Questions to ask when getting a merchant account
There's a steep learning curve involved in getting the best merchant account, and it's natural to feel a little overwhelmed. We've put together the following ten questions that you should ask prospective merchant service providers. The answer to which will help you avoid some of the largest pitfalls that face businesses that are in the market for a new merchant account.
What is interchange and where can I view the categories, rates and fees?
Don't begin shopping for a merchant account until you at least have a basic understanding of interchange fees. Interchange accounts for the bulk of the credit card processing charges that you will pay, and the rates are the same for all merchant service providers. Think of interchange as wholesale processing rates. When shopping for a cheap merchant account, you're looking for the lowest markup over interchange rates.
What type of price structure does this merchant account use?
Merchant service providers use a number of different pricing models that act upon the underlying interchange fees differently. The three main types of pricing are tiered, interchange plus and enhanced recover reduced (ERR). Of these three, interchange plus has the potential to be the least expensive (so long as the rates are competitive) and it's also the most direct.
Tiered pricing generalizes interchange categories resulting in potentially large surcharges, ERR pricing has a hidden charge that is the difference between target interchange and the qualified rate, and interchange plus passes actual charges straight through to you with a fixed markup. Another up and coming price model that's recently been introduced is flat rate merchant account pricing. Check out CardFellow to get flat rates quotes.
What do I have to do to get the best interchange rate once I begin processing?
Getting low merchant account fees is only half the battle. Ensuring that you're transactions are qualifying to the lowest possible interchange category as often as possible is very important. Interchange charges make up the majority of the fees that you pay to process credit cards, not the markup from your merchant service provider.
Will this merchant account have daily or monthly settlement?
Merchant accounts can be set up with either daily or monthly settlement. This refers to when fees are actually charged. In the case of daily settlement, fees are removed from gross processing volume prior to you receiving funds. For example, if you charged a customer's credit card $100, you would receive $97.50 at the end of the day from your merchant bank. This is the gross charge less any charges. We just estimated 2.5% for this example.
In the case of monthly settlement, gross deposits are made to your account throughout the month and charges are taken in one lump sum at the end. Going from our last example, you would receive the full $100 deposit the day it's charged and the fee would be taken at the end of the month along with all other charges.
For obvious reasons, monthly settlement is much better for cash flow because you hold on to your money for longer.
Is this a lease or will I own the equipment?
Don't lease credit card equipment. Most standard credit card machines can be purchased brand new for $300 or less. Leases will lock you into to an agreement of four years or longer and carry outrageous markups in excess of 1,500% or more.
If a prospective provider is trying to get you to sign a lease for credit card equipment, it's a great indicator that they don't have your best interests in mind. Tell them you're not interested in leasing equipment.
Is the equipment that you're recommending proprietary?
Some credit card machines are proprietary and will only work with a particular processor's platform. Merchant service providers will recommend proprietary equipment because it makes it harder for you to switch to a different processor in the future if you're offered better rates and fees.
There are many excellent credit card machines from manufacturers like Verifone, Nurit and Hypercom that are compatible with virtually every credit card processor. Non-proprietary terminals can be reprogrammed to work with almost any merchant service provider leaving you the option to switch if a better offer comes along.
If a merchant service provider recommends proprietary equipment, tell them that you're only interested in terminals that can be reprogrammed by most major processors.
Is there a cancellation fee?
Cancellation fees are used in the merchant account industry to impose a penalty fee on a merchant that cancels their account before the contract term expires. Merchant account contract terms are typically three years long.
There is no benefit to your signing a merchant account contract. The benefit is for the provider, because the penalty fee virtually guarantees that you will stay processing with them for the length of the contract.
Examine merchant account applications carefully for a cancellation fee. If you can't find it on the schedule of fees, ask the salesperson to point it out. Insist that in order to earn your business, the cancellation fee will need to be waived. Almost all providers will do this if pushed hard enough.
What is the monthly minimum?
A merchant account monthly minimum is not actually a fee; it's more like a benchmark. The monthly minimum guarantees the provider will make a certain amount of money on your account each month. In months where you're total fees don't meet the minimum amount, you will be charged the remainder out of pocket.
For example, if your merchant account has a $20 monthly minimum, and the fees on your account for that month only total $13.50. You will be charged an additional $6.50 out of pocket in order to meet the minimum charge.
A monthly minimum can prove costly if your business doesn't process a lot of credit cards, or has seasonal slow-downs. Don't settle for high monthly minimums. Tell your salesperson that you would like the fee lowered or waived.
Is there an annual fee?
Many merchant accounts have an annual fee. There's no benefit to you for paying a hefty annual fee to your merchant account provider. Ask your merchant account salesperson if their account has an annual fee. If so, insist that it be waived.
Do you charge a PCI compliance fee?
The Payment Card Industry (PCI) Data Security Standard (DSS) is serious business, and all merchants should take it seriously and strive to become compliant. However, Visa and MasterCard don't charge a fee to ensure that merchants have done so.
Sales agents and independent sales offices (ISO) go to great lengths to make sure that their merchants get and remain compliant, and there are costs involved in this process. Many merchant service providers have developed monthly or annual PCI compliance fees to cover this added expense, but it's arguably just a cost of doing business.
Insist that any PCI compliance fees be lowered or waived if a salesperson would like to earn your business.
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