Download the Credit Card Processing Merchant Account Cheat Sheet here
Listen to the Shopping for a Credit Card Processing Merchant Account podcast here
Comparing and evaluating
small business merchant account providers who will handle your credit card processing for your small business can be a daunting and confusing task. Aside from understanding all of the common fees such as the "discount rate" and transaction costs, you also need to understand how your money is handled and which processors are offering the best deals - without getting ripped off in the process. Read on and learn the right questions to ask the various credit card processors so that you can make an intelligent decision about which one is right for your small business.
Hello everyone and thanks for joining us for another episode of the Small Business Podcast. We're going to do something a little different this week. It's just me - there's no interview. I'm going to talk to you about how to compare and evaluate merchant accounts for your business. It's probably one of the most misunderstood services for even veteran business owners who have processed credit cards with a merchant account for many years. But it's also a point of confusion for many start up business owners who are just applying for a merchant account for the first time. There are many subtleties across all of the credit card processing companies and the fees they charge and what services are included with each account. Unfortunately there are also many unscrupulous vendors out there who will lock you into long-term contracts and charge ridiculous monthly fees. The good news is that if you know the right questions to ask, you can uncover everything you need to know to make an intelligent decision and get a merchant account provider that helps you grow your business instead of your expenses. So I wanted to take this time to really sit down and go through the questions that you need to ask your merchant account processor when you're signing up. I've also put together a "
Merchant Account Cheat Sheet" so that you can ask all the right questions in an organized fashion when you are on the phone with the salesperson. Getting the best deal for your business is the end goal.
So go ahead and print out the cheat sheet now and have it handy while you listen to the podcast or read this article. If you already have a merchant account and you're thinking about changing vendors, the cheat sheet will be a great resource for you to compare companies. Even if you're not thinking about changing but you don't quite understand the fees your processor charges each month, give them a call and complete the checklist so that you know exactly what you're getting. Keep it on file and when another vendor contacts you saying they can offer you a better deal, you'll be able to pull out this checklist and know exactly what you're already getting with your current provider. They may indeed have a better deal.
So let's get started. First of all what is a merchant account? For those of you who don't know, a merchant account is a way for you to accept credit cards for payment at your business. It's as simple as that. Typically most merchant accounts will provide you with the ability to accept Visa and MasterCard. You can apply for Discover and American Express separately. They have their own application process, but once you get your account number for American Express and Discover cards you then give that account number to your merchant processor who is doing your Visa and MasterCard. They will then enable you to process all four major credit cards through your terminal or online via a virtual terminal account.
Now, Discover and American Express have their own fees and usually they are non-negotiable (unlike the fees associated with accepting Visa and MasterCard which are negotiable through your merchant account company). American Express is typically the most expensive credit card to accept - that's why a lot of merchants don't accept it. I recommend that you do accept American Express cards. Although they take a larger percentage of the transaction (usually 3 to 3.5 percent), making it easier for your customers to use any card they wish will result in goodwill and perhaps larger overall transactions. (American Express states that their cardholders spend more, on average, than Visa or MasterCard holders.) But some people chose not to accept AMEX and that's fine too. Just know that if you don't accept American Express or Discover you may be losing out on business from higher net worth individuals and business owners who use American Express as their corporate credit cards. I accept all four major credit cards simply to remove all barriers to purchase.
But why take credit cards at all? What is the benefit of accepting credit cards? Well, for the most part everybody does these days so if you don't take them and your competitor does, you're basically giving away business to your competitor. But there are two other reasons to accept credit cards. First, accepting credit cards makes it convenient for your customers to shop with you. Impulse purchases will happen more frequently and some customers simply don't carry cash or checkbooks. Plastic has become the purchase method of choice these days. Second, people who use their credit cards simply spend more money per transaction. They actually buy more. Their transactions are larger if they can put it on their credit card. Therefore, if you want people to spend as much money as possible at your storefront or your website, accepting credit cards is a must.
