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Merchant Credit Card Processing: Everything To Know

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Merchant credit card processing opens a business up to a wider variety of payment methods. Business owners can make shopping more convenient for customers and explore e-commerce avenues to expand their reach. In this guide, we’ll explain how Merchant Account Providers operate and how to choose a service that will support you for years to come.

Merchant Credit Card Processing Terminology Explained

A merchant account is a basic utility for most businesses, as essential as Internet access or electricity. Some of the related terms, however, may not be quite so simple to understand at first. Let’s take a quick look at common terms you’re likely to encounter while researching merchant account options:

ABA Routing Number: Also called a Transit Routing Number, this is the nine-digit number identifying the bank an account belongs to.

Automated Clearing House (ACH): An electronic funds transfer system using networks controlled by the Federal Reserve.

Acquirer or Acquiring Bank: The account acting as the merchant account. The acquirer has a relationship with major credit card providers, as well as the business bank account, and it is the account responsible for clearing card transactions and depositing funds into the business account.

Chargeback: An action taken when the cardholder disputes a charge. A chargeback deducts the transaction amount, plus a fee, from the business account tied to the merchant account.

Issuing Bank: The bank or financial institution associated with the credit or debit card provider. It supplies the funds to the acquiring bank, and then bills the cardholder.

Merchant Account: A bank account that allows the account holder to accept credit and debit card payments.

Merchant Terminal: A merchant terminal, also known as a credit card terminal, point-of-sale terminal, or payment terminal, is a device or software program that reads credit or debit cards to process transactions.

Virtual Terminal: Web-based software that processes and stores digital records of credit and debit card transactions.

Payment Gateway: Associated service with the merchant account that encrypts data and transfers information between a merchant terminal and payment processor.

Payment Processor:The technical glue that facilitates with the transmission of transactions. It is chosen by the acquiring bank.

Payment Facilitator: A service provider that offers businesses a shared, mass merchant account. They have less flexible pricing plans, more volume restraints and less customer support than individual merchant accounts.

PCI Compliance: Security standards managed by the Payment Card Industry Security Standards Council.

Processing Volume Estimate: Required field for merchant account application, including information about expected average and maximum transaction amounts as well as monthly processing volume.

How Merchant Services Work

Simply defined, a merchant account is a financial account that accepts credit and debit card payments for the business. Many Merchant Account Providers have credit card terminals available for the business’ use, either as a lease or month-to-month rental (more on that later). The Merchant Account Provider holds a direct agreement with the business bank account. Funds from card payments are deposited into the business’ bank account, and the Merchant Account Provider’s fees come out of that same account.

Once your merchant account is set up, you’re ready to process card payments, including card-not-present transactions. Merchant credit card processing is surprisingly complex. Fortunately, it’s also fast and largely automated, so customers and cashiers don’t need to understand every detail of merchant processing to complete a sale. The handful of seconds it takes for a merchant terminal to scan a customer’s card launches a series of lightning-quick communications between the merchant account, Payment Gateway, Payment Processor and issuing bank to approve the transaction. If you’re using a Virtual Terminal, digital records can make it easier to batch out credit and debit transactions at the end of the day for bookkeeping.

Merchant accounts come in various forms. Contract versus month-to-month service, leased versus rented terminals and various rate plan options are only a few elements to consider before choosing the right Merchant Account Provider for you. If you have an e-commerce branch of your business, you’ll need a provider with online merchant account capabilities so you can accept payments over the Internet, for example.

How to Negotiate With Your Merchant Account Provider

Interested in merchant credit card processing options, but not sure how to find the best deal? Use these steps to negotiate your best plan.

  1. Ask for an Interchange-plus rate quote: This is the most transparent pricing method and our recommended option. Interchange-plus itemizes wholesale transaction cost from the provider markup. Your statement will look a little more complicated, but the transparency is essential to calculate how much you’re paying the Merchant Account Provider (and whether you're being billed fairly).
  2. Read up on fees: Some less reputable Merchant Account Providers count on business owners not knowing which fees are justified. This practice pads the provider's pocket.
  3. Compare equipment options: Leasing credit card terminals can easily inflate costs beyond the actual value of the equipment. Purchasing one outright could cost less! Look for fair rates on monthly rentals for software and equipment instead, or ask what options are available to integrate the merchant account with terminals you provide.
  4. Beware of contract termination traps: Early termination fees, auto-renewal, and other clauses can leave you stuck paying for a service that doesn’t work for your business. If you can, get the provider to waive early termination fees. If it won’t budge, consider other options. For instance, if you find a provider that offers enough cost-savings to warrant the switch, you could make up the penalty cost to terminate early in a matter of months. And definitely strike any contract clause that entitles the merchant provider to “liquidated damages” for early cancellation.
  5. Look at the whole package, not just the price: A provider that charges higher rates, but includes an online shopping cart feature, could be a better deal than a no-frills provider with a lower rate. If, that is, you need the shopping cart and can’t find a cheaper version. Ask yourself what features you need and calculate the bottom-line cost of implementing credit card processing.

Why Merchant Account Fees Are a Solid Investment

One question you may be considering is whether it’s the right time to implement merchant credit card processing. After all, signing on for this service does cost the business a fee for every transaction, whereas cash transactions don’t cost anything. Why should you sacrifice a percentage of your revenue to offer this payment method?

