About Merchant Accounts

Successful merchants accept credit cards as another payment method for the convenience of their customers, to increase sales, to speed up cash flow and to reduce risks of extending credit to buyers that don’t have ready cash, or when a cash transaction isn’t possible or desirable.

Customers use credit and payment cards because: They might not be carrying enough cash, they don’t have enough cash and need to use credit with smallish monthly payments, credit cards come with shopper protection against merchant fraud usually guaranteeing them coverage after the first $50 or so. In the case of payment cards like American Express, they get the convenience of a non-cash transaction with good reporting on their statements.

Also, in today’s Internet economy, approximately 92% of all online purchases are made with credit or other payment cards!

IntelliPay™ can provide IntelliPay™ clients referrals to specific merchant account providers that suit your individual needs. It’s important to use a provider that understands your business.

What is a Merchant Account?

A Merchant Account is a contractual relationship a business has with a bank to allow acceptance of buyer’s purchasing cards and credit cards for payment.

The bank that approves you for a merchant account is called an Acquiring bank (Acquirer) – they acquire your money for you. Acquirers must be member banks of Visa Association and/or MasterCard Association to process Visa or MasterCard payments.

A Merchant Account is NOT a business checking account, however, you must have a business checking account for the merchant account to deposit money from your credit card sales.

Your merchant account must come from an association member bank and can be originated by the bank directly, or more likely, through one of their sales agents which are sometimes called Independent Sales Organizations (ISO’s) or Merchant Service Provider’s (MSP’s).

Types of Merchant Accounts

There are two basic types of merchant accounts.

A Retail account is merchant account that is approved for use in a physical store where the cardholder and the card are present. Typically the merchant swipes the card through a card reader to get your card numbers so this account is sometimes referred to as a “swipe” account or “cardholder present” account.

Retail accounts are the least risky type of account and therefore the merchant account provider charges the merchant must less than the riskier “card not present” type of accounts.

A “card not present” account is also called a Mail Order – Telephone Order (MOTO) account. This is the account used by mail order companies, anyone accepting phone orders or any other system where the merchant can’t physically see the card and/or the cardholder. Currently this is the type of account used for Internet Businesses accepting credit cards online.

Because there is increased risk for charge backs and fraud with MOTO accounts, merchant account providers always charge the merchant higher rates and fees for this type of account.

Getting Approved for a Merchant Account

Banks view merchant accounts much like they do a business credit line that you might apply for. The bank has some risk in approving you for a merchant account because if you receive some payments, then go out of business or can’t cover refund payments, the bank must cover any of your customer chargebacks. Your business has this chargeback risk normally.

When the bank is reviewing your application and documentation, they are deciding how good a risk you and your business are based on their potential losses from your account.

One of the many reasons credit cards are so popular is this cardholder protection feature of being able to charge back an undelivered or unfulfilled purchase. As a cardholder you know you have recourse and won’t have to pay for something you didn’t receive, or for other reasons. In order for this feature to work, the merchant must assume the chargeback risk, and the bank must guarantee this risk if you cannot.

Some factors merchant account providers (MAP’s) are looking at include, but are by no means limited to;

  • credit ratings
  • business maturity
  • business financials
  • quality of personal guarantees for some applicants
  • credit card volume requested
  • average ticket size
  • business type
  • whether the account will be for a physical business where cardholder will present their card personally (“card present”, “cardholder present”), called a “retail” or “swipe” account, or
  • the cardholder will phone or fax in the card number data (“card not present”, “cardholder not present”), called a Mail Order/Telephone Order (MOTO) account.

Additionally, the MAP is underwriting the type of business you’re in and the type of products you sell. If you get approved to sell widgets and later switch to PVC fasteners or consulting, you technically are in violation of your original merchant account agreement. While this may seldom be a fatal problem, you should still contact your MAP and make arrangements to modify your original agreement to include these new products or services. This may cause your MAP to re-evaluate your risk factors, rates and fees.

MOTO accounts are intrinsically riskier than retail accounts primarily because additional positive ID can’t be obtained to assure you and the credit card system that the person giving you the card is really the cardholder. Because of this increased risk the fees banks charge for MOTO accounts are higher than a retail merchant account incurs.

At this time, all MAP’s view Internet businesses as MOTO accounts and charge higher fees. These accounts are under constant monitoring to determine if these businesses represent higher or lower risk than normal MOTO accounts. Someday, there could be a third type of merchant account; retail, MOTO and Internet.

Conditional Approvals

Acquirers or their agents will sometimes approve your application if certain additional conditions are met. Usually, these conditions have to do with helping offset risk the MAP thinks exist with your business.

