Basics of Merchant Accounts and Merchant Processing

New Jersey, Feb. 14, 2005 - Each day we get calls from potential merchants inquiring about our merchant services, what our rates are, and transaction fees.  Merchant services cannot and should never be defined as a flat rate or standardized fee.  Applications that are submitted to the banks undergo a complete and thorough analysis of the business in question, the owners, the way the products or services are marketed and sold, the competition, and the success ratio of the business. So, as a business owner, what do you need to look for in a merchant processor, and a merchant account?

1.  Price quotes - Any merchant processor that gives you a flat rate on a merchant account without asking you any questions about your business should be suspect.  For instance, if you call and say, "I'm opening a new retail business and looking at accepting credit cards, what are your rates?"  If the answer you receive comes back as "You will pay 1.59% and .10 per transaction."  Sure, the merchant processor can write the account for 1.59% and .10 per transaction, but that doesn't mean you will get that rate.  They haven't asked you anything about your business, they don't know where you are located, they know nothing about your credit, and nothing about your product, not to mention a 1.59% rate is impossible to get unless you are a grocery store or a Walmart.  After doing some research we have found that the range for a retail brick and mortar store falls between 1.69% to 1.91% depending on many factors that the bank's RISK Management Department will look at.  We have also seen rates from customers that converted their accounts to us that have gone as high as 2.98% with their previous processors.

2.  Interchange vs. Transaction Rate - Interchange is the percentage of the total sale that you will pay the processing bank, and a transaction fee is a flat rate assessed for each transaction.  You will pay both at all times, but the rates are variable.  If your business does a lot of transactions throughout the month, but the tickets are fairly low in price, you want to pay a higher interchange and a lower transaction fee.  The reverse is true for businesses who do very little sales throughout the month but their tickets are high, you want a low interchange and a high transaction rate.  Three examples of this are listed below:

• Business A did 100 transactions at an average of $20.00 per transaction.  Their rate is currently 1.60% at .45 per transaction.  Their processing fee is 100 x $20.00 x 1.60% = $32.00, Adding the transaction fee it's 100 x .45 = $45.00 the total cost of accepting cards for the month is $77.00
• Same business with same transactions paying close to a standard rate of 1.70% and .25 per transaction.  Processing fee is 100 x $20.00 x 1.70% = $34.00, and transaction fee 100 x .20 = $20.00 for a total cost of $59.00
• Finally let's go a little on the high side, 2.65% and .10 per transaction. 100 x $20.00 X 2.65 = $53.00, and transaction fee 100 x .10 = $10.00 for a total of $63.00

As you can see, example 2 and 3 are pretty close to the same, while the first example is costing the company at minimum $15.00 more a month.  So, think wisely when researching, think about how you do business, and how your products will sell, in what volume and average price of each ticket. Which brings us to our next section, Demographics.

3. Demographics - Some businesses do a high volume of Debit cards, some do a high volume of American Express, others see most of their income in checks.  A merchant account specialist should always ask you what type of payments you see the most of.  You don't want to pay additional fees for American Express if you are only presented that card once a month, nor do you want to pay for debit if you get most of your payments by credit cards.  Sometimes the line is too fine to determine whether you should pay for extra services.  So, when you are searching for merchant services, find a company that understands the type of customers you will be receiving.  For new businesses we suggest starting out slow and increasing your services as you need to.  This also goes for equipment.  Make sure you can expand your equipment as your business expands.  Don't be oversold, but worse, don't be undersold either.

4. Lease or Buy - When it comes to leasing, would you lease an ink jet printer or a $200.00 vacuum cleaner?  Probably not, not if you could buy it outright.  With credit card machines the same is true.  Yes, it is business equipment, and yes some companies recommend leasing your terminals, but in the long run, leasing can be expensive, and not very cost-effective.  A $300.00 terminal most likely will end up costing $669.00, over double the retail price.  So why have leasing at all?  Leasing is only recommended for companies buying a large volume of equipment, that do not want to pay for the total cost up front.  If you are a small business, buying one terminal, you should simply buy the terminal outright.  If you must finance, then we suggest adding the cost of the terminal to your bank loan or leasing an entire point of sale system.  For instance, if you are purchasing a complete network system, where you have computers being used as your cash drawer, networked to a server, then you should find a company that can give you an all-inclusive price with leasing options.

5. Hidden Fees, Pass Through Rates - Looking through a merchant statement, checking all the figures, one can get confused as to what they are actually paying for.  When talking to a merchant accounts specialist, make sure they disclose all the fees, and most importantly, make sure they are not quoting you a pass through rate.  Hidden fees can take the form of authorization fees, batch fees, statement, setup, application, gateway (for eCommcerce sites) and the list goes on.  When they send you a copy of your application for your signature, go through it completely.  Make sure you read the entire agreement, make sure you understand all the fees, and make sure the merchant account specialist is willing to disclose those fees and understands them. 

6. Experience and Knowledge - When you find a merchant services provider that you are comfortable with, make sure they know the industry.  After all, this is your business, and you want someone who truly understands how to serve you best.  Lack of knowledge and experience can cost you dearly, worse yet, it may lock you into a contract that you want to get released from.  If you want to know your salesman's experience, ask.  They should be more than happy and comfortable in discussing their background.

This, of course, is just a brief summary of some of the subjects you should cover when researching merchant accounts.  There are more facets and information available on the internet to help guide you in finding the right processor.  The best advice is to really know your business, your customers, your product, and your credit.  Let the knowledge you possess guide you to the proper merchant account.

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