Choosing A Merchant Account Provider

Michael Zittel 

Do you need a merchant account?

1. If you are a new business, with limited funds and you anticipate processing less than $1000 a month in credit card payments, we do not recommend a formal merchant account. The associated monthly minimums and bank statements of accepting credit cards may not be cost effective. You might want to consider a 3rd party processor such as PayPal, 2checkout and others as they have a Pay As You Sell model. There are risks involved with 3rd party processor such as lack of charge back protection and legitimacy. However, shoe-string business's may find the saving out weigh the risks and lack of legitimacy.
   
   
2. If you are an established business, or a new business anticipating more than $1000 in credit card payments a month, then begin by comparison shopping online. Do not settle for what your local bank offers. All major processing banks use independent sales offices and agents called ISO's and ISA's, who often have web sites offering their merchant services. You can find an extensive non biased list of retail and e-commerce providers at Merchant Service Directory.

Many of the listed ISO's will have agents in your area and will be available to meet you in person. By comparison shopping online you may discover your bank is charging much higher fees than you need to pay. This is a very common occurrence with local banks and can be avoided with a few minutes spent on line.

When comparison shopping, look at the discount rate, per transaction fees, bank statements, monthly minimums, length of contract, and cancellation fees.

Discount Rate and Per Transaction Fees

The discount rate and per transaction fees are usually the most important items to consider. The discount rate is the percentage of each sale the processing bank will keep. The standard rate for a “swiped” merchant account is around 1.59%. This means for every $100 you accept in credit card payments, the processing bank will keep $1.59. A “non swiped” rate is usually around 2.29%. Both require a per transaction fee of some sort. Per transaction fees are an additional fee per transaction ranging between $.10 and $.99. A common pitfall of merchants is thinking lower discount rates and higher transaction fees are more cost effect. This may be, but you have to do the math to be sure. If you average small sales less than $20 a ticket, you will be better served by negotiating a contract with a higher discount rate and lower per transaction fee.

Here are 3 examples to consider:

1. 1.49%, $.30 a transaction x 100 transactions of $20 each = $59.80
   
   
2. 1.59%, $.20 a transaction X 100 transactions of $20 each = $51.80
   
   
3. 1.69%, $.10 a transaction X 100 transactions of $20 each = $43.80
   
   
4. You see, the 3rd rate is better for high volume low ticket price merchants.
   The opposite is true for low volume, high ticket merchants.
5. 1.49%, $.30 a transaction x 10 transactions of $200 each = $32.80
   
   
6. 1.59%, $.20 a transaction x 10 transactions of $200 each = $33.80
   
   
7. 1.69%, $.10 a transaction x 10 transactions of $200 each = $34.80

As you comparison shop please use our Merchant Account Rate Calculator to help you.

Bank Statements

The bank statement is a paper print out of your monthly activity. This should be between $10-$15.

Monthly Minimums

To assure a sufficient amount of revenue to cover the costs of providing good customer service, most ISO's reguire a monthly minimum of transactions totals. This is usually around $25. This means you must process at least $25 worth of associated fees. Generally speaking, if you process over $1k in transactions you will meet the monthly minimum and this becomes a non-issue. However, there are some ISO's who will waive this fee. This may seem like a bargin, but consider this.

If an ISO is willing to lower their standard just to get a low level client, then it's likely they will have numerous low level clients. Low level clients tend to consume more customer service resources. This burdens an ISO with less profitability and fewer customer service representatives to assist you when you need them. Good customer service is as important as fair rates. What you save in the upfront costs of rock bottom rates, you will pay for in the back side when you need good customer service. And, you will need good customer service at some point.

Length of Contract and Cancellation fees

Most banks require a 3 year contract. The longer the term of the contract, the better the rates should be. If you are going to commit to a long term contract, then use it to your advantage. Demand better rates.

In junction with the length of contract most banks have a Cancellation Fee. This fee is usually the sum of the remaining months times the monthly minimum. A monthly minimum of $25 x 12 remaining months = $300.

There are some banks that do not have 3 year contracts, though they charge application fees, set up fees, programming fees, over “cap” fees, and a whole handful of other fees that can total more than the cancellation fees.

Other fees

Other fees include mid and non-qualified rates, batch fees, charge back fees, AVS fees, gateway fees, terminal programming fees, customer service fees, annual membership fees and more. To make a thorough comparison, we recommend that you create a spreadsheet with all associated fees.

Interchange Rate

Now, that we've discussed the fees you should consider the last and final point of choosing the right merchant account. ALL, and we do mean ALL, processing banks are subject to rates set by Visa, Mastercard, American Express, Discover and others. These rates are called the Interchange Rate.

Essentially interchange is the “buy” price for all banks, ISO's and ISA's. Anything over this rate is what the ISO and ISA makes. It is not fair to expect an ISO or ISA to make nothing on the service they provide for you. However, it is not fair for the ISO or ISA to overcharge you either. What this point tells you is everything is negotiable. If an ISO or ISA will not negotiate, move on. Another ISO or ISA will. Just make sure whomever you process through is an FDIC insured bank.