credit cards

Merchant Account Providers-2

Merchant Accounts & Controlling Costs - Part 2

Chargebacks & Fraud

As we talked about last week, it is important to be aware of possible fees associated with your merchant account provider (MAP). One of the most significant "gotcha" moments occur when chargebacks or disputes are initiated by a customer with their card-issuing bank. Before choosing a particular MAP know what security measures they have in place, attached fees, if any, and recourse available if credit card fraud were to take place. Even if chargebacks arise, you can still win a dispute and retain the funds of the sale if you complied with the credit card's established criteria. Business owners are still liable for associated chargeback fees, generally about $25.

While some chargebacks are beyond your control, you can take certain precautions to try to reduce their frequency. It is easy for you to exercise some fraud preventative measures such as: verify the authenticity of purchases when possible, exercise caution with certain International orders, have a liberal return policy giving direct contact info so they will contact you first rather than opening a chargback or dispute, match the customer’s billing address with the address listed on the cardholder’s account and verify codes on the card, ensuring that the customer is actually the same person as the cardholder. Finally always be aware of the latest credit card theft and fraud scams as well as monthly track all the details concerning credit card purchases.

3-Tier Pricing Program

When obtaining a merchant account, many business owners are not informed of Interchange rates which are fees the merchant or acquiring bank pays to the card-issuing bank for each transaction. Instead, the merchant is presented with a single base rate known as the “discount rate” which can be anywhere between 2 to 4 percent of the transaction.  Most MAP’s generally showcase a very competitive “discount rate,” especially those that do not disclose other, higher processing fees. The “discount rate” (also known as the qualified rate) has two less popular sidekicks, the mid or partially-qualified rate and the non-qualified rate. This is where the 3-tier pricing program comes into play.

The 3-tier system is a means to simplify the 125 plus (and growing) interchange categories that have different fees attached based on such factors as type of credit card used, how the card is processed and the nature of the merchant’s business. Instead of applying over 125 plus different fees, the fees are categorized into one of three tiers, Qualified, Mid or Partially-Qualified or Non-Qualified. Once placed into a particular tier, the fees are averaged out with a margin added. This is essentially how a fee is derived for each tier.
  • The qualified rate (discount rate) is the best rate available and the one usually quoted by most merchant account providers.
  • The mid or partially-qualified rate is higher and includes transactions that are keyed in (not swiped), even swiped transactions where the customer uses certain rewards cards and transactions that are not batched out within 24 hours after a sale.
  • The non-qualified rate is the most expensive of the three rates and includes transactions that do not fall under the qualified, mid or partially-qualified rate such as International, government, corporate or particular consumer rewards cards. A transaction can also be downgraded to this rate if the Address Verification System (AVS) is not used, an AVS mismatch where the customer’s billing address does not match the address associated with the customer’s card, or a transaction is not batched out within 48 hours after a sale. 

Fees can vary dramatically, so before selecting a MAP (if you have not done so already) make certain to know not only the discount rate, but also the mid/partial and non-qualified rates. In addition, ask the MAP if there is any way to avoid credit cards from downgrading to the more expensive tiers.

Interchange Pricing

Within the last few years, a new pricing program has evolved that in many instances would be more cost efficient than the more widely used “3 Tier Pricing” model. Simply known as “Interchange” Pricing, this newer pricing scheme involves taking the “real cost” charged on each card type (the Interchange rate), plus a “set profit margin” negotiated between the merchant and the merchant account provider.

Why would this pricing scheme be less expensive in the long run?
In most instances, the Interchange Pricing scheme is more cost efficient than the 3-tiered model as long as the established markup isn’t substantial, negating any potential savings. It is imperative that you look at your customers’ payment preferences. If most of your transactions fall under the qualified rate – and your discount rate is stellar – then the 3-tiered model may be the most cost efficient alternative for you. However, if a fair proportion of a merchant’s sales fall under the mid/partially to non-qualified rates, then using the Interchange Pricing model would be substantially less.  Please note that more and more credit cards, particularly rewards cards, are downgrading so it’s likely that you’ll need to “upgrade” to a better pricing model. Also, don’t make the assumption that the Interchange Pricing model is reserved only for large companies. Small businesses can also benefit. It’s just a matter of locating a merchant account provider that will work with you. There are so many merchant account providers to choose from that you should settle for nothing less than the best pricing scheme for your business, no matter its size.

