Merchant Account Terminology
The aim of this article is to explain some of the more common phrases and words used by merchant account providers so you can understand exactly what they’re talking about when you’re shopping around.
The settlement time is defined as the length of time between a credit card being charged by your company and the time you actually receive the money in your business account.
This can be anything between virtually instantly in extreme cases to over 3 months with high-risk businesses or poor quality merchant account providers.
Most good quality merchant accounts should have a settlement time of 2-3 days. Third-party processing companies will generally take 2-4 weeks to send you your dues.
Also consider the format of payments – are they deposited directly into your bank account or are you posted a check? The first option usually costs a little bit more (many companies offer you the option) but there’s one less thing to worry about – and there’s no delay in waiting for checks to clear.
Settlement time is an important consideration because the sooner you get hold of your money, the sooner you can reinvest it (or enjoy it!), so the faster your business can grow.
The discount rate is the percentage of each transaction that gets taken by the merchant account provider and can range from 2% for your own merchant account to over 10% for third party processors.
In general therefore, you’re looking for the lowest discount rate possible.
However, these fees aren’t as black and white as they may first appear and you should bear in mind that a higher discount rate may be worth it if other services (shopping cart, digital delivery software etc.) are included free of charge.
As this is a charge based on each transaction, the amount you pay is directly related to your sales meaning far lower risk than high fixed monthly fees.
Most proper merchant accounts will charge a monthly fee for upkeep of your account, technical support, shopping cart and payment gateway fees etc.
This is normal and nothing to worry about – the question is what do you get for your money?
Conversely third party processors rarely if ever charge any monthly fee – instead they make their money with higher discount rate fees.
These two factors – discount rate and monthly fees are probably some of the most important points to consider when choosing a merchant account.
Monthly fees must be paid even if you don’t make a single sale, but as business grows, a merchant account with monthly fees but a very low discount rate will usually mean you take home far more profit at the end of the month.
So try to think where you’d like to be in 6-12 months time down the line and get a merchant account for that situation – swapping providers whilst running a busy and successful business can be a nightmare!
Reserve funds are money kept back by the merchant account provider as "insurance". For example if you were to have more refunds than sales one month then money would be deducted from this fund to cover these expenses. For an intelligent, ethical business you should rarely if ever need to dip into these funds.
In general there are three features to consider here.
Firstly the fund can be built up in two ways. Either an upfront lump sum on acceptance of your application, or secondly as a smaller amount deducted monthly.
Generally paying a smaller amount each month will enable you to get off to a faster start as your capital can be used for marketing and thus growing your business, rather than being tied up in a reserve fund.
The second consideration is how long it will take to get your money back (if at all). Will you start getting it back after a month, six months or when you cease trading? Clearly the sooner you start getting your money back the better it is for you.
The last point to look at is how large the reserve funds account should be. Will you be paying into it for ever more? Or in 6 months time will the money start to filter back to you?
Remember that in general, a smaller sum paid monthly and returned fast is what you’re looking for.
A processing limit is how much money you can take with your merchant account. It’s usually based on a monthly turnover and may affect the "ticket price" you can charge (the price of each product) and the monthly cumulative turnover.
In most cases this feature has little bearing – if you’re a small business selling items up to $100 then you’re unlikely to need to worry about a limit in the tens of thousands. However for merchants selling high priced items (jewellery, cars, investment courses etc.) it’s definitely well worth looking into.
Chargebacks are an unpleasant but commonplace situation when trading on the Internet. If you operate carefully you shouldn’t encounter too many but high-fraud businesses like online casinos can suffer severely.
A chargeback is defined as the situation in which a customers credit card is charged, and then the customer claims not to have received their product.
Perhaps they received the CD but you don’t have any proof of the fact that it arrived so they demand a chargeback. Maybe a criminal used their card fraudulently to buy a subscription to a porn site.
Maybe they just don’t recognise the charge (as can happen with third-party processors – they bought something from Ace Investments but there’s no sign of the charge on their credit card bill – just a charge from an unknown "Clickbank".
I have experienced this first hand with complaints about not having bought anything, until we checked our records and let them know the product and the day.
Usually, the customer remembers and apologises but it’s still a waste of both your times. So if you are going to use a third-party processor make sure you remind each and every customer by email after their purchase what name will appear on their credit card bill.
It may not happen to you often, but you can bet your bottom dollar but in the end it will happen.
Check what additional costs there may be. Some merchant account providers charge you extra for the use of their payment gateway, others will include it.
Some will charge a monthly statement fee, others won’t.
In closing I’d just like to reiterate a few points. Firstly, decide on whether a smaller monthly fee or a larger initial lump sum would be better for your business.
Some business owners (myself included) would rather pay upfront then have nothing to think about from then on. Once you’ve paid you’re set up for life and if you have a lean month you don’t have to worry about paying the monthly merchant account fees.
In the long run it will often result in higher profits as you don’t have to shell out cash every month.
Others prefer the idea of a small, monthly charge to spread the payments over time.
Once you’ve decided which model you prefer, it’s simply a matter of weighing up the factors outlined in this article – the most important of which are the discount rate and the fixed monthly fees.
Try to find the best service for the lowest money.
Then… the sky’s the limit.