Merchant Account Basics: Credit Cards Processors

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.??
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

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