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Getting a merchant account for e-commerce

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Most banks charge a percentage of each transaction, called a discount rate, and a fixed per-transaction fee. There is often a fixed monthly fee, a monthly minimum order, and a one-time setup fee as well. A payment-processing system, whether hardware- or software-based, is an additional expense, as we shall see.

Fees for merchant accounts are like interest rates on loans - they vary depending on the perceived level of risk to the bank. Users of credit cards may refuse to pay certain charges for a variety of reasons, ranging from returned products to honest errors to fraudulent charges. Banks want to encourage the view of credit cards as a safe and convenient way to buy, so they are generally pretty lenient about allowing buyers to make chargebacks, as they are called.

The risk to the bank, of course, is that chargebacks may occur after the merchant has already been paid, and the bank could be left holding the bag. How favorable a deal you get therefore depends not only on how large a company you have, and how long you've been in business, but also on what kind of business you're in. Banks have stats on the rates of chargebacks and other hanky-panky in various different industries. Somebody in the business once told me that porno Web sites average over 50% chargebacks, meaning that over half of the charges made don't get paid in the end.

Banks do several things to limit their exposure to chargeback risk. They may ask you to personally guarantee the account agreement, meaning that if your company ends up owing money to the bank, you will be personally liable. Naturally, companies in businesses that have a high rate of chargebacks, especially those selling big-ticket items, will pay less favorable fees. Banks will also hold back a certain percentage of your money every month as insurance against future chargebacks. If you are deemed to be a high chargeback risk, it could be months before the customer's money makes it through the system to your bank account. The bank's chargeback policy has a dollar cost, because money in your bank account earns interest for you, while money owed to you by the bank does not. Be sure to get all the details of a bank's chargeback policy.

As with loans, insurance and other such financial services, some banks simply don't offer accounts to businesses in their "high-risk" categories, while others are happy to do business with anybody, for a suitably high price. Some of the businesses considered "high-risk" are what you'd expect - anything to do with porno, gambling, MLM or GRQ (get rich quick). Weight-loss programs, herbal remedies, and (don't ask me why) water filtration equipment are considered slightly less risky. If your business is on the official poo-poo list, you'll be forced to deal with a smaller bank, and pay premium fees.

Whatever you're selling, an Internet-based store is automatically in a higher-cost category than a traditional merchant. In a traditional store, the customer's card is "swiped" through a gadget that reads the data in the magnetic stripe, and transmits that data to the card issuer, which either authorizes or declines the transaction in a matter of seconds. The cardholder also signs a receipt. Such "cardholder present" transactions present little risk to the bank, and thus earn the lowest merchant rates. Merchants doing transactions when the cardholder is not physically present, whether over the phone or whatever, will pay a higher rate. Merchants doing business over the Internet will pay yet another slight premium, just for general purposes. When you apply for a merchant account, the bank will ask you what percentage of your transactions are "cardholder not present" transactions, and offer you a rate accordingly (for Internet merchants this will of course be 100%).

To sum up, these are the factors that banks use to determine how good a rate to offer you: 

  1. The percentage of "cardholder not present" transactions.
  2. The political correctness of the products you're selling.
  3. The average amount per transaction.
  4. Your projected monthly sales volume.
  5. How long you've been in business, and what kind of credit rating you have.
  6. The kinds of cards you want to accept. American Express charges higher fees than Visa and Mastercard.

Most banks offer credit card merchant accounts, but only a few are suitable for the Internet merchant at the moment. Some Luddite banks won't deal with Web merchants at all. Others may be willing, but aren't knowledgeable about the Internet, and will probably screw things up. If you go to the Web site of any of the major payment-processing software makers, you'll find a list of recommended banks. See: CyberCash, Inc. and Authorize.Net.