Before we discuss the fees involved with accepting credit cards, you need to decide if you if you even need a merchant account to accept credit cards at your business. If you are strictly an online business - if you have a website and you sell 100% of your items or your inventory online - you may not need a merchant account at all. There are several alternatives these days, the most popular of which is PayPal. PayPal is a company owned by eBay and is not a true merchant account provider. However it allows business owners (and individuals too) to accept credit cards as payment without having a merchant account. The fees for accepting credit cards via PayPal are very similar to a merchant account. It's also a much easier to get approved for a PayPal account than it is for a merchant account. There's no contract and for a basic account you only pay a fee when you sell a product (more robust "Pro" versions of PayPal do have monthly fees regardless of your sales). Because PayPal is so popular, there are thousands of free plugins and programmers can easily write custom software for you that will do just about anything related to ecommerce. Most existing shopping cart software also already have PayPal integration, making the need for a dedicated software engineer on staff unnecessary. So there are a ton of resources out there to help you get up and running quickly with a PayPal account. Money can be transferred to your company bank account easily and they even offer a debit card you can use to spend the funds directly from your PayPal account without transferring the money to your bank. However, some business owners have complained of slow or non-existent customer service and frozen accounts without notice so you'll want to investigate it thoroughly before signing up. We have a PayPal account but we also have a merchant account. This is not to say that PayPal does not have its flaws, it's a lot easier to get and sometimes a whole lot less hassle, especially if you are doing low volume. So, if you're strictly an online business you may want to think seriously about not getting a merchant account and just going through PayPal.
The Discount Rate
Now, we're going to assume that you do want a standard merchant account. If you have a storefront, you'll probably want a regular merchant account to accept credit cards. So let's start talking about that. So what are some of the common fees? What are the things that you need to be aware of when you first start looking into getting a merchant account or switching processors? The first fee and probably the most misunderstood fee is the "discount rate." The discount rate is the percentage of the transaction you're going to pay to your merchant processor for the privilege and the ability to accept credit cards. I don't know why they call it a discount rate because you're not offering a discount and you're not getting a discount. The net dollar amount that will be deposited into your bank account is discounted by this percentage.
There are three types of discount rates. There's the
qualified rate, the
mid-qualified rate and the
non-qualified rate. These are the three different percentages that you could be charged when somebody gives you a credit card to pay for their transaction. What makes the difference? There are several reasons why you would be charged a different percentage of the transaction and it is usually based on the type of credit card your customer is using and the type of transaction. First lets talk about qualified transactions. The qualified transaction takes place when you have the credit card physically in front of you - a face-to-face transaction. You take their credit card and you swipe it through your credit card terminal or your credit processing machine. It's typically the lowest risk transaction for the processor and for you because the person is standing right in front of you. Now, can there be fraud when there is a face-to-face ace transaction? Of course, but there's probably more fraud online where it's not a face to face transaction. So the lowest price typically for accepting a credit card when it's face to face and you physically swipe the card is about 1.4% to 1.7%.
Different credit card processors have different fees so this is where you do your shopping around. Everything that you're going to be doing with the merchant account is negotiable so you want to compare a few different processors just to see whose going to give you the best deal. If you're just starting out with a new business and this will be your first merchant account, you don't have a lot of leverage because you're not exactly sure how much money you're going to process each month. But if you're an established business and you're looking to shop your transactions around, you can leverage your existing transaction history to get the lowest possible fees. Make the processors compete for your business! If you're doing $25,000 or $50,000 worth of credit card transactions a month you can really negotiate that qualified rate down.
The second level of the discount rate is the mid-qualified level. The mid-qualified rate is typically paid when you don't have the card in front of you and you're going to hand-key in the number so it's either an online transaction or a transaction done over the phone. However, you must also have the customer's billing address (or at least their billing zip code). Some merchant account providers require only the billing zip code to qualify for the "mid-qual" rate. Others require the street address and the zip code. This "address verification system" or AVS is one more item that, if used and matches correctly, reduces the chances of fraud - thus enabling you to get a lower discount rate. It's still more than the qualified rate but less than the non-qualified rate. We'll talk about what non-qualified is in just a minute.
So if you're keying it in, if you're typing it in, and if you don't have the card physically with you and you're not swiping it through your terminal hardware, you're going to probably get the mid-qualified rate - as long as the billing address matches in the AVS system. If it doesn't match (or you don't have the billing address information) then you're looking at the next level of discount rate which is the "non-qualified rate." The non-qualified rate typically has these characteristics: you're not physically swiping the card (it's not a face to face transaction), the address you have been given doesn't match what is in the AVS, (or you just don't have it for some reason) or it could be a different type of card such as a corporate card or a rewards card. Lots of credit cards these days offer rewards or free miles or they have a catalogue whereby card holders can acquire points and "purchase" iPods or flat screen TVs with those points. Well guess who pays for that? The merchants do, in part, because the credit card companies are charging you more to accept those cards - so it's something you want to ask your merchant processor. This is something that is on the cheat sheet.
