With the exception of choosing a credit card terminal, getting an online merchant account is no different from setting up a standard merchant account for brick-and-mortar use. The process is exactly the same, comprised of an application process and the submission of supporting documents.
Acquiring an online merchant account is one thing, but its components and how they fit into the overall structure of online processing differ significantly from those related to a standard merchant account. Before we jump into the disparities, let’s do a quick review of the mechanics behind online merchant account processing.
Online Merchant Accounts: How They Work
Only with the help of multiple providers, including a Merchant Service Provider which supplies the online merchant account, is online credit card processing possible. Before you get an online merchant account, you need to take certain steps to first establish your e-commerce store. After settling on a domain name, what to sell and the e-commerce hosting platform you’ll use, you’re just about ready to get your online merchant account set up.
When assessing which Merchant Service Provider to work with for your online merchant services, it’s important to look for one that can integrate with the e-commerce platform hosting your online store. This integration is key for a smooth user experience when customers make purchases on your website.
Retail vs. Online Merchant Account Processing
For retail businesses taking in-person transactions with a standard merchant account, the Merchant Service Provider might be the sole provider they work with, yet it takes multiple providers to make online credit card processing happen.
An online merchant account is nestled in with a shopping cart and Payment Gateway to complete the structure needed for online credit card processing. As we mentioned before, the Merchant Service Provider supplying the online merchant account must be integrated with the shopping cart. The gateway then connects that point of sale to the payment network. Sometimes the gateway is supplied by the online merchant account provider, but this can also constitute a separate provider as well.
The requirements for standard merchant account processing vary from those needed for an online merchant account. Firstly, instead of data collection through the Merchant Service Provider’s system via swiping or dipping a credit card, an online payment requires manual entry into the shopping cart software. From there, it is delivered to the Payment Gateway and then passed off to the Payment Processor. The Card Association then receives the transaction data and assesses the Interchange cost for the transaction (more on this later) and whether enough funds or credit are available to approve the transaction. The card issuing bank transmits the authorization to the Card Association network and then the merchant. The Payment Gateway provides confirmation to the e-commerce site or shopping cart.
With a standard merchant account, this process is more linear. With an online merchant account there are multiple routes of information passing, since there are multiple providers giving and receiving information.
Online Merchant Account Costs
Merchant account rates can vary greatly depending on how your business takes payments and the types of cards your customers pay with. With an online merchant account you’re taking riskier payments, so the rates are more costly than a standard merchant account for a retail business taking in-person transactions.
Rates start with Interchange (the wholesale cost of the transaction), and then a rate structure and the Merchant Service Provider’s markup are layered on. For online businesses, it’s common to be set up on a MOTO tiered plan. This plan categorizes transactions into three buckets or tiers: Non-Qualified, Mid-Qualified and Qualified. The higher the risk, the higher the tier.
With multiple providers and higher-cost transactions, you might be thinking an online merchant account is going to cost you more than it’s worth. The truth is, it really might if you aren’t smart about who you work with. There are ways to reduce risk with this type of merchant account, so long as your provider offers the tools to do so. These practices include collecting AVS and CVV and remotely capturing signatures for every transaction to have as proof in case of a chargeback. You can also consolidate the providers you work with to eliminate fees from multiple providers.
How has your online merchant account research fared so far? What other questions do you have? Ask us in the comments section below, we’d love to help you further.
Editor's Note: This post was originally published in January 2019 and has been updated for comprehensiveness and accuracy.