WHAT IS A MERCHANT ACCOUNT?
A merchant account is a type of bank account that allows you to accept payments from your customers using credit and debit cards. The credit card processing company sets it up for you and assigns you a merchant ID number. Once you start accepting credit card payments, the company holds your funds until settlement, when they are transferred to your business bank account.
DO I NEED A MERCHANT ACCOUNT TO ACCEPT CREDIT CARDS?
If you sign up for a processing account with a payment facilitator (PayFac) or aggregator like Square or PayPal, you don’t need your own merchant account. Instead, you sign up as a submerchant under the provider’s master merchant account.
The benefit of working with a PayFac is that it’s faster and easier to set up your account, service is provided on a pay-as-you-go basis, and there are usually no account maintenance fees. But there are some limitations. Most aggregators don’t work with high-risk merchants, so if your business is in a high-risk industry, you’ll need to get your own merchant account. PayFacs are also more risk-averse than full-service payment processors, which means that your funds could be held if something about a transaction raises a red flag.
There are also some advantages of having your own merchant account. You can often get lower rates and better customer service, and the likelihood of having your money held or your account frozen is lower. There are account maintenance fees, but if your processing volume is high enough, they’re offset by the lower transaction rates.
WHAT IS A PAYMENT GATEWAY?
A payment gateway is the technology that creates a secure connection between your website or browser and the credit card processing company, encrypting payment data for each credit card transaction. Some merchant services companies have proprietary payment gateways, but most set you up with a third-party payment gateway, such as those from Authorize.net and NMI.
The advantage of setting up a payment gateway through your merchant account provider is that it reduces the likelihood of compatibility issues and, in some cases, can be less expensive. For instance, you may not be required to pay a gateway setup fee if you go through your service provider instead of going direct. Also, depending on your processing contract, there may be an exclusivity clause that requires you to go through your merchant account provider.
HOW DOES A PAYMENT GATEWAY WORK?
Each time you run a transaction online or a customer makes a purchase on your website, the credit card information enters the payment gateway, where it’s encrypted and routed through a secure connection to the credit card processor, the card network, the bank that issued the card and your business’s bank account. Your customer’s card is charged for the transaction amount, and you receive the funds from the sale, minus the processing costs.
DO I NEED BOTH A MERCHANT ACCOUNT AND A PAYMENT GATEWAY?
It depends. If you want to accept credit cards online and in person, you will need both a merchant account and a payment gateway. If you accept credit and debit cards exclusively using a credit card terminal, you won’t need a payment gateway. But you will need one if you use your computer as a virtual terminal or accept cards through your website.
WHAT ARE THE BENEFITS OF ACCEPTING CREDIT CARDS ONLINE?
The main benefit of accepting credit cards online is that it gives you more ways to accept payments from your customers. According to Visa, “78% of consumers surveyed rank a digital payment method, such as paying with a card or mobile device, as their No. 1 preferred payment option.”
Even a business that has brick-and-mortar locations – whether it’s a retail store, restaurant, office, salon or other type of establishment – may benefit from accepting credit cards online, as Visa notes that “52% of consumers surveyed say they would prefer to shop exclusively online.”
Merchant account providers offer several e-commerce solutions that can help you accept credit cards online, such as hosted payment pages, buy buttons and forms that can be added to existing websites, and integrations with e-commerce platforms. Some can also help you accept payments from customers through your social media pages.
If your business invoices its customers, you can use online invoicing to make it easy for them to pay you on time. All they’ll have to do to pay you is click a link in the invoice and enter their credit card information. Many payment processors can also help you accept ACH payments if your customers prefer to pay invoices by e-check.
HOW CAN YOU AVOID CREDIT CARD PROCESSING FEES?
Because credit card processing fees are how credit card companies generate revenue, it’s extremely unlikely you’ll be able to completely avoid this cost. Through negotiation during the initial application process, however, you can attempt to ensure the rate is favorable.
There are also other ways you can offset your credit card processing fees. For example, some businesses push the fees onto the customer in the form of a surcharge or offer a small discount to customers who pay with cash. This tactic is generally seen at gas stations, where it costs more to pay with a credit card than with cash. While this method eliminates the credit card processing fee levied against your business, it could be a double-edged sword because it could push credit card users away from your business. The credit card networks have strict rules around surcharging, so make sure your policy is in line with their recommendations.
Alternatively, you can set a minimum purchase amount for all credit card transactions. By requiring a minimum of $5 or $10 for each credit card purchase, you can ensure that the transaction is worth paying the credit card processing fee. This option is widely used by many businesses since it’s easily understood by customers and doesn’t feel as punitive as other options. The credit card networks have rules about minimum purchase amounts as well, so again, it’s important to make sure that your policy complies with their guidelines.
In both instances, you could alienate potential customers who prefer to pay with credit cards. The number of people who don’t carry cash is growing, so you ultimately have to weigh the potential savings on credit card fees against the risk of losing sales.
WHAT DO YOU NEED TO OPEN A MERCHANT ACCOUNT?
When signing up for a merchant account, you should have several things on hand to make the process move smoothly. Most credit card processing companies require some general information on your business so they can determine whether you are a high or low risk.
A business’s risk level depends on factors such as its potential to be a victim of credit card fraud or experience a high rate of returns. Payment processors also consider how long a business has been in operation, since they are reluctant to lend money to what may amount to a fly-by-night operation. [Related article: Credit Card Processing in High-Risk Industries]
Most payment processors also want information on the business’s history, including any bankruptcies, defaults or previous merchant accounts on its record. In addition, most processors want information on the business owner, including their personal credit history, as many contracts require the business owner to sign a personal guarantee.
Some merchant account providers charge application and setup fees, but this is unusual among the best processors. You may want to consider other options if the company charges these fees.
IS THERE A WAY TO AVOID MERCHANT FEES?
Few things in this world are free, so avoiding merchant fees altogether isn’t realistic. That being said, there are ways to limit your costs. A good opportunity to do so is by looking for a service that offers a subscription pricing model. This ensures your interchange rates don’t fluctuate, and it may remove some of the added fees.
CAN I MAKE CUSTOMERS PAY EXTRA WHEN THEY USE A CREDIT CARD TO MAKE A PURCHASE?
You certainly can pass on the added cost of using a credit card to your customers. This added surcharge however will likely not be appreciated by your customers and could ultimately result in a loss of business from those who would rather pay less somewhere else. Before instituting this surcharge, you should carefully consider how much you will actually be saving and whether the savings will offset the cost of losing a chunk of your customer base.