fees were incurred as a result -- although rarely in a way that clearly explains the tiered pricing and costs of "downgrading."
Monthly minimum fee
The monthly minimum fee is a way to ensure that merchants pay a minimum amount in fees each month. If a merchant's qualified fees do not equal or exceed the monthly minimum they will be charged up to the monthly minimum to satisfy their minimum fee requirements.
Example: A merchant has a $25.00 monthly minimum fee. Their qualified fees for their most recent complete month of processing total only $15.00. This merchant will be charged an additional $10.00 to meet their monthly minimum requirements. It is industry standard to charge a monthly minimum.
Batch fee
A batch fee is charged to a merchant whenever the merchant "settles" their terminal. Settling a terminal, also known as "batching", is when a merchant sends their completed transactions for the day to their acquiring bank for payment. It is industry standard to charge this fee.
Chargeback fee
If a merchant encounters a chargeback they may be assessed a fee by their acquiring bank. This fee is typically charged whether the chargeback is successful or not and is not dependent on the amount of the chargeback.
Methods of processing credit cards
For a credit card transaction to be processed correctly it must be sent electronically to an acquiring bank. The method of processing credit cards will vary by industry. A merchant account provider typically has the ability to sell or establish a means to process credit cards for a merchant.
Credit card terminal
A credit card terminal is a stand-alone piece of electronic equipment that allows a merchant to swipe or key-enter a credit card's information as well as additional information required to process a credit card transaction. A credit card terminal is a dedicated piece of equipment that only processes credit cards although it is common for related transactions including gift cards and check verification to also be performed. A credit card terminal typically must be plugged in to a power supply and connected to a telephone line. However, newer terminals may be powered by batteries and communicate over the Internet. Some credit card terminals are connected to the cellular network and communicate wirelessly. When a credit card is run through, it contacts the network to verify that the credit card can be charged. The actual billing of the charge is done at the end of day batch where all sales from the terminal of the day are sent out.
Most credit card terminals in current use consist of a modem, keypad, printer, magnetic stripe reader, power supply and memory card.
A merchant accepting credit cards with a terminal in the United States will usually acquire that terminal in one of 4 ways. They may purchase the terminal, rent the terminal, lease the terminal or be offerred the terminal at "no cost" in return for` contractual obligations from a merchant processor.As with computers, there is a wide range of memory capacities and other features like built-in printers and debit card pinpads that affect the manufacturing cost of a credit card terminal.Because of the general lack of knowledge regarding the cost of a credit card terminal, a business owner would be wise to make sure they are paying a fair price or making an acceptable contractual agreement before making a written commitment for processing and/or a credit card terminal.When a terminal is leased there is usually a 3rd party leasing company involved and it is not uncommon in many U.S. states for these leases to be non-cancellable.As with any cntractual agreement, a business owner should carefully review the terms and conditions before selecting a merchant processor and a credit card terminal. The written agreeent will always apply no matter what the processor's representative or terminal seller might state verbally.
Automated Response Unit (ARU)
An ARU allows the manual keyed entry and subsequent authorization of a credit card over a cellular or land-line telephone. A business typically imprints their customer's card with an imprinter and then processes the transaction instantaneously over the phone.
Payment gateway
A payment gateway is an e-commerce service that authorizes payments for e-businesses and online retailers. It is the equivalent of a physical POS (point-of-sale) terminal located in most retail outlets. A merchant account provider is typically a separate company from the payment gateway. Some merchant account providers have their own payment gateways but the majority of companies use 3rd party payment gateways.
Level 3 Processing - Purchasing Cards
Increasingly, corporations and government agencies are relying on this form of payment to compensate their service providers and suppliers. Businesses benefit by receiving their funds quickly and by winning competitive bids and government contracts where purchasing cards are the required form of payment. The downside, however, is the cost associated with receiving these payments.
For some businesses there are ways to process these transactions that allow them to maintain their margins and be competitive in the bidding process. For example, if government transactions are over $5,000, businesses can significantly reduce their transaction costs by including specific information about the purchase along with each transaction. For private large ticket transactions, businesses can save even more. Implementing such a program can enable them to recover a full 1% of their total transaction as pure profit – often as much as a 40% - 50% savings when compared to processing in a more traditional manner.
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