Increasing a business' sales while improving the customer's’ shopping experience is on the mind of every business owner. Consumers today want the flexibility of being able to pay for products or services using a method that's convenient for them, regardless if its an online or retail store transaction. With many different payment systems on the market today its becoming essential for businesses to use merchant accounts as a way of providing customers payment options including credit cards, debit cards or e-wallets.
With the inception of credit cards, e wallets and other financial services; our economy is rapidly accepting these new financial technologies as they continuously shift commerce towards a completely cashless society. The growth of integrated mobile payment systems along with the added incentives of travel or cash back rewards for using payment cards has only fueled the demand of customers to make payments electronically. Many customers use the debit network since it performs the same as cash, allowing customers to make payments directly out of their checking accounts without the need of an ATM or writing checks.
The benefits of credit and debit card usage is not limited to only the customers, merchants have also had better experiences with the move towards cashless payments. Today, most customers can be found carrying little to no cash in their wallets but with their credit or debit cards they have significant buying power. This has allowed businesses to increase their sales with the ability to accept online e commerce transactions or more retail storefront transactions that would otherwise have never occurred if cash was the only available option.
When a merchant decides to avoid accepting electronic payments and only accept cash, the business is limiting and running the risk of completely eliminating the buying power of a large portion of customers. The buying power that comes from the use of debit and credit cards allows customers to make larger purchases more frequently because customers are not limited by the amount of cash in their wallets. Many restaurants, retailers and other businesses relying on impulse purchases have significantly benefited from accepting credit cards with higher sales volumes and larger average sales amounts, customers spend more when cash is not a limiting factor.
Another benefit of having a merchant account is the option to accept credit cards payments online, allowing merchants to expand their businesses and increase their overall sales by opening their doors to the internet. With an e commerce store, a business can virtually be open 24 hours a day and reach a much broader customer base than previously possible when selling strictly through a retail storefront location.
We have reached a point in our economic evolution where many customers have become comfortable, and many times prefer, making purchases using credit or debit cards. Whether these transactions occur at a merchant's location or from the comforts of a customer's home, the importance of businesses to accommodate the lifestyle and demands of their customer base is becoming more and more essential today. One easy step for businesses to improve their customer experience is by allowing for multiple types of electronic payments through the use of a merchant account.
What is a Merchant Account?
Merchants that want the ability to accept credit cards in their business will need to establish a bank account that allows access to the payment card networks for proper customer card authorizations and settlements of funds. This type of account is referred to as a merchant account whose services are provided by a payment processor in conjunction with a banking institution, known as the acquiring bank. The banking institution is needed to access the payment card network with all the proper security protocols in place.
Most payment processors offer their services direct to merchants or through an outside sales organization while providing account information, back end accounting and customer services for their merchants and the sales organizations themselves. In some cases the acquiring bank will also act as their own payment processor, marketing and setting up merchant accounts direct with their merchants and any others businesses in need of merchant services.
Merchant accounts can be used in a variety of ways, whether the merchant operates a storefront or the business accepts cards through a card not present (CNP) environment, it depends on the type of business the merchant operates. The same merchant account can be used for online payments or another transaction occurring in the merchant's store, the authorization process is identical once the card account information is captured.
Traditionally, merchant accounts were set up using strictly phone authorizations through live operators, but that was replaced with manual imprinters and carbon paper and required merchants to “copy” the embossed customer's card account information. The tedious task of collecting and mailing copies of payment authorizations was soon replaced in the 1980's with the invention of the credit card machine.
In the 1990's, the rise of the internet created a significant need for online payment gateways to handle the exponential demand for e commerce payments. Similar in function to a credit card terminal, the payment gateway allowed for merchants to securely accept sensitive customer card account information received online from their customers and send it to their payment processor for card authorization and payment settlement.
Merchant accounts can vary from one another depending on the business and the types of merchants the payment processor is able to partner with. While some payment processors and acquiring banks are only able to work with general retail and e commerce, like restaurants and local stores,other payment processors have focused on more niche industries that can be considered higher risk, including tobacco and adult businesses.
With the rise of electronic payments, the ways in which merchant accounts are used has taken its own course, creating hybrid accounts to tackle some of the problems that merchants face when getting started. Aggregated merchant accounts have emerged as simple solution for merchants having trouble obtaining a regular merchant account, whether it be due to financial troubles or the type of business, aggregated solutions can provide a much lower barrier to entry for payment processing.
