Address Verification Service (AVS): Is a service that reduces the merchant’s likelihood for fraud by verifying the customer’s billing address during a credit card transaction. This occurs when the customer is not physically present to swipe their card.

Authorization: Is the process by which the merchant bank communicates with the card holder’s bank to ensure that sufficient funds exist in the card holder’s account.

Batch : This occurs when the merchant account provider submits stored transactions (usually at the close of business day) that have been authorized but not settled for processing.

Card network: Is the intermediary between the merchant account and the customer’s credit card issuing bank.

Cardholder: Is the individual that is authorized to use the card and has established an account with the credit card issuing bank. This allows the cardholder to make purchases using a credit card.

CVV2 (Cardholder Verification Value) or CVV2 (Card Verification Value): Are 3 or 4 digit numbers printed on the credit card for added security.

Chargeback: Is a credit transaction that is billed back to the merchant on the premise that the customer did not receive his good or service, or if the customer believes that he did not place the order.

Discount Rate: Is a fee paid by the merchant to the merchant account provider for handling the credit card transaction. It is charged per transaction.

Gateway: Used in an internet transaction to connect the shopping cart to the credit card processor (see Payment gateway).

Imprinter: Is a manual device used in physical transactions to create a physical imprint of the credit card on a transaction slip.

Interchange Fee:  The fee that the credit card issuer charges the merchant via the merchant account for their service to allow the merchant to accept their credit card.

Issuing Bank: The bank or financial institution that issues credit cards to the cardholder.

Keyed: Term used to describe when credit card information is manually typed “keyed” in. This method is used in lieu of “swiping”.

Merchant account: is an account provided by the acquiring bank to the merchant so that the merchant can accept payment via credit card.

Merchant Bank: (See Acquiring Bank).

Point Of Sale (POS) terminal: Is an electronic device used to collect credit card information in retail businesses by swiping the card through a machine.

Payment gateway: Allows merchants to accept credit card payments online.

Shopping Cart:  Used for online shopping to allow customers to put their purchases in a virtual shopping cart before they proceed to pay with one online transaction.

Swipe: The act of sliding a card through a Point of Service machine for processing. Used instead of “keying in” the credit card information. 

Cost

Cost is probably the most important factor when selecting a processing company. There are 2 main types of fees, Transactional Fees and Monthly Fees. In terms of monthly fees, pay attention to the monthly statement fee (around $10), monthly minimum fee(between $15-30), and if you are doing credit card processing over the internet the monthly payment gateway fee (between $10-$20).

Transactional fees include items such as the discount rate which is in the 2% range (the lower the better), the merchant account provider transaction fee (20 – 30 cents), and the address verification fee (5 cents).

Account Setup

Quality and speed of account setup is another important criterion to consider when picking a merchant account provider.  Average Approval Rating is an industry term that shows the approval percentage of merchants that apply for an account. It is prudent to looking for a credit card service provider with an approval rating greater than 95%.

Another important service related item is how long it takes for the service provider to setup your account. The better ones can do this in 2 days. Also, pay attention to how long it takes for the money to settle into your account. A good provider can do this in about 2 days, obviously the quicker you get your money the better.

Customer Service and Features

Having access to good customer support for your merchant account can save you a lot of hassle. Find out if customer service is available 24/7, whether they have phone, instant message and email based support.

If you are physically swiping credit cards you will want to make sure that the merchant account provider has access to a good selection of Point of Service (POS) machines.

Some due diligence in the areas of cost, setting up the account and customer service can result in finding the best credit card provider for your business.

The Parties Involved

The merchant account provider (acquiring bank) is the bank that the merchant uses to setup up credit card processing. The merchant account provider connects the merchant to the customer via the credit card network.

The card issuing bank is the bank that the customer uses to be able to buy products or services via a credit card.

The Credit Card Transaction Process

When customers purchase a good or service from a merchant the following steps occurs.

Credit Card Information Input

There are basically two ways that credit information is input. It is either swiped or keyed in. If the purchase begins at a “brick and mortar” type of business (barber or grocery store) then the card is usually swiped using a point of sale (POS) machine. This machine reads the information off the magnetic strip on the back of the card.

If the transaction is done over the internet or by mail order or over the telephone then the information cannot be swiped and must be keyed in. Since a keyed in transaction has a greater potential for fraud additional information is generally required to process the transaction like the 3 or 4 digit card security number,  the card holders billing address and phone number.   In the event of an internet transaction the keyed in information travels through a payment gateway which works similarly to a POS.

Authorization

Once the card information is input it goes to the merchant account provider. The merchant account provider communicates with the costumer’s credit card issuing bank where it determines whether the card holder has enough credit for the purchase. The customer’s issuing bank then issues a hold on the card against that amount and sends an authorization code to merchant bank and to the merchant.