MAP Checklist

Before you begin auditioning different MAPs, it would be wise to first construct an outline of what to look for in a merchant account provider to make your search easier. So, what are some of the main attributes you should look for in a merchant account provider before signing on the dotted line? The most critical ones are as follows:

  • Full fee disclosure: At first, it can be quite mind boggling trying to decipher the various fees that go hand-in-hand with a merchant account. However, make certain that the MAP takes the time necessary to go over each and every fee that would pertain to your account. Are credit cards accepted both online and offline? What additional fees are involved if I accept both online and offline credit card charges? Become knowledgeable regarding the various fees associated with a merchant account, such as yearly, set-up, application, batch, gateway, AVS, monthly minimum, statement, support, cancellation, discount, per-transaction, gateway access fees, card reject, termination and mid/partially and non-qualified rates or interchange rates so that you can ask informed questions and get straight answers in return.
  • Affordable rates: By becoming knowledgeable concerning the different merchant account fees, you would then be better able to compare and contrast proposals. What are the different discount rates and fees for different types of charges (internet, in person, telephone, mail, etc.)? Gain additional negotiating power by asking for sample contracts from each of the MAPs you audition to compare their terms and rates. Also, various fees can be waived without jeopardizing quality. Will a MAP work with you to make credit card processing affordable by waiving a few unnecessary fees such as setup, application, installation or batch fees for example?
  • Complete, reliable product line: For example, for on-line transactions, it is mandatory to have a payment gateway. If you conduct business over the internet, you want a gateway that is secure, incorporates numerous fraud-preventative measures, is compatible with most shopping carts and experiences few hiccups or little “down time”. Better yet, there are also merchant account providers that offer customers a virtual terminal and a shopping cart. Make certain that you are quoted a total monthly expense, as some MAPs do not include the gateway into their monthly fee. Can online payments accept cards other than Mastercard and Visa (Discover, American Express, Diner's Club, online checks, debit cards, etc.)? If so, what are the fees and is anything needed to 'activate' those payment methods? Are purchases processed manually or automatically? If manually, is it possible to get automatic processing? Are separate authorizations or permissions needed when setting up an account for different types of transaction (internet, retail, phone orders, etc.)? Is any additional hardware or software required? If so, what is the cost and how do I get it? Retail business owners should look for MAPs that have value-added products such as a gift card program, electronic check processing, check guarantee, etc.  Even if you are not initially interested in such services, you may decide to change your business model in the future, especially if a MAP offers these programs at an affordable rate.
  • Reputation: You want a MAP with a stellar track record. Perform an on-line search to see if there are negative comments posted concerning the provider. Also, check with the Better Business Bureau to note if there have been numerous complaints made. Taking time to thoroughly investigate the background of a promising MAP could potentially save you a lot of headaches down the road.
  • Honesty: When auditioning different MAPs, it would be wise to heed the sage advice, “If it is too good to be true, it usually is”. Don’t be fooled by suspiciously low fees/rates. If a MAP is offering rates that are well below those of other MAPs, it is safe to bet that they have hidden fees. MAPs are running a business, not a charity. If you think you’re getting something for nothing, you are either getting nothing in the way of customer service or something in the way of hidden fees that may end up costing you a bundle.
  • Five-star customer service: Is the MAP friendly upon first contact? Do they take the time to answer all of your questions without you feeling rushed or that you are being a burden? First impressions are everything and if they can’t get this right, it is doubtful that they will provide exemplary customer service after you become a client. Also, make certain to inquire about their customer service and technical support practices, toll free customer service number and hours.
  • Stands behind their word: This goes hand-in-hand with reputation and honesty. You should be able to secure a 100% money back guarantee on any initial outlay of money (i.e., set up or application fees) to ensure that everything stated by the MAP holds true if you were to become a customer. A reputable and honest MAP would not balk at this request. If they do, it should send up a red flag to look elsewhere.

