Getting Started

What steps should I take to start processing credit cards?

Let's start with the basics! I'm sure you've heard the term merchant account bandied about the internet. We will examine here, what exactly is a merchant account and what is required to get started. Our goal is to get you up to speed with the terminology and processes involved with getting set up for a merchant account.

A merchant account is simply a relationship between a business owner and a merchant bank that enables business owners to accept credit card payments from their customers. This is the account into which a Merchant Account Provider deposits payments into your business checking account from the transactions made from the sales to your customers. To qualify for a merchant account, the business owner must meet the bank's requirements.

The first question you need to ask yourself is: Do I qualify for a merchant account?

Merchant account providers require merchants to meet certain requirements for opening a merchant account.

What basic requirements will you have to meet? What goes into determining whether your business is risky?

To process credit cards online, you need an Internet merchant account. This is the account into which a merchant account provider deposits payments made through your web site. All business owners who plan to process credit cards must have a merchant account.

Basic Requirements for obtaining a Merchant Account:
Almost every merchant account provider maintains the following basic requirements for opening a merchant account. If your business expects a relatively low monthly volume of less than $5,000 per month, you might merely be required to:

	Be a U.S. citizen.
	Have a U.S. checking account.
	Have a U.S. postal mailing address for the business.
	Not be in active bankruptcy.
	Not have been convicted of credit card fraud or a related felony.
	Not appear on the Terminated Merchant File List or MATCH file.

The MATCH file is analogous to a credit-reporting agency. It is a file maintained by the credit card associations and contains information about businesses that have failed to handle their merchant processing responsibilities. You must work with the company that originally placed you on MATCH to get your named removed. You cannot get approved for a merchant account if your name is on the MATCH list.

These are the minimum requirements. Merchant Account Providers sometimes ask for more information in addition to that listed above especially for merchants expecting more than $5,000 per month in sales volume. They may require you to:

	Provide tax returns.
	Provide proof of corporation, partnership, limited liability, or nonprofit status.
	Provide previous processing statements and/or checking account statements.
	Provide trade references.

Why is it more difficult for e-commerce businesses to get a merchant account in comparison with a brick-and-mortar business?

In one word: risk. Transactions conducted via the internet are considered by merchant account providers to be riskier than "retail" transactions. E-commerce businesses present three types of risk to the bank providing the merchant account:

Credit risk. This is the risk the merchant account provider takes with respect to the amounts you, as a merchant, might owe the bank in the future. For new businesses with, for example, $5,000 in charges per month, this risk will be relatively low. Nevertheless, personal credit history figures strongly into the decision-making process for some merchant account providers.

Fraud risk. This is the risk of incurring chargebacks due to the fraudulent use of credit cards. Fraud risk is the greatest concern for merchant account providers. As described above, if the customer contests a charge, the customer's bank is required to refund the money it has fronted to the merchant. The customer's bank passes this loss on to the merchant account provider, which passes it on to the merchant. Newer businesses and certain types of products are considered to be a greater risk for fraud.

Contingent liability risk. This includes not only fraud but risks associated with unforeseen consequences of marketing. Businesses that offer a lifetime service guarantee present a large contingent liability risk because if they should go out of business, the merchant account provider could be held liable.

Of course, e-commerce businesses can vary widely in risk. The following are factors that are considered when determining risk. Different merchant account providers place different weight on each of these factors.

Length of time in business. The longer you have been in business, the better off you will be when applying for a merchant account.

Type of product. Retail sales is generally considered less risky than sales of intangible products such as downloadable videos or e-zine subscriptions.

Cost of items or volume of sales. High-volume sales or sales of big-ticket items are generally considered riskier by merchant account providers. The more money you make per month, the bigger the credit risk for the merchant account provider.

Personal credit history. Some providers consider this to be the most important factor when considering an application. This is not universally true, however. Many merchant account providers consider risks associated with fraud and contingent liability to far outweigh personal credit history. Credit history takes on added importance with time, however, as your business increases in sales volume.

Tax returns. The merchant account provider may look at tax returns and other financial documents for proof of financial responsibility. Individuals with higher incomes are considered less risky because they are less likely to file for bankruptcy if the business fails.

Here is a list of the common fees and costs you can expect to pay from any merchant account provider:

Internet discount rate.
An Internet discount rate is a percentage taken from every online transaction, usually two to three percent. The internet discount rate will generally be higher than a retail card-swipe rate because internet transactions are riskier than retail transactions. Internet transactions are not done face-to-face. The customer is not handing you his credit card and you are not obtaining a signature for the sale.

Transaction fee.
Merchant Account Providers charge a transaction fee for each credit card authorization that is obtained through your merchant account.

Statement fees and monthly minimums.
Merchant account providers charge a monthly statement fee for the merchant account. Some merchant account providers also charge a monthly minimum for the merchant account.

Chargeback Fee.
A chargeback fee is charged to a merchant when a consumer claims their card has been charged and the merchant has not delivered the product or performed the service. The merchant bank will notify you in writing if anyone disputed one of your charges. You will have the opportunity to dispute the chargeback by providing proof that the product was delivered to the customer, such as an invoice and a shipping receipt. A chargeback fee is NOT charged when a merchant issues a return to a consumer.

Reserve.
If your business is considered risky, or if your credit is less than average, the merchant bank may approve you with a reserve on the account. A reserve is a hold on a small percentage of your sales volume, typically 5%. These funds are held in an escrow account for approximately 180 days and are then released to you and deposited into your checking account. Reserves are not permanent. Most merchant banks will remove a reserve after you have shown good processing history with them.

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