Businesses that use a merchant account will be charged fees for processing payment as either a per transaction fee or a fixed monthly cost. Most merchants are charged based on every transactions, normally comprised of a discount fee (a percent of the sale) along with a per transaction fee. Over the years, new billing models have emerged allowing for merchants to pay flat fees, flat monthly fees or even bill their customers for their fees. With many options available, merchants can decide what system works best for the business and customers.
Merchant accounts can exist through a number of different avenues, whether they are issued directly through an acquiring bank, payment processor or as an aggregated account. There are many different options available today for business with a variety of different billing methods. It is important for merchants to fully understand their options and all the costs involved with their merchant account before finalizing their decision.
This History of Credit Card Processing and Merchant Accounts
Dating back to the 1920's and unbeknownst by most, the use of credit by consumers began shaping and molding our society as we know it today. During the Roaring Twenties, exorbitant spending by all types of consumers was fueled by the readily availability of consumer credit from businesses looking to cash in on the economic boom. From department stores to auto dealerships, lines of consumer credit were issued to the individuals that could demonstrate their capability of making payments into the future for products today. With millions of Americans willingly accepting the use of debt to make the purchases they could otherwise not afford, society slowly became accustomed to making purchases without cash.
The use of credit cards took hold in during the 1920's, while department stores were generally issuing cards for identity purposes as a way to combat potential fraud in their store. The first real “network” was derived by various oil companies that set up partnerships with other corporation to accept payments from both their customers or the customers of other companies. Customers were issued cards that could be used at all company-owned gas stations including other in-network gas stations clear across the United States, laying the groundwork for future payment card networks.
With the growth of the airline industry in the 1930s, the use of charge cards issued by the different airlines became increasingly popular, allowing for customers to purchase tickets now and pay later. Ticket discounts and the ability for consumers to make payments on an installment basis lead to nearly half of all airlines revenues in the 1940's originating through the use of travel cards. By the end of the 1940's these airlines cards became the first internationally accepted charge card.
It was not until the 1950 when Frank McNamara and Ralph Schneider devised the Diners' Club card, a charge card that could be universally accepted by restaurants in lieu of paying with cash. By creating a network that was independent of any particular business chains, Diners' could focus on building their network of member businesses accepting their charge card. The public response for the Diners' card was able enormous, leading to their rapid global expansion within a few years and eventually paving the way for many of the card networks dominating the industry today.
Soon after in 1958 American Express launched their first card along with Bank of America and their BankAmericard, the predecessor to Visa. Mastercard followed suit in the 1960s with their Master Charge and finally Discover entered the arena with their card in 1985. Other payment networks that have also been established and entered the United States include JCB (Japan Credit Bureau) and China UnionPay or UnionPay is the largest payment card network in the world.
How Credit Card Processing Works
When a payment card is swiped, the authorization process begins by sending the card account holder's information to the network to complete the transaction. A single payment card transaction requires a number of different organizations to properly authorize a payment request. A payment network transaction includes
- Payment Processor: The processor facilitates the transaction between the merchant location and the payment card network. The payment processor receives and sends the cardholder account information to the card association network. The payment processor handles a number of different transactions from the payment card network, including payment authorization requests, refunds, voids and daily batches.
- Merchant Acquiring Bank: The acquiring bank is the organization that works with the payment processor to underwrite and provide the financial services to the businesses using their merchant account services. The acquiring bank accepts payments upon settlement from the customer bank and manages the disbursement of funds to the merchants.
- Card Issuing Bank: The card issuer is the bank that provides the customer's credit or debit card and provides the merchants with the responses for their customer payment authorization requests. The card issuing bank maintains the consumer's account information on file and uses that information to determine if a merchant's request for payment can be approved or declined. Some of the largest card issuing banks today include Capital One, Chase and Citi. American Express and Discover each act as a card issuing bank and a card association through their closed networks.
- Card Association: The financial networks owned and operated by Visa, MasterCard, American Express, Discover and others. The association handles transactions for the payment cards that are part of their network, whether the cards are co-branded with another company as is the case with Visa and MasterCard or offered as an independent card, such as many American Express and Discover cards. The associations handle the transmission of payment card information between the card issuing banks and the card acquiring banks.