I always recommend, of course, if you're keying it in or it is an online transaction, that you always ask for an require your customer to provide the billing address information in order to qualify for the lower rate. It can be frustrating, however, because occasionally they'll give you the billing address and you'll run the card and it will say "AVS not a match" and you know you're going to have to pay the highest non-qualified rate for that even though they gave you their billing address. If you are an online merchant, you can require the billing address to match the AVS system in order to complete the purchase, but you may lose sales by doing so. So whenever possible ask them for their billing address so that you can qualify for the lower discount rate. Mid-qualified discount rates are usually between 1.7% and 2.2% and for non-qualified transactions you're looking at anywhere between 2.2% and 3.5%.
The brand new business is probably going to pay a little higher than the established person who has lots of history and can show that the merchant processor is going to make a lot of money with them because they've already got an established business history of processing a lot of cards. However even if you're brand new, shop around because all of this is negotiable.
The Transaction Fee
The next thing we'll talk about in terms of common fees is the transaction fee. The transaction fee is paid every time and is a flat fee regardless of the total dollar amount of the transaction. It's usually somewhere between 10 cents and 35 cents per transaction. Now, we've all seen when we go into a small merchant dry cleaner or small convenience store that it says on the sign behind their cash register you must have a minimum of $10 to use your credit card. Because obviously if you have a 50 cent transaction they don't want you using your credit card because they're going to pay anywhere between 10 cents and 35 cents plus their discount rate on top of that so they're going to lose money on a small transaction. Well, you're not really allowed to do that. Visa and MasterCard says you have to accept their credit cards no matter what the dollar amount of the transaction is. Many merchants get away with it and they insist on it being their policy. But they're technically not allowed to do so and if Visa and MasterCard find out you're doing that they could yank your merchant account. So be very careful about that.
Also keep in mind that you're going to pay the discount rate and the transaction fee even when you are processing a refund! This is why offering store credit becomes an attractive alternative to an outright refund. So not only have you paid those fees when you sold the item, but if you have to refund the customer for whatever reason you're going to pay it as well. Some merchant processors will credit you back the first one where you got charged for that when you first sold it. Some will not. So it's a very important question to ask and is on the cheat sheet. Do you refund my discount and transaction fee for the initial transaction? They're not going to waive it for the refund so unfortunately you're going to lose some money on transactions where you refund people. But to keep customers happy and keep them coming back you're going to have to do that and absorb it as part of the cost of doing business. Consider a store credit instead - it saves you the transaction costs of a refund and allows you to keep that money!
Monthly Minimum Fees
The next thing we're going to talk about is the
monthly minimum. Almost all credit card processors, especially for new accounts, have a monthly minimum. The confusion comes when business owners think that the monthly minimum is actually the minimum monthly dollar amount you need to process in transactions. That is not what it means. The monthly minimum means you have to pay a minimum of this dollar amount in fees every month - even if you don't have a single credit card sale. So, for example, if you only process a few dollars the first couple of months, you may not have generated the minimum dollar amount of processing fees (discount fees plus transaction fees) which is usually around $25-$30. So if you have only done $5 in discount fees and another $3 in per transaction fees you're not going to pay $8. They're going to bump it up and add on more until you get into that monthly minimum which is around $25.
If you're processing a lot transactions with credit cards, the monthly minimum becomes a moot point because your processing enough to make that minimum anyway. But for someone just starting out you may find that even though you don't charge a single card during that month you're still going to pay the $25 minimum monthly fee. Some people call this a statement fee. Some people do the minimum plus a statement fee. Don't fall for that. There is a lot of competition out there with merchant accounts these days so you should be looking at discount rate, per transaction rate and a monthly minimum. That's really it. You shouldn't be paying a lot of other extra fees. If you find that you are paying a statement fee or any other fees (and I'm going to list these all on the cheat sheet) so that you can ask about each of the fees merchant processors can sneak into your monthly statement. It's going to be a little tedious on the phone to ask about all the different fees, but it's an important step in the shopping process. This will save you the heartache of finding strange fees on your statement down the road. You may even consider recording your shopping calls - just be sure the person on the other side of the call knows you are recording it and acknowledges that on the recording (laws for recording telephone conversations vary state-to-state).
Credit Card Terminals and Hardware
Let's talk about the hardware. You have a couple of choices here. The merchant account company that processes your credit cards can offer to lease the hardware, they can sell you the hardware or sometimes they can give you the hardware for free. You need to be careful here about each of these choices because each has their own pros and cons. If they offer to sell you the terminal be sure to shop around because you may find the exact same credit card terminal online for a lot less.
