Basics Behind Internet Merchant Account

Merchant Warehouse |

December 10, 2010

Look for “Internet Merchant Account” with any good search engine and the results will run into the hundreds of thousands. If you need to accept credit card payments in your web-based business, your choice of service provider is seemingly limitless. The company you select, however, will be privy to your finances – as opposed to your stationery supplier or shipping box vendor – so it is wise to think of it as a partner, and a very important one at that.

Before you take on such a partner, you need to understand the different steps and activities of Internet credit card processing. Once you know what to look for in a merchant account provider, you will be able to make an informed decision.

The Basics

Processing the credit card purchases of your online customers actually requires multiple components and a number of steps. Between the time your customer hits the “Buy” button and the funds end up in your bank account, certain things happen in a certain order. The entire process depends on a stable infrastructure with three major components: your website, your Internet merchant account and the payment gateway.

Regardless of which merchant provider and gateway service you choose, your website will have to integrate with your service provider network. At the very least, account providers will include detailed instructions for “site integration,” and in the best-case scenario they even handle the “tech stuff” for you.

The second component in this high-tech infrastructure is your Internet merchant account. Specifically, this is the account that you have with a financial institution or bank that enables you to accept credit card payments from your customers. Most local (“community”) banks do not provide Internet merchant account capability, but don’t forget how this article started – there are many thousands of places for you to get such an account.

Finally, the payment gateway will transmit a customer’s order to and from your Internet merchant account provider. The payment gateway accepts the customer billing information (credit card type, card number, expiration date, payment amount, etc.) and commences the required validation steps that must be fulfilled prior to the credit card being billed.

Counting the Cost

Most small and/or local financial institutions do not provide online merchant accounts because transactions done on the Internet are completely different from POS (Point Of Sale) transactions where signatures are required to authorize purchases. Online transactions, therefore, are much more vulnerable to credit card fraud. Fraud protection, then, should be one of the primary considerations when you start counting the cost of getting an Internet merchant account. Of course, there are others, as well.

It can be a bit tricky to calculate the actual, total cost of your merchant account. And don’t forget, there are just as many merchant account providers as there are people looking for accounts, so it’s a “buyer’s market” – ask questions, nail down the actual figures and, by all means, be picky. Typically, an Internet merchant account will have the following costs:

  • Up-front application fees
  • Ongoing fixed fee
  • Discount rate
  • Fixed transaction fees
  • Termination fees
  • Miscellaneous fees

We will briefly consider each of these costs, beginning with the up-front application fees that some providers require for new accounts. In theory, the fee will cover the initial costs of processing your application in case you choose not to open the merchant account, after all. Although ubiquitous at the beginning of the World Wide Web era, and still common enough, these fees are now often waived. With such a selection of providers, and the ultra-competitive nature of the business, it should be no trouble at all finding a provider that eschews an application fee.

Most every Internet merchant provider requires a monthly (“ongoing”) fixed fee, often referred to as a “statement fee.” In fact, it is simply another indirect way to cover costs. It’s a popular one, too, so it may be quite difficult to find a provider that doesn’t require this monthly stipend. You can shop around, but you will not likely find any provider who does not charge at least $10-25 monthly for this monthly statement fee on your account.

The discount rate is, simply, the sales commission that your account provider earns on each of your sales. Simply put, if the discount rate is 3% and you make a sale on your website of $50, you will owe $1.50 to your Internet merchant account provider. Another small fee, usually between 20 and 30 cents, is the fixed transaction fee that, unlike the discount rate, is the same for every transaction. Whether the sale is for $1 or $100, the transaction fee stays the same.

Some Fine Print, Too

Somewhere toward the end of your contract – every word of which you need to read and understand – there may be some verbiage concerning a “termination fee.” This charge can apply if you cancel your account within a certain amount of time (usually six months or a year). Be careful here, as some account providers require three-year commitments.

Finally, there may be other miscellaneous fees that you may only become aware of by reading the contract carefully and completely. Some of these special fees may apply on an occasional basis, some on a continuous basis, and it is your responsibility to find out which are which. One fee that is commonly charged is for refund processing, and it is a serious chunk of change, too. If a customer requests that a refund be credited to their credit/debit card, some merchant providers charge you as much as $10 to $20.

Here is a fairly elementary formula you can use to determine what an Internet merchant account will cost your business on a monthly basis.

Total charges = Statement fee + Number of transactions x (Average sale x Discount rate + Fixed transaction fee) + (Number of chargebacks x Chargeback fee)

For example, let’s say you sell Authentic Geegaws for $10 apiece. You make 100 sales per month, an average of five people request refunds (“chargebacks”) and your Internet merchant account with Smith & Jones has the following terms:

  • Discount rate: 2.5%
  • Statement fee: $10
  • Fixed transaction fee: 30 cents
  • Chargeback fee: $15

Using our formula, your monthly account charges are:

Total Charges = 10 + 100 x (10 x .025 + 0.3) + (5 x 15) = $140

You calculate monthly sales revenue, of course, by multiplying your sales volume by unit price. Therefore, your monthly sales revenue in this scenario is $1000 (100 x $10), and your Smith & Jones Internet merchant account is costing you 14% of your total sales.

Making the Decision

Before choosing an Internet merchant account provider, your really must understand all of the costs, procedures and processes involved with using the account. More than many other business decisions, this is one that you must be fairly certain about, since setting up an Internet merchant account takes a bit of time and is not something you can change willy-nilly, any time you’re flustered or frustrated.
You can use your current and/or projected sales data to forecast, at least roughly, what your monthly merchant account costs will be. As with anything else in life and business, planning ahead will save you time and money. And, as you continue to build your relationship with your account provider over time, you will further refine your online sales efforts as well as your forecasting and cost control. Your account provider most likely has much more online savvy than you do, so take all the help you can get. That’s what partners are for, right?