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New Merchant Account Quick-start Guide for Small Business

July 2009
Here's the vital information that you need to know before, during and after you get a new merchant account.

The process of getting a new merchant account can be pretty intimidating. There's a lot of information out there about merchant accounts and most people don't have time to wade through all of it before getting a new account. If you're that person, this tutorial is for you. If you're pressed for time, here's the vital information that you need to know before, during and after you get a new merchant account. Merchant accounts are very important and we suggest investing the time to learn about them when possible. But for now - this tutorial will get you started down the right path. 

Laying the Ground-work:

There's a lot of competition out there. Use it to your advantage. The market for new merchant accounts is highly competitive and providers are willing to do whatever they can to get your business. Use this competition to your advantage and get quotes from at least three different providers. Most importantly, don't be afraid to let each provider know what their competitor is offering. Processing rates and fees aren't set in stone. Providers can move things around to try and best their competition. Let each provider know what the other guy is offering and you'll see rates and fees drop.

The website CardFellow.com is a great resource for getting quotes for a new merchant account. All you need to do is create a free account and providers will give you quotes right online. CardFellow will also help you select the best quote by working with you and the provider through their on-site Merchant Message Board. It's great service definitely worth checking out.

Not all contracts have a term. 

Technically, all new merchant accounts have a contract - it's the contract term and the cancellation fee that you should watch out for. A contract term is the period in which if you cancel a merchant account, you will have to pay a cancellation fee. Month-to-month merchant accounts without a term can be cancelled at any time without a fee.

Don't disqualify a merchant account just because it has a contract term. Sometimes imposing a contract term will make it possible for a provider to lower rates and fees or lend a piece of equipment free of charge for the length of the term. 

If you do end up considering a merchant account with a contract term, here are a couple of things you should be sure to ask about.

  • Term Auto-Renewal - Some merchant accounts have language in the contract that automatically renews the contract term if the account isn't cancelled within a certain timeframe. The cancellation period is usually about thirty day, but all accounts are different.
  • There's no guarantee - Merchant account contracts with or without a term don't guarantee that rates and fees will remain the same. Merchant account agreements have out-clauses that make it possible for providers to change rates and fees so long as they give notice of the changes. The notice of any changes will be posted on your monthly merchant account statement - that's why it's so important to read them every month.

You have to pay all rates and fees.

Even though discount and transaction fees account for the majority of credit card processing expense, you still have to pay all the other fees. Keep this in mind when you're comparing new merchant accounts. Providers know that discount and transaction fees are scrutinize the most by prospective providers and you may not find there's much of a difference in these fees between providers. However, fees like monthly minimums, statement fees, and other important but less visible fees may vary greatly. When you're looking for a new merchant account, compare all aspects and fees of the accounts, not just discount and transaction fees.

Equipment doesn't cost a fortune.

One of the biggest misconceptions about credit card processing is that credit card machines cost a fortune to purchase. That's just not the case. Very good terminals with thermal printers and other bells and whistles can be purchased new for $400 or less. Wireless terminals and other specialty equipment may be slightly more expensive, but it's still very reasonable if you find the right provider. Before jumping into an expensive leasing agreement, shop around for different equipment prices and deals. Many providers even give terminals away with a new merchant account. Sure, you'll have to give it back if you close the account - but you didn't have to pay for it in the first place.

When you're applying for a new account:

There are no hidden fees.

I know it goes against all of the horror stories you've heard - believe it or not - merchant accounts don't have hidden fees. With that said, they do have hard to see, often overlooked fees. Merchant account providers can't charge you anything that you haven't agreed to in the merchant service agreement that you have to sign when opening a new account. When you're opening a new merchant account, the provider will give you a couple documents to review. The first document is called the merchant service agreement and it's usually between fifteen and twenty five pages long. The second document is called the schedule of fees and it's usually two or three pages long.

Be sure that you receive and review both of these documents very carefully before signing anything. It won't be the most interesting read that you've ever had, but it will be one of the most important. If you've unsure of anything in either document, ask the provider for a thorough explanation.

