Merchant Account Basics
In 1969 credit cards were a novelty and had virtually no users beyond the richest, smartest and best educated. Today almost 80% of American households 1 having at lease one credit card. A majority of internet transactions, over 93% 2, are paid for by credit card.
Merchant Accounts, Gateways, Processors - what are they and how do they all fit together?
- Merchant Account
- A merchant account is a special type of account that allows a merchant to accept credit or debit cards. It also serves as an agreement between the retailer and the their merchant account bank (acquiring bank) and credit card company (via a processor) for the settlement of transactions. 3 A merchant account is in reality a line of credit and not really a bank account, though there is a bank account involved.
- Payment Gateway
- A payment gateway facilitates the transfer of credit card information between the payment point (website shopping cart) and the acquiring bank.
- Processor
- This is a company used by the merchants bank to tie into the various credit card companies systems.
- Rates and Fees
- There are several fees involved in accepting credit cards. Fees vary based on several criteria including your credit rating, the type of transaction and charge back history.
- Setup fee - this is used to cover the cost of setting up your account in the Payment Gateway.
- Monthly gateway charge - covers the expenses involved in providing the secure gateway service.
- Per transaction fee - a flat fee per transaction.
- Discount fee - a small % of the total charged transaction.
- Fraud and Charge backs
- A charge back is just like a dishonored check. It means that perhaps the credit card used was stolen, the person making the transaction is lying and stealing your product or their is another problem.
There are several steps you can take to prevent credit card fraud and charge backs.
- Only ship to the credit card billing address.
- Require a signature upon package delivery.
- If it is a large ticket item require a faxed credit card charge authorization (with copy of front and back credit card being used).
- Use the fraud protection tools provided by your gateway.
- How does it all fit together?
-
The following is a typical successful Internet transaction that assumes that the merchant is using real time processing and that they have a valid security certificate in place. All transactions are encrypted at every step of the way to protect the credit card information.
- Customer places order on a website by pressing a "Submit" or similar button.
- Their browser encrypts the information on the page and sends it to the web server which hosts the merchants website.
- The shopping cart or order processing system takes the transaction information (credit card number, expiration date, CVV code, name, address, order number, description, etc.) and passes it to the payment gateway in an encrypted form.
- The payment gateway then forwards this information the processor used by the merchant's acquiring bank.
- The processor then passes this information to the card association (Visa, MasterCard, etc.) which then contacts the issuing bank.
- The issuing bank then responds with either an "approved" or "declined" code. If the transaction was declined they may issues a code describing why, like bad address. If approved a hold is placed on the funds for this transaction.
- The processor forwards this response to the payment gateway which then forward this information back to the order processing system (shopping cart).
- The order processing system then interprets the response and acts accordingly.
- This entire process takes 2-3 seconds.
- The merchant must then ship the product prior to the settlement of the transaction. There is usually a maximum time period allowed for this.
- Once the product is shipped the merchant will submit all their transactions to the acquiring bank for "settlement." This is usually done in a batch mode (all at once) and can be done automatically.
- The acquiring bank then places the approved funds in the merchants bank account.
- The time to funding typically takes 3 days.
The global marketplace
According to Thomas Lauren Friedman the world is flat as globalization has changed the way we do business and work is distributed around the world. Part of the benefit of this globalization people in other parts of the world are both able and willing to buy products from overseas. If you are interested in embracing this expanding marketplace you need to make sure that your Merchant Account processor can handle these global transactions. Authorize.Net works with 5 different processors, including Global Payments, also know as GPS, GPN NDC or Global East Information Systems.
Other options?
There are several other options out there like PayPal. Some may require the customer to have an account with them, they may not offer some all of the features that a regular Merchant account does, they may cost more in the long run and may not accept credit cards from foreign countries or in non-us currencies. You can also accept payment by check and COD payments. In either case you are opening yourself up to fraud due to forged or bad checks as you have no way of determining if the address you are shipping to is a valid address for the person making the purchase.
Questions to ask before selecting your credit card processor and merchant account.
There are several questions you should ask before selecting a credit card processor and merchant account. We have provided the answers to these questions for Authorize.Net, our preferred provider.
- How long have they been in business?
Authorize.Net has been a leader in providing payment gateway services since 1996. They are one of the oldest, if not the oldest, Internet payment gateway service providers. Authorize.Net was acquired by Cybersource Corp in June of 2007. Cybersource Corp, founded in 1994 (as software.net) was spun off in 1997 and it became a publicly traded company in 1999. 5
- Do they work with your shopping cart or on-line store?
Having been around since 1996 Authorize.Net is tied into every shopping cart we have seen. - How reliable is their infrastructure and how well can they handle major disasters?
On 2 July 2009 at 11:10 PM (pacific time) fire in the Fisher Plaza a class "A" data center in Seattle shut down all servers in the building, not only for Authorize.Net but also for all other companies using that facility. Authorize.Net was in the process of migrating all their backup servers to a new state-of-the art data center in San Jose, Ca. This presented the worst possible scenario, a fire late at night at the start of a long holiday weekend, their backup center was being moved and the fire department prevented access to their live servers. With all this going against them Authorize.Net was able to get back up and running within hours. 4 Authorize.Net has their new backup center up and running which is designed to prevent any sort of future down time and are dedicated to constantly improving their back end infrastructure. - What sort of fraud protection tools are available?
Authorize.Net has an optional Advanced Fraud Detection Suite that provides you with advanced, but easy to use, transaction filters and tools. When properly used this suite is designed to prevent almost all credit card fraud. It gives you a greater control over incoming transactions allowing your to control transaction fees prior to authorization, prevent charge backs and inventory loss. - Can they handle both real time and off-line (manual) processing?
Authorize.Net provides both automatic processing and a virtual terminal. - What credit cards are accepted?
Authorize.Net supports all major credit cards: Visa, MasterCard, Discover, American Express, Japan Credit Bureau (JCB), Diner’s Club. - Can I accept E-Checks?
Authorize.Net also has an exclusive electronic check solution, eCheck.Net®
- Does it work with QuickBooks?
Authorize.Net offers a QuickBooks Download Report feature that is compatible with Basic, Professional, and Premier editions of QuickBooks from 2002 to 2005. For specifics on how to configure and use the feature, please consult our QuickBooks Integration Guide at http://www.authorize.net/files/qbintegrationguide.pdf.
- What currency do they accept?
Authorize.Net can only process transactions in US dollars. The credit card company will provide conversion from other currencies to US dollars automatically. - How long does it take to accept credit cards? During regular business hours (MST) your gateway will be setup in 2-3 hours with Authorize.Net from the time they receive your application. If you need a merchant account that can take 3-5 business days to be setup.
How can I get an Authorize.net account?
