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Merchant Account Go-to-Guide
Hand with EMV credit card swipe through terminal for sale
 Credit Card Processing (Short Overview)
Implementing credit card payments with an merchant account is not just an option for your business, it’s an opportunity. The convenience and accessibility of credit transactions have been proven to lead to an increase of 40% in average sizes (Merchant Warehouse, 2014). Unfortunately, there are some downsides of swiping, too. There are security risks for buyers and chargeback risks for sellers. But as credit card processing solutions advance, so do credit card risk management solutions. This is why it’s important to consider your options. It’s important to consider this developing world of payments. Mostly, it’s important to stay relevant with your audience and to increase revenue for your business.Â
Every positive must be taken with a grain of salt. There are fees that may come with an upgraded payment processing system. There are possibilities of getting rejected due to poor personal credit. Yet there are surely processing companies best fit for your budget, and there are IRS forms that can clear your financial records in processing applications. These are the types of things that businesses should understand when diving into the ocean of credit card processing. It’s vast and it needs to be understood at all depths. That’s what this guide is for: it’s to show you your windows of opportunity with credit card processing, and to encourage an educated leap.
Credit Card Processing Solutions
The credit card processing sphere is extensive, and merchants should be introduced to with the relevant language in order to get a good lay of the land. To provide you with some of the basic elements, here are a few important terms and concepts with which you should become familiar before exploring the solutions that are right for you.
A “merchant account” is parallel to your personal bank account, but instead holds the financials for your business. This is where you can review, accept, and process all of your credit transactions. Merchant accounts also provide a simple way for credit card companies to easily intervene in the event that fraud or any disputes occur.
Point of Sale (POS) System
A Point of Sale System describes the equipment that you use to conduct transactions for your business. For instance, all of your sales may go through a cash register, credit card reader, and receipt printer. Or, you may have a more advanced POS System that tracks inventory or generates sales reports. These tools for purchase make up your POS System.
A Payment Gateway describes the secure online portal through which buyers input their private payment information. Once this information is received, software will then process it to complete the sale.
Education Gateway over blue background, vector illustration
 When considering credit card processing solutions, merchants are deciding which type of payment system will best fit the mold of their respective business. In this decision, there are important factors to consider, such as security or cost. But these variables shouldn’t be considered in a void; instead, they should depend on whether you’re a brick and mortar establishment, whether you’re an online marketplace, or whether you’re involved in –or open to– mobile commerce. In short, how you process payments relies on who you are as a company. And the processing solution that you implement should be just as personal.
Brick And Mortar Establishments:
As a brick and mortar establishment, you may opt to have a similarly traditional processing solution. A simple POS System (such as a cash register and receipt printer) can be supplemented with a credit card reader that will streamline your accounting. A credit card reader will connect to your merchant account and register everything bought and sold. In the same way, keying in credit card information can be a simple approach to processing payments.
From here, your bank account can process all payments from this single funnel.
Online credit card processing requires a payment gateway. In this context, a payment gateway substitutes the credit card reader in that it forwards all buyer information to your merchant account. As the technology behind your check-out page, payment gateways may have optimal functionality when accompanied by a web shopping cart with which it can easily integrate.
But here’s where price comes in. Online transactions unfortunately run a higher risk of identity fraud, as there’s no room for any personal verification between the buyer and the seller. Due to the security risk, web-based credit card solutions may be a more costly option.
Mobile payment with NFC near field communication technology
In essence, mobile commerce  is an integrated credit card processing solution: buyers can conduct mobile payments via online transactions or in-store technologies. In other words, customers can either use WiFi to access an online marketplace on their cell, or download applications that allow them to substitute credit card swipes with a simple smartphone tap.
There are many other integrated solutions that can appeal to merchants, such as the combined implementation of of an invoicing software alongside virtual payment gateways. While consolidating two or more processing solutions is most popular among B2B companies, this again depends on how you define your business identity.
Each available credit card processing solution describes a way to transfer payment information to a merchant account, which can then be easily processed to your bank account. When the natural flow of payments is already in place, the only question that remains is what route do you choose to take to get there. And, in the end, each business must travel down the path that is best paved for their model. Â
Credit Card Processing Rates & Fees
Ah, credit card processing rates and fees: the Bermuda Triangle for businesses in educating themselves in the payment processing industry. When it comes to processing fees, there are so many complicated things to consider and a detailed and exhaustive roadmap is necessary in order to navigate. We thought we’d take this one step further, so forget your roadmap – here’s your atlas.
It’s important to understand who you’re dealing with when it comes to credit card rates and fees. Becoming familiar with the characters involved will help you better grasp the story.