I don't recommend leasing a credit card terminal. They are relatively inexpensive these days and you'll end up paying a lot more in leasing fees than you would if you simply purchased the terminal outright from the beginning. It requires you spend more money up front, but saves money in the long run.
If you shop on eBay be careful because there are a lot of merchant terminals on sale there for 99 cents. But almost all of those deals require you to sign a two-year agreement to process credit cards through them. So be sure there's no strings attached if you buy your hardware outside of your processor. Now one question to ask is, "If I do buy my hardware from someone else, is there a programming fee?" Most reputable merchant account processors will allow you to buy your credit card terminal anywhere (be wary if they insist that you use their equipment) but they may charge you a $150 programming fee to program that terminal for their system. So you want to be very careful about that. Ask this specific question (it's on the cheat sheet) about any re-programming fees for the hardware. You can almost always negotiate out of programming fees.
If they do sell you the hardware the question to ask them, if you do decide to buy it through them because they're offering a good price on is can I take this and use this with a different processor if I leave you two years from now. That's a question to ask that you may not be able to so you want to make sure you buy a system like a Veraphone which is the biggest name in terms of the US. Buy one that is very common that you can use with any processor not just them. It's important to know.
If a merchant account processor offers you a free credit card terminal as part of the deal, be careful and ask additional questions - they've got to make their money somewhere. "Do I have to sign a year contract if process through you only one year?" "Is it a two year contract?" "What exactly is it that I'm getting that for free?" There may be situations where a free terminal is worth signing a year contract - as long as that year-long agreement doesn't include extra fees or a termination clause.
Also keep in mind that the contract may auto-renew so be sure to set a reminder on your calendar 30 days prior to the expiration so that you can cancel the contract if you are not satisfied and plan on changing providers. Never go more than two years for a contract and really these days there's so much competition for merchant accounts that shouldn't have to go more than a year if they give you a free terminal. It might also be good idea to ask for additional terminals if needed. Tell them you'll sign a contract for a year if they offer two credit card terminals - or perhaps a wireless one. If you sell off-site at a swap meet, for example, on the weekends, a wireless terminal would enable you to swipe credit cards at that location (at the qualified rate) using a wireless terminal. Keep in mind there will be additional charges for the wireless access as they normally run on the cell phone networks. Ask if they'll throw that in for free if you do a one year deal. All of this is negotiable.
Software
Software is an area where some merchant processors still charge fees. Do not enter a leasing or purchase agreement for software under any circumstances! There are many places where you can get processing software for free online. I'm not talking about a virtual terminal or gateway such as Authorize.net or Verisign. Those are legitimate online services and there are fees involved for using them. I'm specifically talking about desktop software that runs on your computer to process transactions - it is no longer necessary these days. Shopping cart software is readily available online for free or a small fee. The days of renting software from the merchant processor are long gone so don't fall for it.
Applications and Application Fees
One of the first questions you should as a merchant card processor is, "Is there an application fee?" Some processors will charge you $100 or more for an application fee. Merchants with a history and looking to change providers can always get this waived. However, new merchants may have to pay the fee (but shop around to see if one will waive the fee). Keep in mind that if you get declined they still keep that $100.
There are a couple of things to know about the application. First, if you're just starting out and if you're an individual small business, they're probably going to run your personal credit report. Most small businesses set up S-Corps and C-Corps or LLCs because we think we can separate our personal finances from the business finances which is a good thing to do anyway. However, rarely are they going to take a brand new tax ID with no credit as the tax ID for the merchant. You're going to have to use your personal credit to open the account. Ask them specifically if they will be running a report on your personal credit. It usually won't make a difference if you have bad credit whether or not you pay higher rates - that's more dependent on the industry you're in. However, it may make a difference whether or not you get approved. Some industries pays a lot higher discount rates because there's a lot more fraud than say, for example, a dry cleaner or hair salon.
Unfortunately, if you have bad credit it is not likely you will be approved for a merchant account. There are "high risk merchant accounts" out there, but the discount rates are terrible and often require you to put up a large deposit that will be held in escrow as long as you have the merchant account. Essentially, the merchant processor is worried that a new merchant could process a bunch of cards and then leave town - so that when people come back to get refunds there's no money for them to hold or freeze. So they're taking a risk on that and they want to make sure you have good credit and that you pay your bills and you're an upstanding citizen. If you have a business partner with good credit, you might have better luck having them apply for the merchant account.
