Getting the Correct Merchant Account for Your Business

The first and most important step to getting the best merchant account for your business is to learn about merchant accounts, how they function, the different types available and how this knowledge will all apply to your individual business.

The two basic types of merchant accounts are "card present" and "card-not-present". Each basic type of account has subcategories that are defined by business type or how a credit card transaction is processed.

Card-Present Merchant Account

A card-present merchant account is any merchant account where the credit card and the customer are present during the transaction, and the merchant is able to swipe the customer's credit card through a magnetic card reader to perform an electronic data capture. Retail Merchant Account - A retail merchant account is a card-present account where the majority of credit card transactions are processed by swiping the card through a credit card machine or magnetic strip reader that is connected to a physical phone line. Retail merchant accounts are considered low risk accounts and are granted the lowest rates and fees. When a credit card transaction is manually entered under a retail merchant account the transaction will usually downgrade to the non-qualified discount rate.

Any retail business that expects to process a significant amount of keyed-in transactions should strongly consider opening both a retail merchant account and a mail order merchant account (card-not-present) so that they are able to obtain the lowest discount fee possible for both types of transactions. This is especially true for retail stores that also have a website or mail order catalog.

Wireless Merchant Account

A wireless merchant account is a card-present account where credit card transactions are swiped through a portable credit card machine or magnetic swipe reader to obtain a real-time authorization and an electronic data capture is performed. Wireless merchant accounts are usually given the same low rates and fees as a retail merchant account but typically have higher monthly fees and initial equipment costs.

If your business requires you to accept credit cards while on the run, you should make sure that the cost of a wireless account is justified by the increase in sales that card-acceptance generates. There are also other portable processing options that may be a more economical fit for your business.

Store-and-Forward Merchant Account - A store and forward merchant account has more to do with the equipment being used than the merchant account itself and it is usually granted the same low rates and fees as a retail merchant account while providing the portability of a wireless merchant account. The main difference between a store and forward account and a wireless account is that store and forward does not provide a real time authorization. A store and forward account functions much like the name implies. In order to use a store and forward merchant account your credit card processing equipment must be capable of performing the task.

A store and forward terminal is like a wireless terminal in the way that it is battery powered and does not require a physical phone line in order to process transactions. This makes them ideal for businesses that would like to process credit cards on the go. When a merchant swipes a customer's credit card through a store and forward terminal the transaction information is saved in the terminal's memory.

Once the merchant has access to a phone line, they can plug the terminal in and it will forward the transaction information to the processor. A store and forward merchant account is ideal for business types that require portability, but may not have the budget for a wireless merchant account. Store and forward is also an ideal solution for businesses that have small average tickets or those that don't expect a lot of declined credit cards.

Grocery Merchant Account - A grocery merchant account is a card-present account that is utilized by retail businesses selling primarily grocery and food products. In order to qualify for a grocery merchant account the majority of product that you sell must be considered perishable and you can't sell gasoline. Your business does not have to be a large grocery store to qualify for a grocery merchant account. Grocery merchant accounts are considered very low risk accounts and they are usually given even lower processing rates and fees than those given to a standard retail merchant account.

Lodging Merchant Account

Lodging merchant accounts are for use by businesses that operate in the lodging industry such as hotels, motels, and bed and breakfasts. Lodging merchant accounts are afforded lower rates than card-not-present merchant accounts but they are not given rates as low as retail or other card present accounts.

Restaurant Merchant Account

Restaurant merchant accounts are utilized by food service businesses that authorize a credit card and then go back at a later time and adjust the final total to include gratuity. If you will be applying for, or already have a restaurant merchant account, ask your merchant service provider to go over the details of the account with you carefully and pay special attention to how tips are charged. Restaurant merchant accounts can get a little tricky when it comes to adding the tips into the final bill.

