Surf to Google and perform a search on “Internet Merchant Account”. The results are staggering (472,000 results!) If you have created a web based business andneed to accept credit card payments, your choices are limitless. Before you partner with a provider, take time to understand the different components ofinternet credit card processing, and know what to look for in a merchant provider.
How It Works
Accepting credit card payments through your web site actually requires multiple components. Between a paying customer and your bank account, three layers exist:
Payment Gateway – This is the code that will transmit a customer’s order to andfrom an internet merchant account provider. The payment gateway provides you theability to accept customer billing information (credit card number, credit card type, expiration date, and payment amount) and the necessary validation steps thatmust be followed before the credit card is actually billed.
Internet Merchant Account – A Merchant Account is an account with a financial institution or bank, which enables you to accept credit card payments from yourclients. The payment gateway actually transmits the billing information to theinternet merchant account provider. Unfortunately, most local banks do not provideinternet merchant account capability.
The main reason why most local financial institutions or banks do not want toprovide online merchant accounts is because transactions conducted over theInternet are totally different from face to face transactions where a signature is required to authorize the purchase. This makes online transactions prone to creditcard fraud. Fraud protection should be one of your primary considerations when choosing an internet merchant account provider.
Web Site – Regardless of which merchant provider and gateway service you choose,your web site will need to integrate with your service providers. Most providers include detailed web integration instructions.
How Much Does It Cost ?
Understanding the total costs of your merchant provider can be tricky. Remember my Google example – there are more merchant account providers than there are peoplelooking for internet merchant accounts so ask questions and be picky! Typically, an internet merchant account will have three types of costs:
- Up Front ApplicationFees
- On Going Fixed Fee
- Discount Rate
- Fixed Transaction Fee
- Termination Fees
- Miscellaneous Fees
Let us discuss each type of cost:
Up Front Application Fees
Many internet merchant accounts will require an up front application fee. Thisfee, supposedly, is to cover their costs for processing your application. In caseyou choose not to open an internet merchant account, they still cover theirinitial costs. Although common, many providers waive these fees and I recommendthat you choose a provider that does not require an up front fee.
On Going Fixed Fee
Most all internet merchant providers require a monthly fixed fee or “statementfee” as it is commonly named, which is simply another way to cover their costs andmake money. You will be hard pressed to find a provider that does not require thistype of fee on a monthly basis. However, do not choose an internet merchantaccount that requires more than $10 per month. Additionally, most internetmerchant providers require a monthly minimum (usually $25). The bottom line isthat you will be paying at least $25 per month (on top of the monthly statementfee) for your account.* Discount RateUsually, the discount rate will be between 2 and 4 percent. The discount rate isthe sales commission the provider earns on each sale. For example, if the discountrate offered is 3%, and you receive a sale over your web site for $20, you willowe 60 cents to your internet merchant provider.
Fixed Transaction Fee
Usually between $0.20 and $0.30, the fixed transaction fee is the fixed feeportion of each sale. Unlike the discount rate, the fixed transaction fee is thesame for every transaction. Whether you get a $1 sale or a $100 sale, the transaction fee will be the same.
Termination Fee
A bit more hidden in the small print, a termination fee can apply if you cancelyour merchant account within a specified period of time (usually within one year). But beware, some merchant providers require a three year commitment!
Miscellaneous Fees
If a customer requests a refund and they want their credit card credited, aninternet merchant provider will charge you a separate fee (usually between $10 -$20). Read the contract carefully, as other special fees may apply.
Putting It All Together
Now that the different fees have been explained, let us look at an example set oftransactions to help understand what an internet merchant account may cost your business on a monthly basis.
I have created a simple formula to help you calculate your monthly charges:
Total Charges = Statement Fee + Number of Transactions x (Average Sale x DiscountRate + Fixed Transaction Fee) + (Number of Chargebacks x Chargeback Fee)
For example, let us see you sell widgets over the internet. The sales price foreach widget is $10. You typically have 100 sales per month and about 5 peoplerequest refunds (chargebacks). For this example, let us assume you have signed up with Jones&Jones internet merchant account services and have the following terms:Discount Rate – %2.5Statement Fee – $10Fixed Transaction Fee – $0.30Chargeback Fee – $15Using my formula above, your monthly Jones&Jones charges will be:Total Charges = 10 + 100 x (10 x .025 + 0.3) + (5 x 15) = $140
You can calculate your monthly sales revenue by multiplying your sales volume byyour price:Monthly Sales Revenue = 100 x $10 = $1000
Your internet merchant provider is costing you 14% of your total sales.
Making Your Decision
Before you choose and internet merchant provider, understand all of the costcomponents. Use your current or projected sales data to forecast what yourinternet merchant account costs will be. Planning ahead can save you time and money.
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