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Choosing An Internet Merchant Account
By: Andy Quick, Thu Jun 8th, 2006
Title: "Choosing An Internet Merchant Account" Copyright (c)
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Choosing An Internet Merchant Account Andy Quick
Surf to Google and perform a search on "Internet Merchant
Account". The results are staggering (472,000 results!) If you
have created a web based business and need to accept credit card
payments, your choices are limitless. Before you partner with a
provider, take time to understand the different components of
internet credit card processing, and know what to look for in a
merchant provider.
How It Works
Accepting credit card payments through your web site actually
requires multiple components. Between a paying customer and your
bank account, three layers exist:
Payment Gateway - This is the code that will transmit a
customer's order to and from an internet merchant account
provider. The payment gateway provides you the ability to accept
customer billing information (credit card number, credit card
type, expiration date, and payment amount) and the necessary
validation steps that must be followed before the credit card is
actually billed.
Internet Merchant Account - A Merchant Account is an account
with a financial institution or bank, which enables you to
accept credit card payments from your clients. The payment
gateway actually transmits the billing information to the
internet merchant account provider. Unfortunately, most local
banks do not provide internet merchant account capability.
The main reason why most local financial institutions or banks
do not want to provide online merchant accounts is because
transactions conducted over the Internet are totally different
from face to face transactions where a signature is required to
authorize the purchase. This makes online transactions prone to
credit card fraud. Fraud protection should be one of your
primary considerations when choosing an internet merchant
account provider.
Web Site - Regardless of which merchant provider and gateway
service you choose, your web site will need to integrate with
your service providers. Most providers include detailed web
integration instructions.
How Much Does It Cost
Understanding the total costs of your merchant provider can be
tricky. Remember my Google example - there are more merchant
account providers than there are people looking for internet
merchant accounts so ask questions and be picky! Typically, an
internet merchant account will have three types of costs:
- Up Front Application Fees - On Going Fixed Fee - Discount Rate
- Fixed Transaction Fee - Termination Fees - Miscellaneous Fees
Let us discuss each type of cost:
Up Front Application Fees
Many internet merchant accounts will require an up front
application fee. This fee, supposedly, is to cover their costs
for processing your application. In case you choose not to open
an internet merchant account, they still cover their initial
costs. Although common, many providers waive these fees and I
recommend that you choose a provider that does not require an up
front fee.
On Going Fixed Fee
Most all internet merchant providers require a monthly fixed fee
or "statement fee" as it is commonly named, which is simply
another way to cover their costs and make money. You will be
hard pressed to find a provider that does not require this type
of fee on a monthly basis. However, do not choose an internet
merchant account that requires more than $10 per month.
Additionally, most internet merchant providers require a monthly
minimum (usually $25). The bottom line is that you will be
paying at least $25 per month (on top of the monthly statement
fee) for your account.
Discount Rate
Usually, the discount rate will be between 2 and 4 percent. The
discount rate is the sales commission the provider earns on each
sale. For example, if the discount rate offered is 3%, and you
receive a sale over your web site for $20, you will owe 60 cents
to your internet merchant provider.
Fixed Transaction Fee
Usually between $0.20 and $0.30, the fixed transaction fee is
the fixed fee portion of each sale. Unlike the discount rate,
the fixed transaction fee is the same for every transaction.
Whether you get a $1 sale or a $100 sale, the transaction fee
will be the same.
Termination Fee
A bit more hidden in the small print, a termination fee can
apply if you cancel your merchant account within a specified
period of time (usually within one year). But beware, some
merchant providers require a three year commitment!
Miscellaneous Fees
If a customer requests a refund and they want their credit card
credited, an internet merchant provider will charge you a
separate fee (usually between $10 - $20). Read the contract
carefully, as other special fees may apply.
Putting It All Together
Now that the different fees have been explained, let us look at
an example set of transactions to help understand what an
internet merchant account may cost your business on a monthly
basis.
I have created a simple formula to help you calculate your
monthly charges:
Total Charges = Statement Fee + Number of Transactions x
(Average Sale x Discount Rate + Fixed Transaction Fee) + (Number
of Chargebacks x Chargeback Fee)
For example, let us see you sell widgets over the internet. The
sales price for each widget is $10. You typically have 100 sales
per month and about 5 people request refunds (chargebacks). For
this example, let us assume you have signed up with Jones&Jones
internet merchant account services and have the following terms:
Discount Rate - %2.5 Statement Fee - $10 Fixed Transaction Fee -
$0.30 Chargeback Fee - $15
Using my formula above, your monthly Jones&Jones charges will be:
Total Charges = 10 + 100 x (10 x .025 + 0.3) + (5 x 15) = $140
You can calculate your monthly sales revenue by multiplying your
sales volume by your price:
Monthly Sales Revenue = 100 x $10 = $1000
Your internet merchant provider is costing you %14 or your total
sales.
Making Your Decision
Before you choose and internet merchant provider, understand all
of the cost components. Use your current or projected sales data
to forecast what your internet merchant account costs will be.
Planning ahead can save you time and money.
About the author:
Andy Quick is co-founder of Findmyhosting.com
(http://www.findmyhosting.com), a free web hosting directory
offering businesses and consumers a hassle free way to find the
right hosting plan for their needs. Feel free to contact Andy at
andy@findmyhosting.com in case you have any questions or
comments regarding this article.