Credit Card Associations: The credit card associations are the major players in the payment processing world. They set the stage and they direct the industry. Think: Visa, MasterCard, and American Express.
Credit Card Issuing Banks: Credit card issuing banks supply the financial value to the credit card associations (that is, if they don’t create and issue their own cards like AmEx and a few other associations do).  Think: Chase, Citi, and Wells Fargo.
Credit Card Processors/Acquiring Banks: Acquirers liaise between vendors and credit card associations. They facilitate transactions by relaying necessary information to the  credit card associations and by authorizing merchant requests. Any one transaction may require any number of acquirers. For instance, a business may encounter separate acquirers for financial statements, IT support, and money issuing.
Merchant Account Providers: These are companies that manage credit card processing (e.g. sales, support, etc…), usually through the help of an acquiring bank. They could be financial institutions, independent sales organizations, or double-duty acquirers, depending on the situation. Again, your merchant account is more or less your business’s persona bank account.
Payment Gateways: As we know, payment gateways are the secure payment forms used in online transactions. With payment gateways, processing fees are accrued as payments are wired from this portal to the acquiring bank.
When interpreting credit card processing costs, it is useful to translate these expenses into simplified terms. In short, processing rates and fees are “taxes” levied on each transaction by the parties listed above. Often times, rates combine a percentage of the sale and a flat fee per transaction. What you’re selling, where it’s sold, and how it’s purchased can all be taken into account when your processing fees are calculated.
For all rates and fees, there can be two subcategories attributed: (a) wholesale and (b) markups. Wholesale describes the universal, objective fees of your business’s transactions, paid to your issuing bank and your credit card association. Markups describe the varying, subjective fees paid to your chosen payment processor.
Discount Rate: The discount rate is defined by how the payment was transacted and what type of merchant account you have. It is the most basic expense of credit card processing. This rate covers the time and cost that it takes to process and deposit your credit and debit card payments from your business’s merchant account and into your personal bank account.
The discount rate is initially charged by merchant account providers, who calculate the cost from a certain portion of your total bill along with an additional fee per transaction. On top of this, merchant account providers  charge a markup for use of their platforms.
Similarly, issuing banks, dues, and assessments contribute to extra, conditional costs charged by the credit card associations (such as 2.10% + .10). These extra costs are known as “interchange”.
Surcharge Rates: Your qualified, mid-qualified, or non- qualified rates are determined by the type of card being processed, such as credit card, business cards, corporate cards, international cards, and reward cards.
At the time that a transaction is accepted through an approved credit card processing solution, then a qualified rate is charged. This rate is often the lowest and therefore the rate that is generally referred to when describing processing rates.
At the time that a transaction is accepted through a processing solution that does not qualify for the lowest processing rate, then a mid-qualified rate is charged. Examples include when a credit card number is keyed in as opposed to swiped, or when a company card as opposed to a personal card is used.
At the time that a transaction is accepted through a processing solution that neither qualifies for the lowest nor the non-qualified rate, then this rate is charged. Examples include lack of verification or unauthorized payments.
In the world of credit card processing fees, there are three spheres: (1) transactional, (2) flat, and (3) incidental. Like the discount rate, transactional fees are the most basic and primary as they are charged with each sale. Flat fees represent the costs of your (the merchant’s) purchases, such as signing up for a merchant account. Incidental fees are conditional costs resulting from certain processing activity, such as chargebacks.
Transactional Fees are determined by the risk of the transaction (i.e. they are higher in CNP transactions than they are in in-person, swiped payments). Because of the risk, transactional fees are therefore charged with or without payment approval.
Types of Transactional Fees:
Interchange: see “Discount Rates”
Debit Transactions and PIN Based Fees: These are the fees charged to the processing companies with each transaction conducted with a debit card. Processing debit cards can cost anywhere from 0.2% – 2.0% of the purchase (as opposed to the 1.5% – 4.0% of credit cards), plus an additional flat fee that ranges from $0.11 to $0.25 per sale (whereas the additional range for processing credit cards begins at $0.20). The exact amount depends on the size of the issuing bank. And, typically, cards requiring personal identification number (PIN) are fixed.Â
Flat Fees simply represent the cost of a business’s purchase. Some are monthly and some are one-time charges.
Application/Setup Fee: The initial charge to setup your merchant account. (This is a generally outdated fee).
Terminal Fee: The charge of in-store credit card purchases, applicable only for brick and mortar establishments.
Payment Gateway Fees: The charge of online credit card purchases, applicable for only ecommerce marketplaces.