Consumers overwhelmingly prefer to pay with credit and debit cards, rather than cash. Only 24 percent of Americans reported making most or all payments with cash in a 2016 Gallup poll, down from 36 percent five years before. Meanwhile, the Federal Reserve reported that credit card use climbed faster than any other payment method between 2012 and 2015, resulting in an additional $610 billion in spending.

The implications are clear. Hesitating at a 2.5% or 3% fee could cut your business off from three-quarters of consumers and your business’ potential share of trillions of dollars’ worth of spending. Merchant services are much more likely to positively impact your business’ revenue potential than drain your resources with fees. That said, you do need to be mindful of the short-term costs of investing in any new system. Learning to spot inflated fees or unnecessary charges can keep you from getting hooked by an unethical provider.

How to Simplify Merchant Account Management

Many businesses can’t afford to turn away credit and debit card transactions. If you have an online store or want to accept payments other than cash at a brick-and-mortar location, you need a merchant account. The question is, how are you going to keep accounts organized?

Yes, that’s accounts, plural. This may or may not apply to your business yet, but forward-thinking business owners should consider how to streamline management for multiple merchant accounts. If your business has multiple bank accounts (for instance, a multi-location company that uses separate accounts for each location), you’ll need additional merchant accounts to correspond to each bank account. Some business owners may use separate accounts for in-person and e-commerce transactions. Companies in certain industries, like law firms and auto dealerships, may need separate accounts for different clients or manufacturers.

A sophisticated Virtual Terminal can provide access to all of your accounts under one login. A centralized home base lets you view all your information at a high level or move between accounts with a few clicks. For security and organization, you can restrict employee access so they only view transactions at their location. Other Virtual Terminal features to look for are advanced searches and report generation, so you can compare sales figures as well as view merchant account details. Because Virtual Terminals can often capture electronic signatures and store detailed records, using this software can help prevent incorrect chargebacks for many businesses, as well.

10 Things You Need to Know When Choosing a Merchant Credit Card Processing Provider

We’ve touched briefly on some of the qualities you can expect from an excellent merchant payment provider, and what warning signs to beware. Let’s dive into the specifics of identifying merchant services that will truly support your business. First, let’s go over good signs:

  1. Transparency: The right merchant services aren’t necessarily the cheapest one on the market. It’s the one that offers the best solutions to help your business grow. Open, transparent communication and information are essential so you understand the impact your merchant services provider has on your efficiency and bottom line.
  2. Real-time reports: Look for easy-to-use interfaces and detailed reports. Information should update in real time so you can take care of your books and view data on your schedule.
  3. Free next-day funding: Money from transactions is your business’ revenue. It should land in your account as quickly as possible. Ignore providers that charge a fee to guarantee next-day funding. This isn’t standard practice, and you can easily avoid it.
  4. Customer support: Will you get training to use new equipment? Is a real person available to troubleshoot and answer questions? You should feel comfortable with the level of service provided.
  5. Ease of use: Simple, streamlined operations let you get running faster. You should also ask how the service will integrate with other software applications you use.
  6. Security: Would you believe only about one in 10 merchant service providers are registered as PCI compliant? Don’t gamble with your security. Find a compliant provider and have a rep walk you through the software and equipment they use to protect against fraud and guard your data.

Unfortunately, not all merchant credit card processing companies follow best practices. Look elsewhere if you encounter these red flags:

  1. Required contract: Many merchant services providers prefer to lock businesses into contracts that last two to six years. That’s plenty of time to forget your available window to renegotiate before auto-renewal (some unethical providers may even bury auto-renewal information deep in the fine print). If you find a better provider, your contract may penalize you for switching before your term expires. Month-to-month plans incentivize the merchant payment processor to maintain excellent service to keep your business.
  2. Unfavorable equipment offerings: There are two potential pitfalls here. One is price. Go for a low-cost rental (or purchase a terminal that works for you) rather than sign a lease. Leasing equipment often far exceeds the cost of purchase. The other equipment warning sign is outdated terminals. A Smart Terminal is your best option. Software updates help your business evolve to accommodate new tech and payment methods. You may also have an easier time generating reports and maintaining high security standards.
  3. Billback rates: With Billback pricing, credit card merchants charge a flat, sometimes-discounted rate on all transactions up front. At the end of the month, they tack on surcharges for any transactions that didn’t qualify for the lower rate. This system is misleading and confusing. You’re basically guaranteed to pay more than the lowest “qualified” rate they quote up front, and the separate line items can make it difficult to work out the effective charge on each transaction.
  4. Lots of unnecessary fees: Fees related to merchant services can add up to an aggravating expense. PCI compliance fees, penalties for not submitting a self-assessment questionnaire, next-day funding fees and inflated AVS fees are a few examples of unwarranted charges that look legitimate but just pad the Merchant Account Provider’s bottom line.

Spot unethical fees in your statements. Download the free Merchant Services Assessment!

Interested in learning more about merchant credit card processing and merchant terminals? Browse the free information throughout our site or contact us to discuss your company's specific needs.

Editor's Note: This post was originally published in January 2018 and has been updated for comprehensiveness and accuracy.


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PayJunction Team

Content written by the PayJunction team encompasses broad business topics including marketing, brick-and-mortar business operations and management.

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