One of these conditions might include a security deposit they can access if you can’t cover account losses. This deposit can come in many forms; cash deposit, a “rolling reserve” where the bank accumulates a percentage of your credit card revenues until a deposit target is reached, or funding only a percentage of your credit card revenue for a certain time period, holding back the balance, to “age” your account to assess chargeback volume, frequency and your behavior.

These deposits, holdbacks or reserves can often be negotiated, but not always. If the provider insists on some form of reserve and you can’t or don’t want to tie up capital, you might be able to negotiate a more palatable form of deposit such as the holdback method or change your application to a lower volume request. In most cases, you can simply ask them what your alternatives are.

Bank Approvals vs. ISO Approvals

Banks, because of regulations and other needs, are historically very risk averse. They must act with due regard to their depositors. The risks they can take are very limited. We want our banks that way! We want them to not take risks with our money on deposit in their bank.

However, because of these requirements, they often decline a high percentage of merchant account applications except for certain low-risk accounts, or for applicants that are large depositors and have other significant business relations with the bank.

The banks’ contracted agents, ISO’s and MAP’s, step into this gap and take some or all of the risk from bank. This allows more merchants to be approved, many more. Some ISO’s approve up to 98% of all applicants. They still may apply various conditions to approvals, and will also charge a bit higher rate than banks to further help offset risk. However, for smaller merchants or newer, riskier businesses, ISO’s or MAP’s are usually more lenient and are the places to go.

One important thing to remember is that you’re being approved for a merchant account within the limits of your application. If you apply for $50,000 monthly volume with $100 average tickets, that’s what you’re being approved for. If in the future you exceed those parameters, your account may be reviewed for additional risk and follow-on conditions may be imposed by your MAP.

Not All Merchant Accounts, Merchant Account Providers – or Merchants – Are Created Equal

Some MAPs focus on a particular type of client and understand that marketplace very well. Therefore, their merchant account products, services and pricing, as well as their risk management behavior, are different from another MAP that services a different business market.

For instance, a MAP focusing on the small office, home office or small business market knows certain things about that market and arranges his products and pricing to suit their risk management and profit requirements. Typically, this provider will charge a bit higher discount rate, somewhat higher fixed fees and generally will have a formula for approving most accounts under certain volume restrictions. These business clients generally don’t generate high volume processing, have a disproportionate failure rate nationwide and sometimes have cash flow problems making the chargeback risk higher.

In practice, when this type of merchant account is approved at this MAP, they will set certain alarms in their software to monitor the account’s behavior. They’ll know about all chargebacks, whether the average ticket is within the range the merchant applied for, whether the account exceeds the monthly or annual processing dollar volume they were approved for, and more.

In some extreme cases, if the merchant’s processing sets off an alarm, the merchant account will be automatically, or manually, disabled until the merchant and the MAP discuss the situation and resolve it. These MAP’s usually have so many merchant accounts to manage that manually reviewing all the daily problem traffic can become a huge task, so they automate many of these issues.

Don’t let this be too alarming to you. No MAP wants to shut off accounts unless the risk is just too unmanageable. However, being disabled like this can be fatal if your business depends on your ability to accept credit cards!

Other MAP’s target high-volume merchants as their target markets and understand that market better than any other. This MAP normally doesn’t really want the small business customer.

Because they understand high-volume accounts many of their behaviors differ from the small business MAP. Approval criteria are different, risk management is different, and account management is considerably different. For instance, a high-volume account at this MAP would almost never be shut off for exceeding their volume requirements. Instead, the MAP would call and rework the account requirements while continuing service to the account.

There are also MAP’s that work all markets, and they may or may not service all account types equally well.

  1. It’s important that you have a merchant account.
  2. It’s important to have that account from a MAP appropriate to your needs.
  3. If needed, IntelliPay™ can refer you to one or more MAP’s to better suit your needs.

Managing Your Merchant Account Lifeline

Your merchant account is one of the most important business relationships you have. It is an income and cash stream, a vital sales tool and above all, it’s a bank relationship for your business.

It isn’t a trivial relationship. For instance, if your business merchant account is ever terminated by a MAP, getting another merchant account in the future will be very difficult, if not impossible.

This bank account requires attention and management. You want to stay on good terms with your MAP for many reasons.

