About Merchant Accounts
Successful merchants accept
credit cards as another payment method for the convenience of their customers,
to increase sales, to speed up cash flow and to reduce risks of extending
credit to buyers that don't have ready cash, or when a cash transaction isn't
possible or desirable.
Customers use credit and payment
cards because: They might not be carrying enough cash, they don't have enough
cash and need to use credit with smallish monthly payments, credit cards come
with shopper protection against merchant fraud usually guaranteeing them
coverage after the first $50 or so. In the case of payment cards like American
Express, they get the convenience of a non-cash transaction with good reporting
on their statements.
Also, in today's Internet
economy, approximately 93% of all online purchases are made with credit or
other payment cards!
IntelliPay™ can provide IntelliPay™
clients referrals to specific merchant account providers that suit your
individual needs. It's important to use a provider that understands your
Here for a Referral and to Get Started with IntelliPay™!
What is a Merchant Account?
A Merchant Account is a
contractual relationship a business has with a bank to allow acceptance of
buyer's purchasing cards and credit cards for payment.
The bank that approves you for a
merchant account is called an Acquiring bank (Acquirer) - they acquire your
money for you. Acquirers must be member banks of Visa Association and/or
MasterCard Association to process Visa or MasterCard payments.
A Merchant Account is NOT a
business checking account, however, you must have a business checking account
for the merchant account to deposit money from your credit card sales.
Your merchant account must come
from an association member bank and can be originated by the bank directly, or
more likely, through one of their sales agents which are sometimes called
Independent Sales Organizations (ISO's) or Merchant Service Provider's (MSP's).
Types of Merchant Accounts
There are two basic types of
A Retail account is merchant
account that is approved for use in a physical store where the cardholder and
the card are present. Typically the merchant swipes the card through a card
reader to get your card numbers so this account is sometimes referred to as a
"swipe" account or "cardholder present" account.
Retail accounts are the least
risky type of account and therefore the merchant account provider charges the
merchant must less than the riskier "card not present" type of accounts.
A "card not present" account is
also called a Mail Order - Telephone Order (MOTO) account. This is the account
used by mail order companies, anyone accepting phone orders or any other system
where the merchant can't physically see the card and/or the cardholder.
Currently this is the type of account used for Internet Businesses accepting
credit cards online.
Because there is increased risk
for charge backs and fraud with MOTO accounts, merchant account providers
always charge the merchant higher rates and fees for this type of account.
Getting Approved for a Merchant
Banks view merchant accounts much
like they do a business credit line that you might apply for. The bank has some
risk in approving you for a merchant account because if you receive some
payments, then go out of business or can't cover refund payments, the bank must
cover any of your customer chargebacks. Your business has this chargeback risk
When the bank is reviewing your
application and documentation, they are deciding how good a risk you and your
business are based on their potential losses from your account.
One of the many reasons credit
cards are so popular is this cardholder protection feature of being able to
charge back an undelivered or unfulfilled purchase. As a cardholder you know
you have recourse and won't have to pay for something you didn't receive, or
for other reasons. In order for this feature to work, the merchant must assume
the chargeback risk, and the bank must guarantee this risk if you cannot.
Some factors merchant account
providers (MAP's) are looking at include, but are by no means limited to;
quality of personal guarantees
for some applicants
credit card volume requested
average ticket size
whether the account will be for
a physical business where cardholder will present their card personally ("card
present", "cardholder present"), called a "retail" or "swipe" account, or
the cardholder will phone or fax
in the card number data ("card not present", "cardholder not present"), called
a Mail Order/Telephone Order (MOTO) account.
Additionally, the MAP is
underwriting the type of business you're in and the type of products you sell.
If you get approved to sell widgets and later switch to PVC fasteners or
consulting, you technically are in violation of your original merchant account
agreement. While this may seldom be a fatal problem, you should still contact
your MAP and make arrangements to modify your original agreement to include
these new products or services. This may cause your MAP to re-evaluate your
risk factors, rates and fees.
MOTO accounts are intrinsically
riskier than retail accounts primarily because additional positive ID can't be
obtained to assure you and the credit card system that the person giving you
the card is really the cardholder. Because of this increased risk the fees
banks charge for MOTO accounts are higher than a retail merchant account
At this time, all MAP's view
Internet businesses as MOTO accounts and charge higher fees. These accounts are
under constant monitoring to determine if these businesses represent higher or
lower risk than normal MOTO accounts. Someday, there could be a third type of
merchant account; retail, MOTO and Internet.
