Merchant Agreements
Merchant Agreement / Contract For our overview video on Taking Credit Card Payments visit this post. Merchant agreements come in many different varieties, with the most common being an application, agreement and contract all in one. You will find this to be the most used tool in the field as it allows a representative to get all of the necessary information in one visit. Online applications are similar but typically broken up into multiple steps. The important items to look at are the fees attached in the Schedule A (commonly page 2 of an application). The other critical item is to look at the terms including cancellation policy and funding timeframes. Regardless of what the rep says, these are the legal obligations you and your business will be held too. Three Major Fee Areas Interchange Fees Discount Rate / Transaction Fees Monthly / Support Fees Interchange Fees (Cost) Interchange fees are commonly referred to as “cost,” because they are the fees that every company in the world pays to process credit cards, even businesses as large and bank card heavy as Wal-Mart and Starbucks. These fees are largely out of the control of the merchant and are dictated by Visa/MasterCard and Discover or American Express. What the merchant can do to keep these fees low is to processing correctly with up to date equipment and correct procedures. However much of the fee is decided based on factors such as debit vs. credit, card present vs. not and basic bank card vs. rewards card. The interchange fee can range anywhere from 3% of the transaction to less than 0.1% for high ticket retail debit. Many times the interchange fees are vague or hidden on merchant statements and they are rarely spelled out on merchant agreements. The important point to retain is that interchange fees make up 70% to 90% of total merchant account fees and cost. Discount Rate / Transaction Fees The discount rate or margin between interchange and quoted rate along with the various transaction fees is the gross revenue that the processing company makes from a merchant account. It is important to denote this as gross revenue as many companies have buy rates (pricing floors) where profit is only made above these amounts. In addition sales companies and buy rate free organizations or processors have certain costs associated with acquiring and maintaining an account before final profit is calculated. However the discount rate and transaction fees are where merchants have room to negotiate the total cost of their merchant account. Discount rate can be a little tricky to identify but is typically a percentage anywhere from 0.10% to 1.00% charge to the entire card volume. It is also expressed as a rate such as 1.9% where the margin is the different between the interchange cost and 1.9%. Transaction fees include but are not limited to, authorization fees, batch fee and AVS inquiry. Monthly Support Fees Monthly fees are another major area to negotiate on a merchant account. Common monthly fees include the statement fee, service fee, monthly minimum, PCI compliance and gateway fee. Some fees are reasonable and sometimes they can be way out of proportion to the account volume. A lot of it has to do with what software or hardware products that are supported in concert with the account. This can vary widely and thus the monthly fixed fees can fluctuate. Another commonly misunderstood fee is the monthly minimum which contrary to popular belief is the minimum amount of gross revenue that must be generated. If this amount is not generated, than...
Read MoreAcceptance Methods
Merchant Type – How You Take Payments For our overview video on Taking Credit Card Payments see this post. Although there are hundreds of different types of merchants and seemingly dozens of ways to take credit cards, for the purposes of processing companies there are three major types of merchants. There are additional Merchant Category Codes (MCC) used to classify the types of goods and services provided as well as for reporting to the IRS. However when it comes to risk for the processing companies and thus application acceptance and associated fees, the merchant type is one of the primary factors. These three merchant types are listed below. Three Primary Merchant Classifications Retail (Face-to-Face) Mail Order / Phone Order (MOTO) Internet / eCommerce Face-to-Face (Card Present Transactions) Although this merchant type or way of acceptance is commonly referred to as retail, the more appropriate and technical term is “Card Present.” This is especially true today with wireless technology that makes face-to-face card transactions easier and faster than ever before. This type of card acceptance involves the physical swiping of the card, and carries the lowest interchange fees. It is the lowest risk to both the processing company and merchant because fraud is much more difficult face to face. In addition the physical swipe of the card would require a fake card to be made which is an added cost and deterrent to many thieves who have simply bought stolen credit card numbers. Whenever possible it is always best to take credit cards face-to-face. For high ticket purchases, checking the card numbers and card holder’s ID is an absolute must to avoid simple stolen card fraud. In addition, face-to-face transactions afford the ability for the card holder to physically sign a receipt, either on paper or on an electronic device. This signature help further prevent fraud and gives the merchant a chargeback defense in the case the card holder disputes the charges. Mail Order / Phone Order (MOTO) Although mail or catalog ordering is a bit-outdated in today’s internet age, the term MOTO applies to payment transactions that do not happen face-to-face with the card present. This includes writing the card number down and processing it later. This also includes stored credit card numbers and recurring transactions through a piece of software such as Quickbooks or a Virtual Terminal / Gateway. Obviously taking credit cards over the phone also applies, and is a very common practice in businesses of all types from take-out restaurants to construction and building supply companies. Even though writing down a person’s credit card numbers because the machine is down and taking their info over the phone is fundamentally different, the processing network cannot tell the difference and treats this transactions as the same. They are risker because the assumption is that the card is not there because it is not swiped. This makes using stolen credit card numbers much easier, and thus fees are higher to offset for the higher level of fraud in this category. Practically all businesses have a MOTO element to how they take credit cards, and thus should understand the proper documentation and steps to take to ensure that they are protected. Online Transactions That last and most risky are transactions that happen online. In this situation, not only is the card not present, but there is typically not a human element involved for additional soft touch fraud prevention. Ecommerce is the highest area for credit card fraud and thus carries the highest restrictions for approval and fees. However many of the fees between MOTO and Internet are...
