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Tips for Business Owners: Merchant Account Basics

Resource Nation, Resource Nation

Accepting credit cards is one of the best ways to increase sales at a small business.  Credit cards are widely used, convenient, and a quick method of payment.  A merchant account is the link between a customer’s credit account and your business bank account.  When it comes to choosing a merchant account provider, you have a few different options:

  • Banks:  Your existing bank or another institution can refer you to a credit card processing account provider.  Banks usually outsource processing functions to third parties, and recommend these companies to their customers.  Banks are the most highly regulated credit card account providers.
  • Credit card companies:  Some companies set up an account for processing, while others require businesses to use a third party processor to accept their cards.  Both MasterCard and Visa require businesses to establish an account through a third party.  American Express or Discover both offer merchant service accounts that can process only these types of cards.
  • Offshore companies: Businesses in high-risk industries that do not qualify for an account with a bank-recommended vendor or a credit card company often opt to set up an account with an overseas provider.  Offshore accounts are less expensive, but they are also riskier because they are not subject to American laws and regulations.

Registered credit card broker: Brokers represent several third party processors or credit card companies.  Brokers do not process transactions themselves, they merely set up the accounts that will do the processing. Brokers are not as highly regulated as banks or credit card companies, so make sure you do your homework and choose an honest and reputable broker. Your options might be somewhat limited by the risk level of your business.  Businesses that are at a higher risk for chargebacks (returns) or customer fraud will pay higher rates for services.  When choosing a provider, make sure you get all potential fees in writing.  Usually, account providers charge fees for the following:

  • Per-transaction fees: A fee can be assessed as a percentage of the transaction amount, or as a set charge, such as $.50 per transaction.  Magnetic swipe transactions are less expensive because they present less risk- the card is present at the time of sale.  Remote, internet based, or over the phone transactions will usually be more expensive.  Choose a fee structure that makes sense for your business.
  • Chargebacks: When a card is charged, the merchant account provider bears the risk of non-payment while the information is verified.  Chargebacks are when funds must be returned to a customer account.  Chargebacks are expensive for the account provider to process, and they pass the charges on to your business.  Fees for chargebacks can range up to several dollars or more.
  • Monthly minimums:  Some account providers will require a “monthly minimum” charge volume to guarantee a certain amount of revenue.  You’ll end up paying for services even if you don’t process any credit card transactions.  Make sure you understand the fee structure, and choose a provider that is within your budget.  You should also ask about security measures, how transaction information is transmitted (over the phone or using an internet connection) and who you can contact if you are having trouble operating the system.  Choosing the right account provider can reap big savings for your business.

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