Acquirers or their agents will
sometimes approve your application if certain additional conditions are met.
Usually, these conditions have to do with helping offset risk the MAP thinks
exist with your business.
One of these conditions might
include a security deposit they can access if you can't cover account losses.
This deposit can come in many forms; cash deposit, a "rolling reserve" where
the bank accumulates a percentage of your credit card revenues until a deposit
target is reached, or funding only a percentage of your credit card revenue for
a certain time period, holding back the balance, to "age" your account to
assess chargeback volume, frequency and your behavior.
These deposits, holdbacks or
reserves can often be negotiated, but not always. If the provider insists on
some form of reserve and you can't or don't want to tie up capital, you might
be able to negotiate a more palatable form of deposit such as the holdback
method or change your application to a lower volume request. In most cases, you
can simply ask them what your alternatives are.
Bank Approvals vs. ISO
Banks, because of regulations and
other needs, are historically very risk averse. They must act with due regard
to their depositors. The risks they can take are very limited. We want our
banks that way! We want them to not take risks with our money on deposit in
However, because of these
requirements, they often decline a high percentage of merchant account
applications except for certain low-risk accounts, or for applicants that are
large depositors and have other significant business relations with the bank.
The banks' contracted agents,
ISO's and MAP's, step into this gap and take some or all of the risk from bank.
This allows more merchants to be approved, many more. Some ISO's approve up to
98% of all applicants. They still may apply various conditions to approvals,
and will also charge a bit higher rate than banks to further help offset risk.
However, for smaller merchants or newer, riskier businesses, ISO's or MAP's are
usually more lenient and are the places to go.
One important thing to remember
is that you're being approved for a merchant account within the limits of your
application. If you apply for $50,000 monthly volume with $100 average tickets,
that's what you're being approved for. If in the future you exceed those
parameters, your account may be reviewed for additional risk and follow-on
conditions may be imposed by your MAP.
Not All Merchant Accounts,
Merchant Account Providers - or Merchants - Are Created Equal
Some MAPs focus on a particular
type of client and understand that marketplace very well. Therefore, their
merchant account products, services and pricing, as well as their risk
management behavior, are different from another MAP that services a different
For instance, a MAP focusing on
the small office, home office or small business market knows certain things
about that market and arranges his products and pricing to suit their risk
management and profit requirements. Typically, this provider will charge a bit
higher discount rate, somewhat higher fixed fees and generally will have a
formula for approving most accounts under certain volume restrictions. These
business clients generally don't generate high volume processing, have a
disproportionate failure rate nationwide and sometimes have cash flow problems
making the chargeback risk higher.
In practice, when this type of
merchant account is approved at this MAP, they will set certain alarms in their
software to monitor the account's behavior. They'll know about all chargebacks,
whether the average ticket is within the range the merchant applied for,
whether the account exceeds the monthly or annual processing dollar volume they
were approved for, and more.
In some extreme cases, if the
merchant's processing sets off an alarm, the merchant account will be
automatically, or manually, disabled until the merchant and the MAP discuss the
situation and resolve it. These MAP's usually have so many merchant accounts to
manage that manually reviewing all the daily problem traffic can become a huge
task, so they automate many of these issues.
Don't let this be too alarming to
you. No MAP wants to shut off accounts unless the risk is just too
unmanageable. However, being disabled like this can be fatal if your business
depends on your ability to accept credit cards!
Other MAP's target high-volume
merchants as their target markets and understand that market better than any
other. This MAP normally doesn't really want the small business customer.
Because they understand
high-volume accounts many of their behaviors differ from the small business
MAP. Approval criteria are different, risk management is different, and account
management is considerably different. For instance, a high-volume account at
this MAP would almost never be shut off for exceeding their volume
requirements. Instead, the MAP would call and rework the account requirements
while continuing service to the account.
There are also MAP's that work
all markets, and they may or may not service all account types equally well.
It's important that you have a
It's important to have that
account from a MAP appropriate to your needs.
If needed, IntelliPay™ can refer
you to one or more MAP's to better suit your needs.
Managing Your Merchant
Your merchant account is one of
the most important business relationships you have. It is an income and cash
stream, a vital sales tool and above all, it's a bank relationship for your
It isn't a trivial relationship.