When a customer is prepared to check out and their payment card is swiped, dipped or tapped at a merchant credit card terminal, account information that is stored on the payment card is securely captured and sent along with the transaction value for payment authorization. Payment cards retain the cardholder’s account information in a secure format on both the EMV (embedded chip) on the front and the magnetic strip (mag stripe) located on the back of payment cards. To combat the rise of fraud, payment cards have been slowly moving away from the use of the mag stripes and adopting a more secure technology called EMV. Cards that are equipped with an EMV microchip are capable of creating and sending dynamic authentication codes as a way to prevent fraud.
Once the payment card is accepted at the merchant credit card terminal, account information is encrypted and the payment authorization request is sent through the payment processor and entered into the card network. From the card network, the card association is able to receive and decrypt the payment card files from the authorization request to determine the card issuing bank. Once the bank is realized, the authorization request is forwarded over for a decision by the card issuer.
Transactions at the card issuing bank require either an approval or denial response to inform both the merchant and customer as to the sale of the item or service. A card issuer will use a number of different checks before providing an answer including; account status, amount of available credit, fraud alerts, etc. Once a decision can be made, the card issuing bank's response is sent back through the card association's network onto the merchant location, informing both the merchant and customer of the payment authorization's status.
How Online Credit Card Processing Works
An e commerce payment occurs using the same process as a swiped transaction through a credit card terminal once the payment card information is received. The difference between a swiped card transaction originating in a credit card terminal and an online transaction lies in the fact that the customer's is not present during the sale, requiring an different method to capture the card information. To securely accept and transfer the card account information from the merchant's e commerce website to the payment processor requires the use of a payment gateway.
- Payment Gateway: A payment gateway is an online application that allows merchants to securely link their e commerce website to their payment processing company. A payment gateway accepts cardholder account information from the customer's web browser and encrypts the data before transferring account information to the payment processor.
Payment gateways are generally built and operated by a 3rd party company that has the experience and knowledge of financial technology to design an online payment application capable of providing the maximum level of security. Once integrated into an e commerce shopping cart, the payment gateway provides a seamless link between the merchant's website and the payment processor for fast and secure payment authorizations.
Similar to a credit card terminal, the payment gateway captures the encrypted card account information from the customer's web browser and packages it along with the transaction details from the shopping cart for transmission to the payment processor. Once the customer bank renders a decision as to the status of the transaction request, that information is sent back to the payment gateway and presented to the customer through their web browser.
The merchant account is linked directly into the payment gateway, providing immediate functionality once the gateway has been integrated into the merchant's shopping cart. The gateway is able to pass the XML account files containing cardholder details from the customer's web browser through a SSL (secure socket layer) to the payment processor. The files sent through the SSL are normally done using a standard financial interchange message, usually ISO 8583, for maximum security during the transmission process.
After the card association receives the secure customer and transaction files from the payment processor, the customer's card issuing bank can be determined. The transaction details along with account information will be sent to the bank for account verification and payment authorization after various credit, security and fraud checks are performed. Once a decision has been made, the response will be sent back through to the payment gateway to inform both the merchant and customer as to the authorization's status.
Unlike a swiped transaction occurring in a retail location, online credit card transactions have significantly higher risks without the added security that comes from EMV chips in today's cards. To combat fraud, e commerce merchants rely heavily on their own fraud prevention practices including address verification (AVS) and other security protocols available through their payment process or payment gateway. Merchants that choose to ignore this problem can face significant losses that will not be covered by payment processors, banks or the card association.
Who uses a merchant account?
As technology has advanced and consumers have adapted the shift towards a cashless society, more and more businesses have needed to accept credit cards as a way to maintain their customer base. Some of the most commonly seen types of merchant accounts today include:
- Online Merchant Accounts
- Retail Merchant Accounts
- Restaurant Merchant Accounts
Types of High Risk Merchant Accounts
Other types of businesses that do not fall into the category of general commerce or general e commerce might be considered to be medium or high risk merchant accounts. Typically today the most common types of businesses that are classified as higher risk include:
- Adult Merchant Accounts
- Alcohol Merchant Accounts
- Firearm Merchant Accounts
- Tobacco Merchant Accounts
- CBD Merchant Accounts
- Debt Repayment Merchant Accounts
How does pricing work for a merchant account?
