Understanding Payment Processing

 

As a small-medium size business owner wanting to sell your products or services, it may seem that the thought of steering your way through the labyrinth of accepting and processing customer payments is overwhelming. Below is some useful information that can help you get a better understanding of the world of payment processing.

 

Merchant Accounts

 

A merchant account is an account set up through a credit processing company or a bank to accept and process charge card orders. Without a merchant account, one cannot accept payments by any of the major credit card brands.

 

How do I get a Merchant Account?

 

Merchant accounts are obtained via a formal application process through an acquiring financial institution, or the merchant services department of a bank. Think of a merchant account as a form of credit - this means your financial institution will assess your credit to see if your company is worth the risk. Therefore, merchant account providers will usually require copies of financial statements however, if you are a start-up, you will most certainly need an extensive business plan which outlines, your sales venture.

 

Fees

 

A merchant account has a variety of fees, some periodic, others charged on a per-item or percentage basis. The majority of the per-item and percentage fees are passed through the merchant account provider to the credit card issuing bank according to a schedule of rates called interchange fees, which are set by Visa and Mastercard. Interchange fees vary depending on card type and the circumstances of the transaction. For example, if a transaction is made by swiping a card through a credit card terminal it will be in a different category than if it were keyed in manually or processed/taken over the phone.

 

What is a "Chargeback"?

 

Essentially, a chargeback fee occurs when a cardholder disputes the sale with their card issuing bank. This is not to be confused with a refund, which is simply a merchant refunding a transaction. With chargebacks the card issuing bank sends through a request to recover money for their cardholder. The merchant agrees to pay a chargeback fee (usually between $25-$50), for each chargeback that the bank deems valid. The most common complaint for a chargeback is that the cardholder cannot remember the transaction. However, the chargeback ratio is very low for transactions in a face-to-face (POS) environment. See Chargeback Management.