VISA and MasterCard mandate that an entire transaction must downgrade if the tip amount is more than 20% of the total bill. This means that the waiter or waitress will be getting cash from the drawer for the total amount of their tip, but the restaurant will be paying a mid or non-qualified fee that may be upwards of 5%. Depending on the profit margin of the restaurant, this may cause the business to lose money frequently on non-qualified transactions due to high tip amounts.

Card-not-present Merchant Account

A card-not-present merchant account refers to any merchant account where the credit card and the customer are not present when a transaction takes place. The only way to prove to a processor that the card and the customer were present when a transaction takes place is to swipe a credit card and perform an electronic data capture.

Any account where this is not possible the majority of the time is considered to be a card-not present merchant account. Card-not-present merchant accounts are considered to be higher risk by acquiring banks and are therefore charged higher processing rates and fees. When reviewing quotes for a merchant account you should not expect a card-not-present merchant account to have the same rates and fees as a card present merchant account. The rates and fees will always be higher for a card-not-present merchant account than they are for a card present merchant account.

Internet Merchant Account

An Internet merchant account is a card-not-present account that is used by online businesses to transactions through an electronic payment processing gateway. These accounts are set up under the assumption that the Internet is the business's store front and that the majority of sales will be generated from their online presence or website. Most payment processing gateways are multi-functional in the way that they are able to perform real-time transactions without human intervention as well as manual transactions. This means that the gateway is able to collect a customer's order and payment information from a shopping cart and then communicate with the processor to authorize the transaction without any human intervention. However, the gateway also allows a person to log into a secure control panel to manually enter credit card numbers that are the result of phone or product catalog orders. When processing online it's just as vital to get a good payment processing gateway as it is to get a good merchant account provider.

Mail Order Merchant Account (MOTO)

A mail order merchant account is the most common form of card-not-present accounts. A mail order merchant account is set up under the assumption that the business will not have the customer or the card present when processing a transaction and that most transaction will be manually entered into a credit card machine or other form of processing equipment. The term "mail order" does not mean that every business that uses this type of account is selling products from a catalog. It simply implies that the business operates on the basic card-not-present scenario. Mail order merchant accounts are given the lowest processing rates and fees of all card-not-present account types.

Touchtone Telephone Merchant Account

A touchtone telephone merchant account is just as it sounds. No credit card equipment is needed to process transactions using a touchtone account. The only thing equipment required is a touchtone telephone such as a cellular phone. Touchtone telephone processing is a good alternative to wireless processing for businesses that require real-time authorizations while on the go but cannot afford the initial up-front investment that is required for wireless processing terminals.

Touchtone telephone processing operates using a verbal prompt system that a merchant calls to complete credit card transactions. The merchant simply enters a customer's credit card and transaction information when prompted using the keypad on their touchtone phone. The system will process the information and verbally read back a decline or authorization number that should be copied onto a hard copy receipt that the customer will sign. Manual credit card imprinters are a must-have for any merchant that will be processing credit cards using a telephone authorization system like touchtone.

Touchtone processing usually has significantly higher rates and fees than other card-not-present accounts. Reason being, there is usually another company aside from the merchant service provider that supplies the touchtone system necessary to process transactions. This company charges a fee for their services making the total cost to the merchant that much higher. Even with the higher rates and fees the initial cost of a touchtone merchant account is usually very reasonable.

In order to figure out which type of merchant account is best for your business, and which rates and fees will matter the most, you must create a profile your business. How your business accepts credit cards, seasonality, processing volume, average ticket size, and other factors will all play a role in figuring out which type of merchant account is best for your business and which rates and fees are most important.

You can profile your business using the following questions as a guide. Each question is followed by a description that outlines what the question is asking and why it's important in determining the best type of merchant account or rate and fee package for your business. Don't worry if you aren't sure of the answers to any of the questions below.

How will I be processing credit card transactions?
Envision how you see a transaction taking place. If you will be accepting credit cards via your website you will need an Internet merchant account or a mail order merchant account. If you will be accepting credit cards for your retail store you will want to check out retail merchant accounts. Perhaps your business will require some degree of portability in order to process credit card transactions making a wireless merchant account, touchtone telephone merchant account, or store and forward merchant account possible options. If your business is in the lodging industry you will want to research lodging merchant accounts. And lastly, any supermarkets should take a look at grocery merchant accounts.

