If your business is web-based or has a web-based element, you will need to arrange an Internet merchant account to accept online payments. Choosing the right type of account is very important. If you select one that doesn't fit your needs, you might end up paying more than you need to in fees or deterring overseas customers. Additionally, if you sign up for a merchant account that isn't adequate for the volume of custom your business attracts, you might not be able to accept online payments effectively and end up losing custom.
Who can you get a merchant account from?
A merchant account that accepts credit cards must be sponsored by a bank that's a member of the credit card associations (Visa and Mastercard). This bank is referred to as an "acquiring bank".
- The processing rates you will pay for a merchant account with an acquiring bank are lower than those you'll pay when using other options.
- Acquiring banks prefer relatively low-risk businesses. If your business is seen as higher risk or if you have no trading history, you may not be able to get an account.
Member Service Provider (MSP) and Independent Sales Organization (ISO) are essentially terms for the same thing. MSP is used by Mastercard and ISO is used by Visa.
Essentially, what an MSP/ISO does is to resell merchant accounts. They are not banks themselves and do not handle any payments. An MSP/ISO is sponsored by one or more acquiring banks – typically several – allowing them to be registered with Visa and Mastercard credit card associations.
-An account from an MSP/ISO is a genuine merchant account. You have complete control over it. You can accept and process card payments online just as if you had a standard merchant account with an acquiring bank.
- MSP/ISOs often provide valuable secondary services, such as excellent payment gateways.
- Both the MSP/ISO and the bank sponsoring it take a percentage of each transaction. For this reason, MSP/ISOs may be a more expensive option than a merchant account with an acquiring bank.
Third Party Payment Processor
A third-party payment processor is an entity that handles transactions between a buyer and seller via its own merchant account. Examples include PayPal, Google Checkout and Amazon Payments.
- Acceptance for merchants is easy and quick.
- Third-party payment processors provide an all-in-one payment solution: a payment gateway and secure credit card processing. Typically, there will also be some means of resolving disputes between the buyer and seller.
- Transaction fees are higher.
- Since you don't control the merchant account, the payment processor can freeze it, stop payments or otherwise interfere with transactions at any time, if your account should be deemed high-risk or if activity associated with it should appear suspicious.
Merchant Account Pricing
Pricing structures may vary significantly between providers. This can make it difficult to assess the real cost of payment services. In general, there are three categories of fees:
These are the fees charged for each payment. A credit card payment may be liable for a per-transaction fee, a percentage fee or for both. Look for accounts that only charge a percentage fee for credit card payments and a processing fee for debit cards, rather than both.
These are fees that you must pay on a regular basis. Common fees include the following:
- Monthly Account Fee: This is charged by a bank to cover the cost of operating your account. It is normally waived by third-party processors, but merchant account holders usually have to pay it. A typical monthly fee might be £20 to £30.
- Minimum Monthly Account Fee: In the event that your transaction fees don't exceed a certain amount, you may have to pay a minimum monthly account fee at a flat rate. Smaller merchants will generally have to pay this fee while larger ones may not. It is normally a small amount per month, between £15 and £30.
- PCI Fee: If a merchant is not in compliance with the PCI DSS (Payment Card Industry Data Security Standard), this fee may be levied by a merchant account provider. The PCI fee is usually around £20 per month.
One-off fees are fees that you only pay once. They include the following:
- Setup Fees: These are charged by some providers when opening a merchant account. Before signing a contract, you should negotiate this fee as it is often reduced or waived altogether.
A rolling reserve functions in a similar way to a security deposit. It is an amount of money, typically some small percentage of your total transactions, which is held in your account as a means of covering future reversals of online payments. Whether a rolling reserve is required and how much the reserve will be depends on your provider and the perceived degree of risk associated with your business. Make sure that your cash flow is sufficient to withstand this.
A problem with your merchant account could paralyse your online business. For this reason, you need to ensure that adequate customer support is available. You should be able to reach your provider's customer support 24 hours a day, seven days a week. Before signing up with a provider, you should look for reviews, comments and other feedback from existing customers.
If your business operates globally, you may need to accept payments in different currencies. You will need to ensure that your merchant account provider is capable of delivering multi-currency processing. Multi-currency processing capabilities will allow you to accept payments in more than 150 international currencies. Funds in your account may be withdrawn either in pounds sterling or in one of 14 alternative currencies.
Dynamic Currency Conversion (DCC)
Alternatively, you could opt for an account that offers dynamic currency conversion rather than multi-currency processing. This is better if you only do business with foreign clients on an occasional basis. Your prices are displayed in pounds sterling, but at the checkout stage your customers can choose to pay in their own regional currency. One downside of DCC is that a fee is usually charged by the provider, which can inflate the price your customers are shown by up to 5 per cent.
Refunds for online payments should always be free. When a refund takes place, the acquiring bank is reimbursed for the fees paid on the sale transaction therefore there is no cost to pass on to you.