Payment Card Industry (or, PCI) Fees: The charge for not complying with standards, or the standard fee for complying with regulations.
Annual Fees: These are fees charged every year to cover the basic use of a provider’s services. In my opinion, this is a bogus fee. Most of the better merchant account providers will not charge it.
Early Termination Fees: The charge for canceling a merchant account before the contracted end date.
Monthly Statement/Service Fees: The charge for call centers – such as customer service or account assistance.
Monthly Minimum Fees: The charge for businesses that do not achieve minimum monthly or yearly transaction amounts, which typically is expected to reach an annual total of $50,000. This is another fee that is not charged by some of the better providers like Dharma Merchant Services.
Statement Fees: The charge of printing & mailing bills, which can be avoided with electronic billing.
Online Reporting Fees: The charge of electronic billing, which is typically not charged or is packaged together with another fee.
IRS Report Fees: The charge of 1099-K (reporting purchases for tax purposes), typically from $2 to $5 depending on the provider.
Network Fees: The charge of certain card networks..
Incidental Fees only occur under certain conditions, but the activity charged is important to prepare for. Unlike transaction fees based on a percent of each payment and fixed fees based on a flat rate, incidental fees are not affected by the quantity or quality of the transaction.
Types of Incidental Fees:
Internet Gateway Fees: Additional transactional fees charged for securing transactions conducted through online marketplaces.
Address Verification Service (or, AVS) Fees: Additional transactional fees charged for online marketplaces and telephone order businesses.
Voice Authorization Fees (or VAF): The charge for authorizing transactions with use of a toll-free call center.
Retrieval Request Fees: The charge for the retrieval request that you issue when disputing a chargeback. This will typically cost between $10-$50.
Chargeback Fees: The charge for chargebacks, varying with circumstances.
Batch Fees or “Automated Clearing House” (or, ACH) Fees: The daily charge for transferring funds from your merchant account to your personal bank account.
Non-Sufficient Funds (or, NSF) Fees: The charge for personal funds that so insufficient that they cannot afford merchant account fees.
Downgrade Fees: The charge for non-qualified rates due to risk increases, typically caused by unauthorized or unverified transactions.
Credit Card Processing Pricing Models
As you can see, credit card processing fees and rates vary from business to business, and from month to month. The most important thing is to expect the expenses you’ll run into and to know your way around your statements.
Not every credit card processing pricing model is created equal. In fact, the options are as dynamic as business types and sales volumes themselves. When you boil it down, there are four main processing models available: (1) tiered, (2) blended, (3) interchange plus, and (4) subscription/membership. Here are the variables that fit into each of these equations: The Tiered Model = fixed percentage of each transaction + markup fee based on credit card used The Blended Model = fixed percentage of each transaction The Interchange Plus Model = fixed rate for merchant account + markup fee based on each transaction The Subscription/Membership Mode: fixed percentage of each transaction + fee for each transaction Let’s look more deeply into the math. The tiered model​or “tiered pricing system” is a pricing plan that charges the merchant a certain fixed percentage for each transaction, along with an additional markup fee based on the qualified level of the credit card used in that 1 transaction. As previously discussed in the rates & fees section , every credit card transaction can be deemed 2 qualified, midÂqualified, and nonÂqualified. The less qualified the credit card transaction, the higher the markup fee. Since what is deemed qualified and what is deemed mid or nonÂqualified is subjective to the payment processor, the tiered model is often the least transparent of the four. In other words, it’s the model with which it is most difficult to anticipate your monthly statements. The blended model​is a pricing plan that charges the merchant only a certain fixed percentage for each transaction. Unlike the tiered model, there is no consideration of the type of credit card used for the transaction nor are there any other additional fees that can be added. Though a consistent blended rate is high, it is generally not charged on a monthly basis. This is why the blended model is typically best for businesses with low sales volumes. The interchange plus model​charges the merchant a fixed rate for the merchant account, along with an additional markup fee based on each transaction. Like the blended model (and unlike the tiered model), the interchange plus plan does not change according to the credit card used in the transaction. The unique aspect of the interchange plus model is that its margins stay constant, so every business pays rates only proportionate to its sales volume. In addition, the interchange plus system clearly conveys which fees are wholesale (meaning, the fixed rate for your merchant account) and which fees are markups on your statement, making it arguably the most transparent model of the four. The subscription/membership model​charges the merchant a fixed rate for the merchant account, along with an additional fee for each transaction. Similar to the blended and the interchange plus models (and unlike the tiered model), the subscription/membership plan does not change according to the credit card used in the transaction. This processing pricing option is unique in that there are no percentage markups charged, making it popular among big businesses carrying out a lot of sales. As you can see, some of the most notable differences between these four credit card processing plans is their varying ratios of wholesale rates to markup fees. In other words, these models range from rates that are completely wholesale (subscription/membership), to rates that combine wholesale rates and markup fees (tiered and interchange plus), to rates that are completely markups (blended). So, depending on your business’s financial standing, your sales volume, and your pricing solution, you may require a certain ratio over another. And just as every business is unique, so is the model that works best for you. 1 Additional markup fees include payments to the bank, to the credit card company, and to the merchant account.