Read MoreTaking Credit Card Payments
Overview: Accepting Credit / Debit Cards Taking credit card payments, rather it be in person, over the phone or online; is one of the most important points in the circle of commerce. This is typically the entry point for most businesses and an area commonly overlooked when it comes to understanding the basics. With new and emerging technologies today, taking payments with mobile phones (iPhone / Android) is now a feasible possibility for all businesses. In addition, setting up an internet storefront or ecommerce solution is easier than it has ever been. Behind the scenes, technology and fraud prevention algorithms are developing at a rapid pace, allowing the payment ecosystem to stay in balance. With all of these new and exciting changes, there are still three basics that are very important to understand, track and document when it comes to taking payments. These three critical areas impact many areas of your business but most importantly impact three important money areas listed below. Three Money “Hows” Impacted By 3 Critical Areas How Fast You Get Your Money (Funding) How Much Money You Pay In Fees How Safe Your Money Is (Security) These three important areas that must be understood in order to maximize your businesses cash flow, minimize costs and protect your money are listed below. Three Important Areas – Taking Credit Cards How You Take Payments (Merchant Type) Merchant Agreement / Contract Technology (Device) Used To Take Payments How You Take Payments (Merchant Type) The type of merchant you are classified as, or more specifically, how your business accepts payments impacts all three important money areas. Unfortunately, the details are commonly glossed over. Most businesses primarily take payments via the following methods. Retail (Face-to-Face) Mail Order / Phone Order (MOTO) Internet / eCommerce Some business accept payments through only one method however, most merchants take credit cards through a combination of the three areas above. For detailed information on this be sure to check out our Acceptance Methods post. Merchant Agreement / Contract One of the key areas of payment processing that can potentially have a large impact on funding (cash flow) and processing fees, is the merchant agreement. This contract between the sales organization and the merchant serves as an application, fee schedule and terms of credit card processing. Most agreements are fairly similar with a few stipulations to look out for. The major items to be aware of when it comes to fees are as follows. For further explanation see our Merchant Agreements page. Interchange Fees Discount Rate / Transaction Fees Monthly / Support Fees Technology (Device) Used To Take Payments Commonly the focus with taking credit cards is the device, hardware, software, etc. that will be used to accept payments. While this area has the smallest impact on fees (other than outlay for device / technology) it has a large impact on the security of both the merchant funds and the personal information of its customers. It also can play a role on how quickly funding takes place. For a discussion about the most common types of devices today, view our Payment Technology...
Read MoreThe Merchant Statement Fee
The Fee is not Just for the Paper Every month millions of businesses are charged a statement fee in association with their card processing merchant account. Many ask the question, “Why am I getting charged so much to get a few sheets of paper each month.” Merchant statement fees are commonly $10, $12 even $15 and there is a large misconception that this fee is only related to the packet of paper that summarizes the card processing for the previous month. The truth is that most organizations have an “account on file fee” associated with every merchant account they board. This fee is typically based on how many accounts an ISO (independent sales organization) has with the processor and can be anywhere from $0 to $5. It is also common for sales agents to be restricted by a statement fee “buy rate,” meaning that they can not charge less than say $5. The account on file fee is designed to account for the monthly cost of doing businesses associated with each account, which includes, preparing and sending a paper statement to the merchant, even if they do not process a single card. How to Eliminate the Statement Fee It is common to see statement fees from $5-$15, if you are paying much more than this, call your account representative and find out why. Additionally, most processors and sales organizations offer to remove or reduce the statement fee if the merchant moves to paperless (online) statements. If this is not an option, or if you prefer paper statements, it is likely that the sales organization or agent will reduce this fee should you ask. This is especially true if you have increased processing volumes since the account was first established. An important piece of information to know is that, the two major tools that sales organizations use to protect or keep their merchant accounts are via the statement fee and monthly minimum. These fees are commonly used in calculations for termination clauses. They are also used as ways to guarantee a minimum level of revenue, should a merchant account become dormant for any reason. So do not expect to completely eliminate this fee, however ensure that what you are paying is...
