What You Need to Know About Merchant Credit Card Processing

Written by: Lyle Knox

September 3, 2014

In today’s world, eCommerce is no longer the unwieldy, difficult to implement process of days past. New technologies and tools now make eCommerce solutions affordable and accessible, even for start-ups and small businesses. And, while accounts intended for eCommerce were once seen as high-risk, most banks and credit processors have relaxed their standards, making it much easier to establish a merchant account.

Still, before you jump into an agreement, it’s important to understand the way merchant credit card processing works.

First, there are four parties involved in almost every credit card transaction – the bank which issues the credit card (issuing bank), the person or company making the purchase (payer), the business accepting the payment for that purchase (merchant account), and the bank which provides processing services for the merchant account (acquiring bank).

The issuing bank lends money to the payer in the form of credit, and this credit is used to make a purchase. During processing, fees are deducted from that transaction by both the issuing bank and the acquiring bank before transferring funds to the merchant account. The issuing bank’s fee is called the interchange cost; the acquiring bank’s fee is called the discount rate. Both fees are generally calculated as a percentage of the transaction. The exact amount or percentage of these fees is determined by the merchant services agreement – which is why it’s important to be informed before signing a contract with a services provider.

Here, we’ll outline a few guidelines intended to help you make the right decision for your business, and avoid the most common merchant credit card processing pitfalls.

Read Your Agreement.

Read all of it – especially the terms and conditions, which should be included as part of the application you complete and submit when applying for service. These terms and conditions will outline usage of the service, as well as define important factors such as pricing, dispute processes, and other items which affect your relationship with your potential processor.

Pay Attention to the Contract Terms.

What is the length of the contract? Are there set-up fees? What about early termination penalties? A standard merchant processing agreement will typically have three to five year duration terms. Cancellation fees for early termination are common and are often based on the monthly cost of service, calculated by the amount of time remaining under contract – which means these fees can easily add up to a significant sum if you decide to end your relationship with a merchant processor early.

If you have questions or concerns about the term of contract or potential cancellation fees, don’t hesitate to point them out – a good processor will understand your concerns, and work with you to address them. If your potential processor is unwilling or unable to respond to your concerns, move on to the next.

Keep An Eye Out For Hidden Fees.

As a business owner, cost of service will be one of your first considerations, and it’s a major factor when selecting a processing service. That said, industry pricing can be confusing. It is important to note that the rate you pay for processing may fluctuate, depending on the type of credit card used by your customer.

Also, there may be variations in pricing determined by the type of transaction – meaning swiped transactions (those which occur in-person) might be processed at a lower rate than eCommerce, and so forth. Your salesperson should understand these terms, and be able to explain them clearly and concisely. If they are unable to do so, this is a definite red flag.

Though there are some processors who will quote and charge a flat rate for all transactions, this is still relatively unusual. Pay close attention to the terms quoted, and make sure to review your contract closely for fluctuating rates, assessments, surcharges and interchange fees. Make sure you fully understand the pricing before signing a contract, to avoid paying more than expected for your merchant processing services.

Avoid Volume Commitments.

Some processors require businesses to complete a certain dollar amount in transactions per month to receive premium pricing. If that volume amount is not met, the cost to the business may be increased, or other penalties or fees applied. This can place unfair financial pressure on small businesses or start-ups, and can ultimately have an adverse effect on business.

(Please note – this should not be confused with a monthly minimum fee, which is a standard fee charged to help processors recoup the cost of inactive or dormant accounts. The monthly minimum fee should still be clearly defined and disclosed within the terms and conditions.)

Know Your Options.

Competition is stiff in the merchant processing world, and you have options available to you as a business owner. If you receive an offer which raises eyebrows or just seems too good to be true – compare it with others before making your decision.

Overall, it’s a good idea to remember that your credit card processing service is there to help you make money – and that it’s a mutually beneficial relationship. A good processor should have your best interests in mind – they should be informative, supportive and willing to do what it takes to establish the type of relationship which will best support your business’s success.

Originally published September 3, 2014.

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