Frozen or Held Funds
Now that we've covered the major fees (there are others to ask about that are listed on the cheat sheet), let's cover a few other things you should be aware of when setting up your merchant account. New merchant accounts are typically set up with a ceiling in terms of maximum dollar amounts you can process each month. Go above that and you'll likely have that money held by the credit card processor for weeks - even months. Ask your processor, "How much am I allowed to charge customers each month? What's my monthly limit? The dollar amount is usually based on your previous history - or if you have no history - on your personal credit.
Your average monthly volume is also something they watch. Let's say your average monthly volume is $5,000 in credit card transactions. But one day you wake up to find that you have been mentioned in a major national newspaper or prominent blog and you do $25,000 in volume the next month. That may get flagged in the system and your money may not be transferred to your bank account until they can determine that that unusual volume month isn't some sort of fraud. In this case, regular and close communication will go a long way. This has happened several times in the past for our company and each time, a phone call to the processor explaining the unusual activity allowed them to release the funds to my bank account. Seasonal businesses may face this issue as well. A retailer that makes the majority of their sales around the holidays may have very slow months during the summer and then heavy transaction months near the end of the year. Ask your prospective processor what happens to your money in these situations.
Establishing a relationship with a specific individual at merchant account processor in customer service can go a long way in alleviating these problems before they happen. Just keep them informed as to what's going on and hopefully they won't hold the money. If they do hold your funds, you'll get it resolved much more quickly if you keep the lines of communication open and frequent. Be proactive and show them that these are legitimate transactions - not unusual fraud.
The issue of communication brings up an important point about customer service. Be sure to ask if they offer 24 hour, USA-based customer service representatives AND do they outsource it or is it their own employees that answer the phones. Low cost merchant credit card processors may be lower cost because they cut corners on service. When your funds have been frozen and you need to pay bills is not the time to find out how their customer service works. Ideally, you want a specific person that is your account representative so that when you do have a problem you can call them specifically. if they are the same person who helped you with your application and they've gone through every step with you, they are already aware of your business and you have an established relationship with them. An assigned account representative is always preferable to explaining your entire situation and business to a new customer service rep each time you call.
Even if held funds or a frozen account isn't an issue, the number of days it takes to get money transferred into your bank account once a transaction is settled varies greatly from merchant processor to merchant processor. Ask them how long it takes for your funds to go into you bank account. A very important question. For some, one business day is normal - for other five business days is more common. Often times if you process through the same bank where you have your business checking account, it goes into your bank account a lot faster than if you use an outside service. But beware, your bank may actually outsource the service to another company so you'll still need to use the Merchant Account Cheat Sheet to interview them. You may find an outside processor will give you better rates so it might be worth waiting an extra day or two to have your funds transferred into your bank account.
Chargebacks and Fees
Chargebacks are a big issue for some businesses. A charge back is when somebody basically says they didn't get what they paid for and they call the credit card company and they dispute the charge. If you are an online merchant, perhaps you've shipped an item to them and they say they haven't received it and they dispute the charge.
For a brand new merchant account they may just immediately, and without even talking to you first, take the funds out of your bank account. So you'll want to ask your credit card processor, "What happens in a charge back situation? Do you give me time to respond before you take the money out of my account and what kind of information do you need for me to win that dispute?" In other words if you can show them that it was delivered to your customer and they signed for it and received it, is that enough to win the dispute?" Each merchant account processor may require different information during a chargeback situation so be sure to ask them what is required and how long you have to respond before they rule in favor of the customer automatically. Even if you do win a dispute, the merchant account company may charge you a fee ranging from $10 to $25.
If you're an online storefront this is why I recommend you always request a signature because if you don't have a signature to prove that they received it you will probably lose that dispute and that money will come out of your account and you've lost that product. Not a big deal if you're selling an eBook because you're not shipping a physical good, but still an annoyance. Plus if you have shipped the physical good you now not only incur a charge back fee but also lost the product as well. So ask your provider how they handle chargebacks and how it will work if somebody disputes a transaction.
These are the major issues you need to be aware of when applying for a merchant account. The Merchant Account Cheat Sheet will allow you to compare credit card processors quickly and easily so that you can ask the right questions and shop intelligently for a reputable merchant services company.
Download the Merchant Account Cheat Sheet here
Listen to the Shopping for a Merchant Account podcast here
