Merchant Account Basics -
Credit Cards Processing
Did
You Know?
U.S. Credit Card Penetration Rate: 81% of Households
have at least one credit card
This
article is provided for information purposes only. The terms
and conditions of your merchant account are between you and
your bank or merchant provider, and should be consulted for
specific information related to your merchant agreement with
your bank or merchant provider. A merchant account is a special
account with a bank that is a member of the Visa and MasterCard
associations. Such a bank has been certified by Visa and MasterCard
associations and can provide you, the merchant, with all of
the services related to your merchant account. Once your merchant
account is setup and "live" on the credit card system,
you can accept credit cards from customers generally as follows:
- A customer
presents their credit card for payment
- Using
their credit card number, you submit an electronic request
to the processing network for "authorization to capture
funds" from the cardholder's credit card account in
the amount of the purchase. Traditionally, one would submit
this request by swiping a credit card through an electronic
transaction terminal provided by the bank.
- The processing
network immediately receives your electronic request and
determines if the cardholder's account is valid and if the
funds are available. If they are, the processing network
returns an electronic response to your terminal or computer.
This response is called an "authorization code",
and is your guaranteed authorization to capture the funds.
Typically, this code is a six-digit number. The transaction
and its associated authorization are stored in a "batch",
where other transactions for that day reside.
- You print
a receipt for the customer using the electronic terminal
or your computer and the customer signs the receipt. As
far as the customer is concerned, the transaction is complete.
As far as you the merchant are concerned, there is one more
step to complete the transaction.
- At the
end of your business day (usually), you submit a final request
to the processing network to go ahead and "capture
the funds" that you obtained authorizations for during
the course of business that day. This is called "settlement"
or "settling your batch". This request is also
submitted using the electronic terminal or your computer.
The processing network immediately receives your response
electronically and determines if the capture amounts contained
in your request match the authorizations for each item.
If so, the request is granted and an "Accepted"
response is returned to your electronic terminal or computer.
A settlement report can be printed showing the grand totals
by card type (Visa, MasterCard, American Express, Discover,
etc) for the settled batch. Note: any corrections to your
batch, such as voiding a transaction, must be made prior
to settlement.
- Within
48 to 72 hours (usually), the funds associated with the
batch you settled are deposited electronically into your
business bank account. Typically, the discount rate you
pay to your merchant account provider are deducted from
the deposit before it transferred to your bank account,
resulting in a "net deposit" of funds.
- At the
end of the month, your merchant account provider will mail
a statement to you, detailing the credit card activity for
the month and the associated fees you have been charged
for such.
Understanding
your merchant provider's rates and fees
All banks and merchant providers require "transaction fees"
from you for accepting credit cards. Typically, these fees are
broken down into 3 categories: a discount rate, a transaction
fee, and monthly fees. For the bank's purposes, a transaction
is usually defined as any communication between you and the processing
network. A "credit" transaction is treated the same
as a regular transaction. Settling a batch is usually considered
a transaction as well, as it involves communication with the processing
network.
Discount
Rate
This is the percentage of the total transaction amount that
the bank will usually deduct prior to transferring your deposit
into your bank account. Typical discount rates range from 2.5%
to 5%, depending on your type of business and other factors.
A higher rate may be charged on individual transactions if the
transaction doesn't conform to certain qualifications, as described
by your bank or merchant provider. For instance, accepting a
"Visa Business Card" credit card may cost you 1% more
than regular transactions. The reasons for these non-qualified
transaction surcharges and complete details on all transaction
qualifications should be discussed with your bank or merchant
provider. Address Verification (AVS) may also fall into this
category when not used properly. Address Verification (AVS)
is described below.
Transaction
Fees
This is a flat amount that you pay for each transaction. Typical
transaction fees range from 30 cents to 50 cents per transaction.
Monthly
Fees
- These
are fees charged for other account related services, such
as customer service, your monthly statement, network access
fees, and minimum monthly fees.
- All the
fees and charges are required to be disclosed to you prior
to your commitment to the merchant agreement between you
and your bank or merchant provider, and are usually enumerated
carefully to you in the merchant agreement itself.
Merchant
Accounts Introduction
Credit card processing can be a confusing subject. Before you
jump in with both feet lets give you an introduction; What merchant
accounts are, what information is needed to obtain your merchant
account and rates/fees involved.
What
Merchant Accounts are?
A merchant account is a special account that is setup for a
business to accept and process credit card orders. After processing
a customers credit card the transaction goes through a series
of complex stages. The money transferred through the merchant
account is then deposited into the business's checking account
within 2 to 3 business days.
Requirements
for Merchant Accounts
Getting important information together ahead of time will ensure
that you breeze right through your merchant account application
process. Here's what you may or may not (depending on the provider)
need in order to obtain your merchant account:
1-
Business checking account (some providers set you up with
one)
2- A copy of a voided check (if you use your own business
checking account for funds to be deposited in)
3- Articles of incorporation, business license or reseller
license. (A 'Certificate of Assumed Name' from your county
Register of Deeds office may be all that is required. These
only cost around $8.) The purpose of this is to prove you
are a legitimate business.¾
4- Pictures of business office and location (this extra step
can save you money in credit card processing costs)
5- Have a web site (if you want real-time processing)
6- Photocopy of your return policy information
7- Provide trade references
8- Photocopy of recent tax returns (may or may not be needed
depending on monthly sales volume you expect through your
merchant account)
9- Site inspection (have a photographer come in and take pictures
of your inventory). Only a handful of providers still require
this.
10- A photocopy of your drivers license
Explanation
of Credit Card Processing Solutions
In order to process credit and debit cards through your merchant
account, you need to decide which processing solution is right
for you.
Retail
Swipe Terminal - This particular solution is for retail
and storefront merchants who see their customers face-to-face.
This type of solution incurs the lowest merchant account processing
fees since you actually are able to swipe the customers credit
card through the terminal. It is believed that orders that are
swiped have a lower fraud risk, hence the reason for the lower
processing fees.
Real-Time
Processing - This is the solution for businesses on
the Internet. Real-Time allows you to automatically process
credit card orders through your merchant account with no assistance
needed on your end. Everything is automated, and the funds transferred
into the merchant account, from the cardholder, is deposited
into your business checking account, within a few days. All
Real-Time solutions are secure and the purchase of a secure
certificate is not usually required.
Virtual
Terminal - If you are a merchant on the Internet and
expect to receive orders via phone, fax or mail then getting
a Virtual Terminal solution (along with a Real-Time processing
solution) is the best route to go. The Virtual Terminal is a
secure website where you login and manually type in a customers
credit card information. Once the information is submitted,
it is securely processed and funds are then deposited into your
merchant account within a few days. A Virtual Terminal can be
accessed securely from any computer connected to the Internet.
Most all Real -Time processing solutions also come with a Virtual
Terminal at little or no additional cost. Virtual Terminals
can also double as good mobile processing solutions
