How to Set Up a Merchant Account to Process Credit and Debit Cards
In today’s world, it’s almost impossible to have a business without being able to accept credit cards or debit cards. Whether you have a physical store or an online store, the ability to process credit and debit cards allows customers to buy your products and services safely and efficiently. In brick and mortar stores, most customers prefer to purchase their items using credit or debit cards rather than cash. Studies also show that people typically spend 12 to 18% more with credit and debit cards than cash. In e-commerce websites, credit and debit card payments are the most convenient way of purchasing online since other payment options are limited to mailing a check or money order, or using a third-party provider like Paypal or Google Checkout.
Credit card processing starts when the customer swipes their credit or debit card in a terminal or when they enter their card information online. Money is transferred from the customer’s bank to the merchant account of the business. Money is automatically “held” or transferred electronically. To be able to process credit and debit card payments, a business needs to establish a merchant account. A merchant account is a bank account that lets businesses accept payments either by credit or debit cards.
It is easy to setup a merchant account. Depending on which provider you choose, you need to have the following to open a merchant account:
- Physical or virtual store
- Business checking account
- Federal Tax ID or Employer Identification Number (EIN)
You may also need to have the following personal information ready:
- Business checking account numbers
- Driver’s license
- Business licenses and permits
- Business financial information
Be sure to compare different providers to ensure that you get the best rates. You may be able to establish a merchant account at your local bank, but check other options as well so you get the most competitive prices. Some banks have stringent requirements and may not be as cost effective as a regular merchant service provider (MSP).
Choosing a provider can be tricky with all the different fees and transaction costs involved. Most merchant service providers charge a flat monthly fee as well as a per transaction fee, in addition to other fees. Contracts can be month to month or could be more long-term, like a 2-year contract.
There are different fee structures for merchant accounts. The best one for you depends on the kind of products and services you offer and the type of business you have. Here are some of the more popular pricing models:
- Flat Rate. This is the simplest type of pricing. A single monthly flat rate is charged whether your transactions increase or decrease.
- Interchange Plus. Interchange reimbursements fees are wholesale merchant account rates for different kinds of card transactions. They are published by card brands such as Mastercard, Visa and Discover biannually in April and October. In the interchange plus pricing model, you pay the interchange rate in addition to a fixed rate.
- Tiered. This is the most common pricing model. You get charged different rates for different types of transactions. In a three-tier merchant account rate structure, qualified transactions get charged the base rate, mid-qualified transactions get charged another rate and non-qualified transactions get charged a higher rate. In a six-tier merchant account rate structure, debit and credit card transactions are separated.
- Mixed Rate. You get charged a combination of the interchange plus and the tiered rate pricing.
Here are some of the fees that you can expect to pay on your merchant account:
- Equipment Fee. For physical stores, you need credit card processing equipment to be able to handle transactions. Some merchant service providers provide the equipment for free.
- Setup Fee. Some merchant service providers charge businesses a setup fee to open their account while others waive them.
- Monthly Flat Fees. Monthly fees are fixed fees that are charged to businesses regardless of the number of transactions done per month. It can range from $10 to $15 a month.
- Minimum Monthly Fee Requirement. Merchant service providers require a minimum monthly fee for transactions. If the monthly transactions are less than the minimum, usually in the $25 range, you may be required to pay additional fees.
- Transaction Fees. For every transaction, merchant accounts charge fees that range from $0.17 to $0.31 whether the card is declined or approved for payment. A transaction is considered to be any communication with the processing bank, including refunds, clearing a batch and other tasks.
- Authorization Fees. Authorization fees are charged on authorization responses.
- Chargeback Fees. A chargeback request happens when a customer refuses to pay or disputes the charges on their card. Customers request chargebacks when the products are not satisfactory or if their card was stolen and used by somebody else. Most chargeback fees are charged to the merchant at $25 per transaction.
- Contract Cancellation Fee. Depending on your merchant service provider, they may charge cancellation fees for terminating your contract.
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