Give thought to your processing volume and average ticket.

When you're filling-out your new merchant account application, you'll have to declare a monthly processing volume and an average ticket. The term processing volume refers to the gross credit card sales in a monthly period and average ticket refers to the average dollar value of a credit card sale. The underwriter at the processor uses these two figures to access the risk associate with your new account. Basically, that means they take these numbers pretty seriously. If you grossly exceed either of these figures once you begin processing, your account may be frozen or even closed. Declaring processing volume and average ticket is especially difficult if you're starting a new business and you don't have prior processing history to look at. In this case, work with your provider to arrive upon realistic numbers and then pad those by 10 or 20 percent to be on the safe side. But again, every business is different so be sure to ask your representative for assistance if you're unsure.

Once you start accepting cards:

How much you're charged is determined by how you process transactions and the types of cards that you accept. It's a bit of backward terminology, but when a credit card transaction charges at a higher rate - it's said to have downgraded. The way a transaction is processed and the type of card that's being processed are the two main reasons why transactions downgrade.

The main types of credit cards that downgrade are:

  • Business or corporate cards
  • Rewards credit cards
  • Government cards 
  • Foreign cards

 

There's not much you can do to limit downgrades due to card type because card issuers have strict regulations that bar merchants from discriminating against cardholders because of the type of card that they're using. The good news is that you can limit downgrades that are a result of processing errors. Two common and easily corrected processing errors that cause downgrades are:

Failing to clear your credit card batch daily

Credit card batches must be sent to the processor within 24-hours or every transaction in the batch will downgrade. Failing to clear your batch every day can be a very costly mistake. For example, imagine that you've processed $8,000 worth of credit card transactions and you forget to clear batch. The next day you send the batch to the processor, but instead of being charged the qualified rate of 1.7%, the transactions downgrade to 2.5%. That's a difference of $64 just for not clearing your batch in the allotted time. Providers offer something called auto-batch close. As the name implies, this feature will automatically close credit card batches when there are transactions that need to be settled. There's no charge for this service and it will help you avoid expensive downgrades.

Punching-in transactions on a card-present merchant account

If your merchant account was issued under the assumption that you'll be processing transaction when the credit card and the customer are present, you were given what's called a card-present account. Cardpresent accounts have lower rates when you're swiping credit cards, but all transactions that are manually entered will automatically downgrade.

This is a common problem for retail businesses that also process catalog of Internet orders through the same machine. All keyed-in transactions will downgrade to a higher rate. The solution to this problem is to open a card-not-present merchant account.

Chargebacks are serious business

A chargeback occurs when a cardholder contacts the issuer of their credit card to dispute a transaction. When this happens the merchant that made the charge will get a notice regarding the dispute. If and when a chargeback happens to you, it's very important to deal with them quickly. Merchants are given a limited amount of time to respond to a chargeback dispute. If the window of opportunity passes, the cardholder automatically wins the dispute.

Ignoring the fact that chargebacks are very costly, excessive chargebacks may result in your merchant account being terminated. The best way to protect your business from chargebacks is to stop them before they happen. To do this, create a chargeback prevention plan and be sure to follow it for every transaction. When you do receive a chargeback notification, deal with it immediately.

Scrutinize your merchant account statements

For many businesses, credit card processing charges account for a significant portion of monthly operating expenses. This is reason enough to read your processing statements every month. Statements are confusing and it takes time and effort to learn to read properly - but you can't afford not to! If you throw your processing statements in a pile each month - stop! Open the statement every month and scrutinize the charges. If you're not sure how to decipher the statement, call you're provider and ask them to explain everything in detail.

Don't forget your processing volume and average ticket

This can't be stressed enough. Grossly exceeding the processing volume of average ticket amount that you declared on your merchant account application can result in your account being close and your funds being frozen. If you need to, write these figures down and post them where you can see them when charging credit cards.

 

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