Starting a merchant account can be a little daunting. However, if you become knowledgeable before you begin your search, you would be in a better position to negotiate, not to mention, you will be getting the best deal possible. Also, remember not to become fixated on cost alone. Customer service as well as the reputation of the merchant account provider is just as important. Ask these questions and establish a mutually comfortable relationship with your Merchant Account Provider from the start. It will help you avoid "traps" and lay the groundwork for a long, solid partnership.

Sources: Andy Lax via Bobette Kyle via

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Merchant Account Providers

Merchant Accounts & Fees - Part 1

Has your business grown to the point that you can no longer put off accepting credit card payments? Do you have an existing merchant account, but still have questions? Or maybe your company is establishing an online presence, making it essential to accept plastic. Regardless of the reason you must have a merchant account, which entails choosing a merchant account provider (MAP).

The most important thing you can do is to make it easy for potential customers to purchase your goods or services. One way is to allow them to use plastic.
If you are not currently accepting credit cards? Are you worried about the fees involved? Or is this unfamiliar territory a little too daunting? Whatever the reason, you need to take the plunge and accept credit cards to maximize sales.

First, paying by credit is the preferred method of today’s consumers. Do you have an on-line business? If the answer is “yes”, then accepting credit is even more critical as 88% of internet shoppers use credit for on-line purchases. 
Accepting plastic will far outweigh the fees involved in setting up a merchant account. There are hundreds from which to choose, so take the time to compare setup charges, equipment expenses, discount and transaction fees, etc.
You will also find that the charges and services provided will depend on the way you plan to accept plastic, your monthly sales, your business profile and the provider you select.

Accepting plastic by some estimates can increase your sales 20% - some even say as high as 400%! It will also give your business an aura of professionalism. Your small business must be current and in step with the times. If it appears outdated, you may relinquish any advantage you have over your competitors even if your goods or services are superior!

You are giving your customers a choice regarding their payment options when you accept credit cards. This will build confidence in your establishment and lead to repeat sales. It has also been shown that those who use credit cards make more frequent purchases than those who pay in cash. Even the amount in a given credit card transaction tends to be larger than if cash is the coin of currency as it is more difficult for people to part with cash than to sign a receipt or punch in their credit card information.
Accepting plastic also ensures your customer’s ability to pay. It takes only seconds to verify if funds are available and the money is deposited in your account.

Fees That Go Bump in the Night

When considering different merchant account providers, for in-person terminal use or on-line transactions, it is critical to know their language. So let's talk their language - don't worry, translation follows.