Credit Card Processing Refunds
Refunds are inevitable in any business, and the trick is to handle them with care. Why? Because refunds are not simply a mark of a good level of service for your customers, they’re also a sign of a bill ahead for you. As a merchant, your bill for each refund depends wholly on your credit card processing company. Some processing companies reimburse the merchant’s account for the amount the customer is requesting back, but charge businesses a small fee. On the contrary, some credit card processing companies will not reimburse the merchant’s account for the amount the customer is requesting back, and they will charge businesses both a transaction fee and a processing fee for the transaction. It’s important to note that credit card processing companies do not accept refunds indefinitely. Instead, there is typically a 60 to 120 day limit for an exchange. Additionally, merchants may not be able to access their reimbursed funds for up to six weeks. Again, all of these factors depend on the credit card processing company, so this is an important aspect about which to inquire when choosing your processor or when deriving your business’s refund policy.
Credit Card Processing Fraud, Disputes, and Chargebacks
The security of your business’s funds is one of your main concerns as a merchant. There will always be customers challenging charges – whether those challenges are valid or not. That being said, you need to be able to recognize red flags and most of all, minimize them. First, to best identify the potential merchant account culprits (i.e. fraud, dispute, chargeback), let’s put a name to who’s who. Fraud: wrongful or criminal deception intended to result in financial gain. Dispute: a situation in which a customer questions the validity of a transaction that was registered to the account. Chargeback: a demand by a creditÂcard provider for a retailer to make good the loss on a fraudulent or disputed transaction. Friendly Chargeback: a demand by a customer for a retailer to make good the loss on a seemingly fraudulent transaction or a regretful purchase. As you can see, the main differences in these situations lie between the various actors and intentions with which any given charge is challenged. In a fraudulent occurrence, the customer​is acting with malice​; in a dispute, the customer​is acting along suspicious activity​; and in a chargeback, ​the creditÂcard provider​is acting according to dues. ​Lest not forget the “friendly chargeback” phenomenon, in which the customer​is acting according to remorse​or by mistake. 1 Now that we’ve IDÂed our perps, let’s get into how to help you, the merchant – the potential vics. The two main concerns when it comes to credit card processing fraud, disputes, and chargebacks are (a) how to protect against them and, when the unfortunately inevitable issues arise, (b) how to resolve them. How to protect against credit card processing fraud and chargebacks. When we’re talking about protection, we can disregard protection against disputes. These things do happen, and should come at no cost to you. In other words, if customers dispute a charge, then they’re essentially reporting personal fraud on their personal accounts (and your goods happen to be target of that personal fraud). If the customers’ disputes render true, then the credit card processor will handle the fraudulent activity (see the “refunds” section for how this will be handled). If not, then no harm, no foul. Thus, the focus should be on protection against fraud. And, as fraud is the trickiest of the three processing sticky situations (due to its inherent deceit), it’s most important to narrow the window within which fraudulent transactions can occur. Here are your surefire ways to keep your guard up, guns ablazing: 1. Ask for as much verification as possible: ​This can range from requesting photo identification for inÂperson transactions, to requiring the threeÂdigit verification credit card code (CVV code) for online transactions, to implementing a captcha for online transactions, and even to asking for the buyers’ contact phone number or email addresses attached to their accounts for all types of transactions. 2. Implement new technologies:​As you can see, not all of the preventative measures of verification requests above are traditional (i.e. captchas), and there are always new technologies working to improve your credit safety. In addition to identification techniques, there are recent developments in payment processing that can only work in your favor if you are aware of them and their benefits. For one, there are EMV credit cards . These cards create advanced microchip technology 2 that allows the credit card at hand to communicate with the credit card reader on the spot. 3. Keep your eyes peeled: ​With inÂstore transactions, you have the power to use your presence as security. In other words, take advantage of the fact that customers are buying in your brick and mortar establishment by visually checking their receipt signatures and their card numbers 4. Take extra precautions: ​Sometimes, it’s better to rely on a thirdÂparty for your funds’ security. For one, you can store all buying and selling data and records on another computer beside your own. Or, you can require that online buyers input a ZIP code and street address into their payment gateway that matches with the Address Verification Service (AVS) and their credit card accounts. 