For instance, if your business merchant account is ever terminated by a MAP,
getting another merchant account in the future will be very difficult, if not
This bank account requires
attention and management. You want to stay on good terms with your MAP for many
You may want to increase your
limits as your business grows
Your chargebacks may surge
because of a lack of inventory or supply
You may be able to negotiate
lower prices as your credit card business grows
You need an additional merchant
Your credit rating can suffer if
the relationship goes bad
You business enters some tough
times and your chargeback payments are slow
In order to handle these
situations, you need a good working relationship with your MAP. To build this
relationship you need to stay in touch with them. Particularly, you need to let
them know of circumstances that will or may affect them or your account, in
Some of these circumstances might
Your sales have picked up and
you're worried you may exceed your volume limits
You've changed your sales
tactics and your average ticket is higher than noted
Holiday shopping looks like it
will push you over your limits
You want to pick up a product
line that will affect volume and average ticket
You want or need a permanent
increase in volume or average ticket limits
A chargeback from a customer is
unjust and you need them to reject the chargeback
Your business products have
substantially changed from the type you applied to sell and you need those new
ones to be allowed
You want to negotiate better
rates or fees.
Treat this account as you would
any vital financial relationship.
Additional Merchant Accounts
If you have a retail store and a
retail merchant account, you must get an additional merchant account to accept
mail order or Internet orders. If you have an Internet store and now are
opening a physical store, you'll want to get an additional retail merchant
account with it's lower rates for those sales.
Typical Fee Structure
Depending on the Merchant Account
Provider, the type of account you need, and the various risk evaluations, your
merchant account fees may differ from items in this list. There may also be
fees not listed here.
In any case, all fees must be
disclosed and you should find them in your merchant agreement or other
documentation from your sign- up process.
In general, it's good to remember
that MAP's don't make a large profit margin on each sale. They have be
processing hundreds of millions of dollars across all their merchants to make a
reasonable income. Many of the fees described come about because smaller, lower
volume accounts are truly unprofitable for them and the fees are their attempt
to break even or make a little on each merchant account.
However, you should pay attention
to fees charged by MAP's when you're shopping for a merchant account. MAP's do
not all use the same fee structure.
Some Merchant Account Terms
AVS Fee: A flat
fee charged for each Address Verification Request. AVS is for U.S. cards and is
an attempt by card associations to manage fraud by comparing street address
numerals and zip codes to those in the cardholder's file at his issuing bank.
The result is given to the merchant at the time of authorization and the
merchant can decide whether to honor the transaction or not.
Batch Fee: Some
MAPs charge for each batch you settle. Authorizations accumulate in a file
every day and are usually settled once daily. If you force mid-day settlements
you may accrue additional settlement, or "batch" fees. $0.25 - $0.50 per batch.
A flat fee charged for the administrative and transaction costs associated with
handling a customer chargeback request. $10 - $25.
Customer Service Fee:
A flat fee some MAP's charge to maintain their customer service facilities. A
good MAP will have 24 hour phone support.
The percentage collected by the bank from your transaction dollar volume. For
MOTO accounts typical Discount Rates run anywhere from 2.1% (quite low) to over
3%. For instance, if your rate is 2.49% you would be charged $2.49 on $100
dollar monthly volume. The discount rate is shared by your acquiring bank, the
cardholder's issuing bank, the banking networks, and Visa, MasterCard or
Most MAP's charge a flat minimum fee in case all your other variable fees
(discount rate and transaction fees for instance) don't add up to the minimum
fee requirement. If your other fees exceed the minimum, you shouldn't be billed
the minimum. The minimum can vary widely among MAPs, ranging from $15 - $50.
The average seems to be around $30.
This is the additional discount rate charged by the bank and Visa/MC for
transactions that violate ideal transaction profiles. Non-Qual, Mid-Qual and
Qualified Rates should be clearly defined in your Merchant Agreement with your
MAP. Typically, you are charged extra (sometimes up to 1% more!) on
transactions that are not run through the AVS system, that aren't settled
within 24 - 48 hours (time may vary per bank), or are NOT a standard consumer
credit card (meaning additional charges probably apply if the purchase is made
with a corporate card, foreign cards, or others). IntelliPay™ automatically
settles your transactions within 24 hours, and runs AVS on all your
transactions from U.S. based cards automatically, but you must understand your
merchant accounts requirements on Non-Qual rates.
Retrieval Request Fee:
If you request research on a past transaction your MAP may charge you a fee to
research their data stores and create documents for you. $10 - $25 per
Also called an Application Fee. Can range anywhere from $50 - $300. Often
refunded if application is disapproved.
Some MAP's charge a statement fee to itemize, print and ship your monthly
A merchant account flat fee assessed for each transaction you run. Typically
$0.15 to $0.35 per transaction.