Read MoreCapture, Settlement & Batch
Authorize & Capture: Process Solution The authorize capture process for charging credit cards is a method that provides both automation and flexibility for the merchant. It is rapidly become adopted by merchants who provide products or services where the price can fluctuate during time of use or there is a delay between order and fulfillment. This is popular among, online merchants, gas stations, travel as well as bars and nightclubs. Authorization Capture Definition from Authorize.net “A credit card transaction request to authorize and capture, or settle, funds for a purchase. The payment gateway submits the request to the card issuing bank for authorization and upon approval, will automatically submit the transaction for settlement.” Authorization & Capture Definition from PayPal “Authorization & Capture, or Auth/Capture, allows you to authorize the availability of funds for a transaction but delay the capture of funds until a later time. This is often useful for merchants who have a delayed order fulfillment process. Authorize & Capture also enables merchants to modify the original authorization amount due to order changes occurring after the initial order is placed, such as taxes, shipping or gratuity.” Depending on the business environment and configuration of hardware/software, even if an authorize/capture process is used, a settlement or batch of the transaction may still be required. – To learn about authorizations learn about Authorizations – To learn about settlement and batch continue reading below Settlement & Batch: Clearing Transactions In a basic sense regardless of how a transaction is authorized it must be settled in order for the funds to physically move from one bank account to another. This is typically done in a batch, which can affect cash flow or how quickly funds are deposited in the merchant’s bank account. Settlement from Authorize.net: “For credit card transactions, settlement occurs at the completion of transaction processing between the involved financial institutions and processing entities, and funds for the credit card transaction have been successfully deposited into the merchant’s bank account.” Batch from Authorize.net: “A group of transactions that have been gathered over a certain period of time and are submitted together to the appropriate processing networks for clearing and settlement.” Potential Batch Processes All transactions for a given business day are kept in a queue and batched manually at closing time for that particular business. Transactions are kept in queue but batched automatically at set time such as 11pm or another time when equipment is not in use. Transactions are batched at fiscal close of business 3pm PAC (money transfer deadline for financial institutions) regardless of when physical business closes. Transactions are batched in real time. Each batch process impacts cash flow and fees associated with batching differently. Which process is correct, will vary from business to business and processor to processor. If you are unsure which process is correct for your business please contact us at...
Read MoreHow to Process a Card for Payment
Processing a card payment may seem fairly simple when only viewing the physical act of swiping a debit or credit card through a terminal or inputting the card numbers into software. The truth is that once set up correctly, processing payments should be simple, error proof and allow employees to focus on serving the customers. The trick then lies in having the correct professional setup that matches the business needs, because below the surface the actual electronic process of authorizing and settling credit cards is far from simple. The Two Parts to Card Processing: Authorization & Settlement In the traditional sense, there are two parts to every credit or debit card transaction. This includes an authorization and a settlement. Both steps are required in order to charge a bank card, and depending on the hardware, software or service company, terminology can vary slightly so it is important to understand the fundamental steps in the process. – To learn about auth/capture and settlement see our Capture and Settlement post – To learn about authorizations continue reading below Authorization Transaction Authorization from Wikipedia: “Authorization hold (also card authorisation, preauthorization, or preauth) is the practice within the banking industry of authorizing electronic transactions done with a debit card or credit card and holding this balance as unavailable either until the merchant clears the transaction (also called settlement), or the hold falls off.” An authorization in simple terms is communication with the card issuing bank (ie Chase, BoA, Wells Fargo, etc.) that is looking for approval or denial to run a transaction on the card. Response codes are transmitted that are usually 6 digits and are recorded within the hardware or software performing the transaction. Also if configured correctly AVS and CVV2 codes are transmitted and recorded. These are security measures that are used to protect the financial intuition and merchant from fraudulent activity. It is important to note that when a sale is authorized, the sale amount is placed against available credit or funds and is not actually removed from the balance until settlement is performed. Criteria For Authorization Approval Is the card number valid? Is the expiration date submitted valid? Has the card been reported as lost or stolen? Is there enough available credit or balance on the card? In traditional credit card processing, if all the conditions above are met correctly, the transaction information is held in queue and then must be settled or batched via a manual or automated process at the close of business or other allotted time. There is however another option and is widely used both in online sales and also with gas stations, rental businesses and in the bar and night club industry. This is the process of Authorize and Capture and has been adopted in response to Visa’s initiation of the misuse of authorization fee. – To learn about auth/capture and settlement see Capture and Settlement – To learn about misuse of authorization see Misuse of...
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