Does my business have seasonal swings?
Any business that has significant seasonal swings will be especially affected by monthly fees because of seasonal downtime. If your business is dormant for certain months out of the year you should try to have monthly fees such as the statement fee and monthly minimum fee lowered. You may need to give a little in other areas like the discount rate and transaction fee in order to make this happen, but it will save you money in the long run. This scenario is often true for businesses that are affected by the weather such as craft fair businesses or ski resorts.

The term average ticket refers to the average amount or dollar volume of a sale. If you have a high average ticket you should do your best to find the lowest discount rate possible. Work with providers to have them lower the discount rate on your merchant account even if they must raise the transaction fee to compensate. If your business has a smaller average ticket you should to work to lower the transaction fee, even it if means you will need to sacrifice a higher discount rate. The basis for this rule is simple mathematics. The following example illustrates both scenarios and shows how rates and fees can be manipulated to decrease processing charges substantially.

Example:
The following business has an average ticket of $500. While reviewing quotes the business owner was faced with a number of options. Each quote they received was competitive, but because of the business's high average ticket, one quote was a better fit.

Merchant Account A:
Discount Rate: 1.90%
Transaction Fee: $0.05
Average Charge Per Transaction: $9.55 (500 X 0.0190 + 0.05 = 9.55)

Merchant Account B:
Discount Rate: 1.59%
Transaction Fee: $0.35
Average Charge Per Transaction: $8.30 (500 X 0.0159 + 0.35 = 8.30)

Merchant account B saves the business $1.25 per transaction because the percentage charged over the high $500 average ticket carries more weight than the flat per transaction fee. Now let's use the same example for a business with an average ticket of $10 and you'll see that the opposite is true.

Merchant Account A:
Discount Rate: 1.90%
Transaction Fee: $0.05
Average Charge Per Transaction: $0.24 (10 X 0.0190 + 0.05 = 0.24)

Merchant Account B:
Discount Rate: 1.59%
Transaction Fee: $0.35
Average Charge Per Transaction: $0.51 (500 X 0.0159 + 0.35 = 0.509)
The percentage discount charge over a $10 average ticket is hardly noticeable. It's the per transaction fee that carries the most weight for a business with a lower average ticket.

What will my processing volume be?
The term processing volume refers to the dollar amount of Visa and MasterCard transactions that you expect to process in a monthly period. If you expect to process a higher volume, monthly fees are of the less importance to your business. Higher volume businesses should be most concerned with obtaining the lowest transaction and discount fees possible. Monthly fees such as the statement fee and monthly minimum will not be much of a factor over gross charges.

Will my business benefit from the ability to accept credit cards?
This is probably the most important and most often overlooked business profile question. All too often business owners fail to compare the cost of credit card processing to the expected increase in sales it will generate in order to determine if credit card processing will benefit their business. Of course, retail stores and e-commerce website have very little choice, but smaller businesses and professional niche business types need to give this question some serious thought. Be sure to look at what your competition is doing before you make a final decision on whether or not to accept credit cards. If the competition is accepting credit cards, you may have no choice but to accept cards as well.

Overall, the ability a business's ability to accept credit cards is most often beneficial. Business owners cringe at the cost involved, but the extra business card acceptance generates often negates these fees with profit to spare.

Does my business require multiple merchant accounts?
If your business will be processing credit card transactions in a number of different ways (card-present and card-not-present), you should research the costs and benefits of obtaining multiple merchant accounts. This is most often necessary for retail businesses that also have an online presence. In this situation the business would require an Internet merchant account to process their online sales and a retail merchant account to process their in-store transactions. When looking into multiple merchant accounts for your business you will often be able to work with provider to have monthly fees lowered or waived on one of the accounts.