  • You may want to increase your limits as your business grows
  • Your chargebacks may surge because of a lack of inventory or supply
  • You may be able to negotiate lower prices as your credit card business grows
  • You need an additional merchant account
  • Your credit rating can suffer if the relationship goes bad
  • You business enters some tough times and your chargeback payments are slow
  • and others…

In order to handle these situations, you need a good working relationship with your MAP. To build this relationship you need to stay in touch with them. Particularly, you need to let them know of circumstances that will or may affect them or your account, in advance.

Some of these circumstances might be:

  • Your sales have picked up and you’re worried you may exceed your volume limits
  • You’ve changed your sales tactics and your average ticket is higher than noted
  • Holiday shopping looks like it will push you over your limits
  • You want to pick up a product line that will affect volume and average ticket
  • You want or need a permanent increase in volume or average ticket limits
  • A chargeback from a customer is unjust and you need them to reject the chargeback
  • Your business products have substantially changed from the type you applied to sell and you need those new ones to be allowed
  • You want to negotiate better rates or fees.

Treat this account as you would any vital financial relationship.

Additional Merchant Accounts

If you have a retail store and a retail merchant account, you must get an additional merchant account to accept mail order or Internet orders. If you have an Internet store and now are opening a physical store, you’ll want to get an additional retail merchant account with it’s lower rates for those sales.

Typical Fee Structure

Depending on the Merchant Account Provider, the type of account you need, and the various risk evaluations, your merchant account fees may differ from items in this list. There may also be fees not listed here.

In any case, all fees must be disclosed and you should find them in your merchant agreement or other documentation from your sign- up process.

In general, it’s good to remember that MAP’s don’t make a large profit margin on each sale. They have be processing hundreds of millions of dollars across all their merchants to make a reasonable income. Many of the fees described come about because smaller, lower volume accounts are truly unprofitable for them and the fees are their attempt to break even or make a little on each merchant account.

However, you should pay attention to fees charged by MAP’s when you’re shopping for a merchant account. MAP’s do not all use the same fee structure.

Some Merchant Account Terms

AVS Fee: A flat fee charged for each Address Verification Request. AVS is for U.S. cards and is an attempt by card associations to manage fraud by comparing street address numerals and zip codes to those in the cardholder’s file at his issuing bank. The result is given to the merchant at the time of authorization and the merchant can decide whether to honor the transaction or not.

Batch Fee: Some MAPs charge for each batch you settle. Authorizations accumulate in a file every day and are usually settled once daily. If you force mid-day settlements you may accrue additional settlement, or “batch” fees. $0.25 – $0.50 per batch.

Chargeback Fee: A flat fee charged for the administrative and transaction costs associated with handling a customer chargeback request. $10 – $25.

Customer Service Fee: A flat fee some MAP’s charge to maintain their customer service facilities. A good MAP will have 24 hour phone support.

Discount Rate: The percentage collected by the bank from your transaction dollar volume. For MOTO accounts typical Discount Rates run anywhere from 2.1% (quite low) to over 3%. For instance, if your rate is 2.49% you would be charged $2.49 on $100 dollar monthly volume. The discount rate is shared by your acquiring bank, the cardholder’s issuing bank, the banking networks, and Visa, MasterCard or others.

Monthly Minimum: Most MAP’s charge a flat minimum fee in case all your other variable fees (discount rate and transaction fees for instance) don’t add up to the minimum fee requirement. If your other fees exceed the minimum, you shouldn’t be billed the minimum. The minimum can vary widely among MAPs, ranging from $15 – $50. The average seems to be around $30.

Non-Qualified Rate: This is the additional discount rate charged by the bank and Visa/MC for transactions that violate ideal transaction profiles. Non-Qual, Mid-Qual and Qualified Rates should be clearly defined in your Merchant Agreement with your MAP. Typically, you are charged extra (sometimes up to 1% more!) on transactions that are not run through the AVS system, that aren’t settled within 24 – 48 hours (time may vary per bank), or are NOT a standard consumer credit card (meaning additional charges probably apply if the purchase is made with a corporate card, foreign cards, or others). IntelliPay™ automatically settles your transactions within 24 hours, and runs AVS on all your transactions from U.S. based cards automatically, but you must understand your merchant accounts requirements on Non-Qual rates.

Retrieval Request Fee: If you request research on a past transaction your MAP may charge you a fee to research their data stores and create documents for you. $10 – $25 per incident.

Sign-Up Fee: Also called an Application Fee. Can range anywhere from $50 – $300. Often refunded if application is disapproved.

Statement Fee: Some MAP’s charge a statement fee to itemize, print and ship your monthly statement.

Transaction Fee: A merchant account flat fee assessed for each transaction you run. Typically $0.15 to $0.35 per transaction.