The costs that are assessed to businesses for a merchant account will vary between payment processors depending on the pricing structure that the business and processor agreed upon. All credit card and debit card transactions carry fees including discount fees and transaction fees, but how these fees are billed to the merchant can vary dramatically making it very important for businesses to fully understand how they are being charged for credit card and debit card transactions and the other fees.
There are a few types of pricing systems that are commonly in use today; tiered pricing, interchange plus pricing, flat fee pricing and membership programs with a set monthly fee. Traditionally tiered pricing was the most commonly used fee schedule but in recent years there have been more options available to businesses and the trend has been moving away from the tiered pricing format towards the other programs offered.
In the beginning the use of tiered pricing was the most commonly used billing structure, establishing between 3 to 6 different rates that payments could be charged, otherwise known as qualifying. The tier, or rate, that a payment card qualifies for can vary due to various different reasons including the type of card, how the payment was accepted or even when the transaction was finalized. This type of pricing structure can be very confusing and at times extremely costly to merchants eventually leading to its decrease in popularity among businesses and payment processors alike.
One of the most commonly used pricing models by merchants today is interchange plus pricing. Sometimes referred to as cost plus pricing, the interchange plus fee schedule uses the true cost of the credit or debit card and tacks on a set fee per transaction. Merchants like the simplicity and ease of knowing what they will be charged for each transaction and removing the mystery of costly downgraded to lower tiers that was so very common with the tiered pricing models.
In recent years other types of billing methods have emerged that offer easy to understand pricing for merchants. One of the most popular has been a flat fee, normally around 3% for every transaction that is processed, regardless if its a credit card or debit card. Other programs offer flat monthly fees for all payment card transactions up to a predetermined dollar amount every month. While both types of billing structures can be interesting for businesses, many times the costs involved are substantially higher than other types of pricing models making it important for merchants to weight all options.
Most merchant accounts will have other costs including additional transaction fees, chargeback and retrieval fees that are billed on a per occurrence basis. Other fees that are billed monthly include maintenance fees, compliance fees or other fees to cover the service costs. In some cases, higher risk merchants will also have to pay annual registration fees to the payment card associations to use their services making payment processing an expensive product at times.
By determine junk fees or other costs that can be lower or removed can help merchants keep the overall costs of their payment processing services to a minimum. While there will always be costs and fees to some extent when accepting credit or debit cards, a full understanding of the costs involved with processing payments can significantly help a business lower their fees when comparing costs between merchant services providers.
Why Businesses need Merchant Accounts
As consumers have drifted away from primarily using cash for purchases while increasingly opted for the convenience of using credit and debit cards for payments, the need for merchants to cater to this change is becoming essential to keep up with consumer trends. Operating a business that does not accept credit cards payments can substantially limit the buying power of their current customers to only the cash available on hand and can also hinder any potential expansion into new customer markets.
Traditionally, businesses have operated by selling their products and services to their local clientele from the areas surrounding their business, focusing on more niche industries to meet the needs of customers. Short of opening new locations in different areas, merchants would find it difficult to expand their customer base outside their current markets due to barriers caused by time and distance constraints that traveling to outside markets caused.
With the advances in technology and the creation of the internet, commerce has been able to expand and allow merchants to remove those sales barriers from before and reach a broader audience. Today, merchants accepting payment online with a merchant account are able to sell products and services to customers from across the globe 24 hours a day without having to open an additional location.
Types of Merchant Accounts
While the process of accepting payment from a credit or debit card is nearly identical for merchant accounts there can be differences on how the accounts are set up. Whether its the acceptance method of the merchant or the type of bank providing the payment processing services, the types of merchants account will vary between business. Some of the most common businesses include:
General Commerce Merchant Accounts
The most common type of payment processing used by businesses that operate through a store front with generally the lowest fees of all types of merchant accounts. These businesses can vary from restaurants to retail shops or wholesale distributors that accept payments by customers in person. Transactions are normally run through a credit card terminal or a point of sale (POS) machine but can also be manually entered if required.
