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Merchant account-A guide to understanding the basics

Once the customers fill their online shopping cart, they will be ready to make the payment. This is an important step in an e-store. This can be through a credit/debit card and an e-check - the most popular being the credit card. All e-stores need to have the necessary systems in place to accept the credit card payment online . This is where the Merchant account comes into the picture.

In order to process an online credit card transaction, a business will require:

  1. A Merchant account with a bank or processing organization.
  2. Software to transfer the transaction details to the credit card processor - also called the payment gateway or virtual terminal.

What is a Merchant account ?

In the simplest of terms, a merchant account is a specialized account provided by a bank or other financial institution to enable real time e-commerce transactions. It allows businesses to accept payment online through credit/debit card and e-check.

The account is set up under a contractual agreement between business/merchant and the bank. As in such agreements, the rights and responsibilities of both the parties are chalked out. Broadly, under this agreement the bank agrees to pay the merchant for all valid online business transactions, including credit card, debit card and e-check and processes the payment made.

What are the steps involved in an online credit card payment?

  • The customer enters the credit card information in a web form or gives it over the phone.
  • This information is passed on to a credit card processor . This can be done though a processing software called the gateway, or through a real time processing system.
  • The credit card payment processor, such as Authorizenet, Verisign, LinkPoint, ECHO, Bank of America processes the credit card and verifies the credit card holder's billing address to prevent fraud.
  • The information regarding the approval or denial is passed on to bank providing the merchant account . It is also passed back to the customer to enable him to complete the transaction.
  • Once the credit card transaction is validated, the amount is held in the merchant account .
  • This amount is transferred to the personal checking account or business account. This can be done instantaneously or over a period mutually agreed upon.) (usually 24 to 48 hours)

Organizations offering merchant account services

  • Banks: The banks provide a secure and reliable option. They will give a more professional outlook of the business to the customer. However they have more regulations and will be conservative in their selection.
  • Independent Sales Organizations (ISO): These are also called as Third party merchant account providers . They allow the e-commerce businesses to use the ISO's merchant account in return for a fee. They charge higher rates. Also there is no written contract, unlike a bank and it will be difficult to handle charge backs and refunds. The customers may also be apprehensive regarding privacy issues because the credit card information is shared with a private party. However on the positive side, they have fewer regulations and provide a good option for smaller businesses. The business can also avoid the some of the costs associated with setting up a merchant account.
  • Merchant service providers: These can be independent sales organizations, banks and financial institutions. In addition to providing merchant account facilities, they take care of the credit card processing as well.

How to set up a merchant account with a bank/financial institution

Basic requirements for setting up a merchant account :

  • The business should be located in the USA and should have a proof of address.
  • The business should have a checking account in an American bank, in the name of the business.
  • The Merchant account holder or owner should have a valid SSN, Federal tax ID and address.
  • The business should have an active website with a listed DBA. The website should contain clear information on the Product delivery methods, Product prices, exchange and refund policies, privacy policies and customer service number.
  • The domain name should be registered to the merchant.
  • The website should have a secure checkout system.

Information/documents required for setting up a merchant account

  • An Application to the bank for starting a merchant account and The document of the agreement drawn up between the bank and the merchant;
  • Account details of the merchant's personal or business account. This can be given in the form of Voided Check from the personal account or a letter from the bank with the account details ( A voided check is a check, which is crossed out with “Void” written across it. This will give the bank information about the account);
  • Copy of Driver's License or other government issued ID card;
  • A detailed and accurate list of the products and services offered, including the pricing and refund policy, product delivery method and customer service telephone numbers. This can be given on paper or displayed in the web site.
  • Credit card Processing Statements of the previous three months.
  • Copy of Articles of incorporation, if the business is an incorporated business.
  • Business/Personal Tax Returns and business financial statements.

Costs involved in setting up a merchant account

Fixed fees: These fees will be charged irrespective of the transaction amount.

  • Application Fees : This is the cost for processing the application and setting up the merchant account. Some providers may waive this fee.
  • On Going Fixed Monthly Fee : This is a monthly fee charged by the provider to cover services such as customer service, billing, managing fraudulent services.
  • Termination Fee : This is a cancellation fee, charged, if the account is terminated before a time specified by the provider. The commitment time ranges from 1 to 3 years.
  • Annual fees : This flat fee is charged by some providers to be paid every year.

Variable fees: These will vary according to the transaction amount.

  • Discount Rate : This is the commission charged by the merchant account for each sale. The discount rate will be between 2 to 4 %. The provider will fix a monthly minimum amount for the commission charged. The client will be charged this amount irrespective of the transaction amount
  • Fixed Transaction Fee : This is a fixed fee charged per transaction, irrespective of the amount of the transaction. Usually between $0.2 to $0.3
  • Batch transaction fees : This is charged for a batch of transactions when they are closed out and the amount is transferred to the client's business account. This usually done once a day.

Miscellaneous Fees : This will cover the fee charged to process customer refunds, voice authorization fee, account activation fees, address verification fees, statement fees.

How to start a merchant account with an ISO:

In a third party merchant account, the business can avoid most of the initial costs mentioned above. The independent sales organisation will charge a flat set up fee instead.

The third party will hold a merchant account with the bank, process the credit card payments and provide the necessary software to accept payment. The business/merchant simply incorporates this software on his business web page. In other words, the customers actually make the payment to the ISO, on their secure web page. In return the business/merchants are charged a fee for each transaction. This will be higher than the rate charged by the bank. So this method will prove costlier in the long run.

PayPal, ProPay, Click Bank are some third party merchant account providers.

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