Merchant Accounts Explained for Beginners

Accepting credit cards for online payments requires a merchant account in the payment chain, however it is important to stress that it doesn’t have to belong to you.

Here we will look at the types of merchant account that are available, how to obtain one, and whether or not your really need one at all.

Types of Merchant Account

There are generally three types of merchant account on offer:

  1.  Customer Present: The customer comes into your store, you swipe their credit card through a Point Of Sale machine and they sign a receipt. This type of account isn’t suitable for e-commerce.
  2.  Mail Order/Telephone order: This type of account falls into the card not present category- which means neither the card nor the cardholder are present at the point-of-sale and the customer and the order taker are not face-to-face. This account is generally not usable for Internet sales but is usually easily upgradeable to one that is.
  3.  Internet: An Internet merchant account falls into the card not present category. This means neither the card nor the cardholder are present at the point-of-sale, and the customer and the order taker are not face-to-face. For a merchant to be able to accept credit cards and debit cards for payment on the Internet, the merchant must have an Internet merchant account.

Obtaining an Internet Merchant Account

Obtaining a merchant account is a time consuming step, and if you’re a new business you may find it difficult to obtain an internet merchant account at all.

The procedure might take weeks to complete, and obviously involves costs.

An Internet merchant account is obtained from an acquiring institution (usually a bank).

The acquirer authorizes the purchases made with the card and ensures that the funds are deposited into the merchant’s bank account.

The costs involved vary depending on country, and acquiring institutions, and are effectively bank charges.

These costs can be considerable especially for small businesses with low sales.

The costs fall into the following categories:

  1. Setup costs– one off cost at start.
  2. Monthly costs– A recurring cost.
  3. Transaction costs –A percentage of transaction or fixed charge per transaction or both. There may also be a minimum charge per transaction, which is an important consideration if you sell lots of small value items.
  4. Reserve Costs: Banks may demand a bond to cover contested charges, refunds and fraud. In each case when disputes are settled in favour of the credit card holder a charge-back  occurs.This involves refunding the customer for the disputed sum and imposing a charge-back fee on the merchant.
    This means that in addition to losing the amount of the sale the merchant loses the amount that the bank charges in charge back fees. In addition, if the merchant has too many charge-backs he’s at risk of losing his merchant account.The amount demanded by the bank varies considerable, but is based on the level of risk perceived by the bank. This  in turn is greatly dependent on the type of business being operated by the merchant.

Who Needs A Merchant Account

Generally speaking a merchant account only becomes cost effective when you have lots of sales.

Although it is difficult to be very specific due to the wide range of fees involved merchant accounts only come into consideration when you are making in excess of around $1500 per month in regular sales.

For new small and new businesses a third party merchant account like that provided by PayPal is the best option.

Merchant Account Alternatives

Because of the initial set up costs of merchant accounts, the length of time taken, and the difficulty in obtaining them there are a number of merchant account alternatives available ( e.g PayPal) which are more suitable for the small business, and for anyone starting out on the Internet.

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