MOTO Merchant Accounts (Mail Order/Telephone Order)
Businesses that are accepting mail order or telephone order sales will need the ability to process credit cards manually. These transactions can usually be entered through a credit card terminal or online using a virtual terminal located in many of the payment gateways today. While fees can be slightly higher for these transactions versus a swiped card, merchants can prevent fraud by requiring the billing address for AVS verification and the CVV code from the back of the cards to verify the customer.
Wireless Merchant Accounts
Merchants that operate mobile businesses, whether they travel to their customer's locations or operate at events, such as fairs or conventions, will generally want the flexibility and functionality of a wireless merchant account. Using either a wireless credit card machine or an adapter on their smartphone, merchants will be able to accept customer payments remotely. Fees for a mobile merchant account are about the same as retail merchant account with the possibility of an additional transaction and monthly service fee.
E Commerce Merchant Accounts
Online businesses operating web stores will need a merchant account that is set up to accept online payments from their customers. Merchants will need a fully functional online store with shopping cart and integrate the payment gateway provided by the payment processor into their website. Most merchant accounts that are set up for e commerce have similar rates and fees as a general commerce merchant account but with additional payment gateway fees.
High Risk Merchant Accounts
Businesses that are unable to obtain a merchant account through regular payment processing channels will usually require the services of a high risk merchant account. Depending on the type of business, the history of the business or the background of the merchant, a high risk merchant account might be the only solution for some businesses. Fees for high risk merchant accounts are usually more expensive than other types of merchant accounts and are dependent on the level of risk determined by the payment processor.
Merchant accounts will operate in the same manner whether the transaction is from an online purchase or through a restaurant POS system. Some accounts will require additional fees because of how transactions are accepted or the type of business that is being operated. Most merchants will be able to figure out which category their business would be classified as and understand how that will effect the rates of their merchant account.
What is needed for a merchant account?
For a business to establish merchant account services, most payment processors will require some information about the owner and their business before starting. Depending on the business; especially the size of the business and the industry, many of these documents will be required for the merchant account to be approved.
- Completed Application
- Social Security Number
- Copy of Drivers License or Passport
- Voided Check from Business Bank Account
- Last 3-6 Months Bank Statements (if currently processing)
- Last 3-6 Months Payment Processing Statements (if currently processing)
The underwriters at the payment processors and acquiring banks will want to have a full understanding of the merchant and the business before making any decisions about credit card processing services. Certain businesses will require less documents, especially startup and general commerce businesses while higher risk businesses will usually require the above items and possibly other supporting documents to complete the bank's application package.
Documents supplied to the underwriters will be used to perform their proper Know Your Client (KYC) due-diligence including checks of the merchant's financial history along with a check of their history with the payment card associations. Merchants with a negative history including account closures, outstanding balances or being listed on the MATCH list might be required to accept lower processing volumes, accept reserves being held from funding or even the account being declined.
Businesses that are currently processing payments through a merchant account will usually be required to submit the previous 3-6 months of payment processing and banking history for the same period. Underwriters use this information to determine the financial strength of the business since processing fees and other merchant accounts costs are usually collected on a monthly basis and the acquiring bank needs to know costs will be paid.
Some types of medium risk to higher risk merchant accounts might be assessed registration fees due to the requirements of the payment card association. A few industries might also be required to provide a legal letter drawn up by an attorney or other industry professional stating the business is abiding by all federal and state guidelines for the sale of their products. Merchants needing such documentation or registration fees will be advised from their merchant services provider as to requirements for businesses from their industry to be approved for a merchant account.
What to choose a merchant account provider?
Partnering with the best payment processing company is important for the success in a business of any size in any industry. Working with a merchant services company that offers low fees, advanced software along with outstanding technical support can help a merchant grow their business and succeed. Before signing a contract with a merchant services provider, ask about their company and the features they can offer partnering businesses.
Working with an online payment processor that can offer a payment gateway that is fully compatible and easily be customized into a merchant’s website can save merchant money. The Allied Payment Gateway is compatible with over 99% of the major shopping carts available and provides features and reliability that the other payment gateways can’t, giving merchants all the keys needed to run a successful business.
Start accepting credit cards today!
Allied Payments is available to help your company easily apply and setup with a low cost retail merchant account. Most merchants coming inquiring about rates will see a decrease in their credit card processing fees once using our competitive rates. Contact our office today and see how easy it is for retail merchants to partner with an affordable merchant services company.