1 Link to friendly chargebacks article 2 Link to EMVÂreadiness article 5. Go the extra mile: ​In addition to relying on a thirdÂparty computer other than your own, take it one step further by implementing tokenization. Tokenization is the security solution that renders credit card numbers unreadable after they’ve been input into your system, thus warding off hackers and later, fraud. 6. Think ahead: ​When developing your business’s policies, lean towards credit cardÂonly solutions, such as implementing a rule that you’ll accept credit card refunds only (as opposed to cash back refunds, too). By leading customers to credit card associations, you’re adding an extra level of security, verification, and factÂchecking from the side of these bigger corporations. 7. Follow the rules:​This one’s simple, if you adhere to PCI requirements, you’re less likely to encounter fraudulent activity. As mentioned before, these seven security precautions protect against fraud (and therefore, against disputes, as well). However, chargebacks are important to take individual note of as well, though less threatening as they are often done with a more innocent 3 intention than are fraudulent charges. Unless, of course, we’re talking about friendly chargebacks . 4 Here’s how to protect against chargebacks, friendly or otherwise: 1. Request written confirmation: ​While we’ve already addressed requiring signatures as a verification method against fraudulent activity, a signed receipt can also be used as evidence that the buyer both indeed purchased and intended to purchase your inventory. 2. Educate yourself on your options:​Major credit card associations, such as Visa, are constantly developing verified methods of substantiating proofs of purchase. Not surprisingly, the higher amount of evidence required, the lower number of friendly chargebacks faced by businesses. Since Visa’s new update, they’ve reported a 20% higher success rate for merchants disputing friendly chargebacks (Verifi). Other preventative measures for you to consider are mixed media verification, as in photo identifications and eÂmail addresses for inÂstore transactionsÍľ as well as IP addresses, geolocation, and device identifications for online transactions. Each of these modes requirements for purchases can provide another layer of evidence that your consumer is in fact responsible for what has been consumed. 3. Prepare for the worst:​In some cases, a buyer is aware of the transaction but is too ashamed to own up to the charge as it appears on their credit card billing statement (think: pornography subscriptions), and so they request a chargeback. This is not out of remorse, nor is it out of neglect, but instead out of embarrassment. If this could potentially relate to your business name in any way, arrange with your credit card processor to label customer transactions differently on buyers’ statements. It’s a simple solution, and it can save you from a lot of grief. 4. Be accessible:​Suppose a customer has an issue that he or she would prefer to address with the merchant directly. If your consumers can’t get ahold of you first, they may simply rely on disputing charges and requesting chargebacks with the credit card processors instead as a backup. This is particularly important for online transactions, during which shipping mistakes can create a problem. Take out the middle man by providing – and responding to – active contact information for your business. 5. Be transparent: ​Whether an online or inÂstore transaction, buyers can be thrown off and angry when their expectations are not met. Be sure to advertise as clearly as possible to prevent unhappy customers who feel happy to request chargebacks. 6. Protect your customers, and they’ll protect your account: ​Preventing fraud is a topÂtier way to prevent chargebacks. By complying to PCI regulations, you are fighting against both fraudulent activity in your own merchant account and fraudulent activity in your customers’ personal accounts. If they recognize a single instance of fraud attached to an experience with your business, they have higher chances of both reporting and receiving fraud attached to regretful purchase with your business later on. How to resolve credit card processing fraud, disputes, and chargebacks. The method of resolving any instance of fraud, disputes, or chargebacks varies from situation to situation. Universally, writing down all your stored data pertaining to the transaction(s) at hand is the best start. This includes the date and time of purchase, the date and time of notification, the purchase verification, and any other recorded information or security precautions taken to prevent the issue. 3 Link to friendly chargebacks article 4 Link to friendly chargebacks article The process that ensues from fraud, disputes, and chargebacks ensues as follows: the consumer will report the issue to either you or to the credit card processor (who will then report the issue to you). Then, the relevant funds are frozen until an agreement between you and the consumer is reached. For wrongfully requested chargebacks, it’s important for merchants to adhere to the notion that the transaction was not conducted according to any errors on theirs or their business’s side. In some cases, you can be charged a chargeback fee (around $25), a settlement fee, and even a lack of due diligence fee. For other refunds to your merchant account, see the conditions explained in the next section, titled “Refunds.”