Batch Processing (Transfer the money)

The various transactions a merchant does during the day are stored. Generally, at the end of the day the transactions are processed in one batch, where in the card issuing bank transfers the money to the merchant account. Before the card issuing bank does so, it subtracts a transaction fee (processing fee) which is a percentage of the purchase (generally around 2%). Once the merchant account bank receives the money it subtracts a flat processing fee.

For example if a customer buys a $100 product and the interchange fee is 2% and the processing fee is $0.50 then a $100 purchase loses $2 at the customers card issuing bank and $0.50 at the merchant account provider, meaning the merchant actually gets paid $97.50 on the transaction. 

Discount Rates

The discount rate is a component of transactional fees however, since it is one of the largest fees I decided to mention it first.  The discount rate is charged to the merchant and is based on a percentage of the product or service cost i.e. if someone buys something from you for $100 and the discount rate is 2.5% then $2.50 will be subtracted from the total.

The following fees can be tacked on to the discount rate. Mid or Partially Qualified Fee, Non Qualified Fee, Surcharge Fees. These fees are incurred if the credit card is keyed in and not swiped, or in the case of someone using a corporate card or a card with a reward plan. These charges can add significantly to your discount rate so it is important to find out how much they are.

The discount rate should be around 2%, it is higher if the business is conducted online due to the additional fees mentioned in the previous paragraph.

Monthly Costs

There are 2 types of monthly fees, monthly statement fees and monthly minimum fees. A monthly statement fee is a fixed fee that is charged for customer service and support. It is typically around $10 a month. A monthly minimum fee is charged based on the amount of business done per month. If the monthly minimum is not met, the monthly minimum is charged. It ranges between $15-30 a month.

Annual Fees

In addition to monthly fees you might have to incur an annual fee. Although some merchant account providers do not charge this fee you might have to pay it if you received free credit card terminal equipment.

Startup and Termination Costs

These are fees associated with starting or terminating a merchant account. A setup fee is charged to setup the account (it is also known as an application fee). Some merchant accounts wave this fee. When setting up a account you are normally required to sign up for a one or two year contract, it is therefore important to find out what the cancelation fee is if you decided to terminated your contract early.

Transaction Based Fees

These are fees charged per transaction. They consist of address verification fee, transaction fee, and chargeback/retrieval fees.

An address verification fee is charged when a card is not swiped. It prevents fraud by validating the credit card holders billing address info. This charge is normally between 5-10 cents. Transaction fees are charged by the merchant account provider and are typically 20-30 cents per transaction. It is sometimes known as interchange fee, authorization fee or per inquiry fee.

A charge back fee is charged if the customer disputes the charge because they doesn’t recognize the charge , or feel the product was not as described correctly or due to fraudulent use. This fee is normally around $25 per charge back.

Other Fees

Daily Batch Fees or ACH Fee is charged to pay for the expense of settling your transactions into your bank account if you do not have any transactions on a given day you are not charged. This fee ranges between 5 -50 cents.

Gateway Fees are charged for internet merchant accounts. This fee is assessed by the gateway service provider which might be different from your merchant account provider. This fee can be as high as $35.

Voice Authorization Fees are charged when calling in your transaction. The average cost is between 75 cents to $1.50.

Reprogramming Fee is charged if existing software or hardware requires reprogramming.

Bogus Fees

Some unscrupulous merchant account providers might try to charge you junk fees. Watch out for teaser discount rates that sky rocket after a couple of months or low discount rates that only apply to certain cards. Also watch out for fees called file fee, audit fee, conversion fee, over the limit fee, excessive transaction fees.

This information should equip you to make good decisions and get the best deal when shopping for credit card processing for your small business.

Merchant account fees and charges depend on a number of factors; volume of transactions, the type of input device that is getting the credit card info (POS scanner in a grocery store versus someone typing in their credit card over the internet), the type of product or service you are providing, and the location of your business.

Generally, the riskier any of the aforementioned factors are (ie. if you are selling a high risk product or doing business from a high risk country) the larger your fees will be. To understand what merchant account(s) is(are) right for your business let us look at the 3 major types of merchant accounts and their applications.

Merchant Account #1 Retail

A retail merchant account is used in a “brick and mortar” business such as a grocery store or a drug store. They require you to have POS (Point of Sale) equipment for the customer to be able to swipe their card.  A merchant account requires that the majority of transactions are processed via a POS machine.

Merchant Account #2 MOTO (Mail Order Telephone Order)

This type of account is required if you are taking credit card payments via phone or by mail. These were designed mainly for mail order companies. They do not require equipment. Typical these systems have higher discount rate (a discount rate is the charge on purchase that customers card issuer takes from the sale of an item).

Merchant Account #3 Internet

This is type of account has become a very popular option for merchants and essential for anyone doing business online. These types of accounts process the credit card payments using a payment service gateway or shopping cart application.

So there are the 3 main types of merchant accounts. You can decide which account is best suited to your business. You may find that it is more than one.