  • Application/Set Up Fee: Some merchant account providers charge a fee to defray its cost in underwriting applications and opening an account. However, many providers skip this fee altogether, so search around. Some providers claim to have no setup fees but then charge for the gateway, using semantics to their advantage.
  • Monthly Statement / Support / Service Fee: This is a monthly fee of approximately $10 to $15 charged to your account for these services. Your merchant account provider should provide you with a toll-free number for full back-up support and assistance when needed.
  • Annual Fee: The same as credit card accounts, merchant accounts also charge for running your account throughout the year.
  • Discount Rate: This term may be confusing as I’m not sure where the “discount” comes into play, but I digress. The discount rate is the merchant account fee that is charged on credit card transactions. It is important to know that on-site transactions (swiping cards) are less expensive than purchases made online or when credit card numbers are inputted manually. You can expect, on average, a 2.5% discount rate for online purchases.
  • Transaction Fee: This is the cost incurred when a transaction takes place and is usually linked with the discount rate. When checking out various merchant account providers, you may note an equation that looks something like this:2.5% + 30 cents per transaction. This indicates a discount rate of 2.5% and 30 cents charged for each transaction. One little note of fact is that a transaction fee is charged regardless if the transaction is approved or not. So with every swipe of push of the submit button, a fee of usually between 20-30 cents is charged depending on the type of sale.
  • Address Verification Service Transaction Fee (AVS): If your plans include on-line sales, it is required that you have an AVS system. This is a fraud preventative measure that checks the customer’s billing address with the address noted on the credit card. Fees average 5 to 10 cents per transaction.
  • Internet/Payment Gateway Fee: This fee applies if you will be using an Internet payment gateway instead of software or a terminal. This is usually a fixed fee of approximately $15-30 per month and billed through your merchant account or directly from the gateway provider. Some gateway providers charge an additional gateway transaction fee that normally runs 5 to 20 cents per transaction.
  • Software Fees: This is often billed for the use of payment gateways.
  • Voice Authorization Fee: There will probably be a point in time where your normal method of taking credit card payments is experiencing a glitch or the occasional hiccup. In such cases, it may be necessary to use the phone to complete a transaction. This fee normally ranges between 75 cents to $1.50. This fee will only apply on rare occasions (at least let’s hope so).
  • PIN Debit Transaction Fee: When debit cards are used for purchases and PIN numbers need to be entered manually, this fee will apply. This fee is normally a flat rate (no discount percentage added) and runs around 70 cents.
  • ACH, Daily Discount or Batch Fee: Once your business day has ended, your total sales are normally transferred into your bank account. There is a fee for this service that ranges between 5 to 50 cents. If no transactions were made on any given day, this fee should not be charged to your account.
  • Monthly Minimum Fee: This is a fee that is charged if you do not meet the monthly minimum amount stipulated in your contract. For example, if your monthly minimum is $25 and you only accrued $20 in fees for a given month, you are required to pay the difference of $5.
  • Surcharge / Partially or Mid Qualified / Non-Qualified Fees: This fee usually ranges anywhere between 0.5% to 2.5% and are dependent on the type of credit card used such as company credit cards, debit cards, rewards cards, government cards and those used internationally. Rewards cards, for example, typically downgrade to mid or non-qualified rates that can be much higher that the quoted qualified rate.  (Do you think Visa and MasterCard are the ones who truly pay for these rewards?)  Consequently, if you are quoted only one rate, ask for the other tiers. So, when speaking with merchant account providers, get clear answers regarding these fees before signing on the dotted line.
  • Reprogramming Fee: If you need to update a portion of your transaction set up, a fee will be applied to cover the cost of reprogramming both your hardware and software.
  • Chargeback / Retrieval Fee: In this day and age of credit card scams, fraudulent transactions and disputes made on sales, merchant account providers want to recoup on the time spent to resolve these issues. This fee usually runs around $25 and is only applied if a dispute arises. What you need to be aware of are additional chargeback/retrieval fees not brought to your attention before enlisting the services of a MAP.
  • Cancellation / Termination Fee: Since there are fees involved in setting up a merchant account such as administration costs, credit checks, server maintenance, etc., many merchant account providers have a fee in place should you decide to close or cancel your account. Depending on which provider you choose, this fee may be based on the length of time you have remaining on your minimum account period or your monthly average fee. Be leery of variable instead of fixed termination fees. Many providers waive this fee.  Before choosing a merchant account provider, know the specific details, as this could potentially cost you.
  • Hidden/Junk Fees: It is a common practice among some merchant account providers to not fully disclose all fees that will apply to your account. These can catch you off guard so it is critical to know what hidden fees to look out for. One prime example would be an excellent introductory rate. It seems almost too good to be true, but after several months you notice that your rate has doubled. Another example of the old “bait and switch” would be providers who offer outstanding rates on certain cards, but turn around and attach exorbitant fees to others. Other examples of hidden fees would be PIN debit transaction fees that are charged when debit cards are used for example. Begin by knowing what merchant account providers have up their "fee sleeves" so that you will not become their next unwitting victim.

These are just a few of the fees that may apply to your merchant account. None of these fees are necessarily without merit. However, the problem lies in not receiving full disclosure before signing a contract. There should be no surprises when you open your first billing statement from your merchant account provider.

In closing, I should state that there are hundreds and possibly thousands of merchant account providers who run their business with honor and integrity. If interested in a listing of the major U.S. merchant account providers, please see here

Sources: Andy Lax via StartupNation

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