Merchant Accounts

As we discussed earlier Internet card payments require a merchant account in the payment chain. Here we will look at the types of merchant account that are available.

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 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. 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- recurring cost.
3. Transaction costs –percentage of transaction or fixed charge per transaction or both. There may also be 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 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 chargeback 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 dependant on the type of business being operated by the merchant.
 

Payment Service Providers and Internet Merchant accounts

An Internet merchant account on its own isn’t sufficient to accept payments on the Internet what is needed is the Internet equivalent of the PDQ. This is the payment gateway which is responsible for taking the credit or debit card details form the customer and verifying them with the acquiring bank.

In order to make use of a payment gateway an Internet merchant account is required. If you are not providing the payment gateway services yourself (only very large organisations do) then you will need to acquire and pay for this service.

This usually involves cutting and pasting a few HTML links on to the web page and is easily accomplished by anyone who can author a simple web page. The costs involved must be added to the acquiring bank costs to calculate the total cost.

Alternatives to Merchant accounts

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