Merchant account
A merchant account is a type of bank account that allows a seller, known as the merchant, to accept payments by debit or credit cards. A merchant account is established under an agreement between an acceptor and a merchant acquiring bank for the settlement of payment card transactions. In some cases a payment processor, payment service provider, independent sales organization, or member service provider is also a party to the merchant agreement and can act as middle man between the merchant and the bank.
Whether a merchant enters into a merchant agreement directly with an acquiring bank or through an aggregator, the agreement contractually binds the merchant to obey the operating regulations established by the card associations.
A high-risk merchant account is a business account or merchant account that allows the business to accept online payments though they are considered to be of high-risk nature by the banks and credit card processors. They will typically pay higher transactions fees if they are accepted at all. The industries that possess this account are adult industry, travel, Forex trading business, gambling, and multilevel marketing businesses. "High-Risk" is the term that is used by the acquiring banks to signify industries or merchants that are involved with the higher financial risk.
History
Since credit cards were developed in the 1960s, the earliest methods, submitting credit card slips to a merchant processing bank by mail, or by accessing an Automated Response Unit by telephone, were initially used but have long been overshadowed by electronic devices. These early methods used two-part forms and a manual device for mechanically imprinting the embossed card number information onto the forms. This was done by a merchant imprinting their customer's card with a credit card imprinter to create a customer receipt and merchant copy. These copies would be taken to the merchant acquiring bank for processing.Methods of processing credit cards
Credit and debit card transactions are sent electronically to merchant processing banks or payment service provider for authorization, capture and deposit. Various methods exist for presenting a credit card sale to "the system." In all circumstances either the entire magnetic strip is read by a swipe through a credit card terminal/card reader, a computer chip is read or is captured using near field communication technology or is entered into a website.Credit card terminal
A credit card terminal is a stand-alone piece of electronic equipment that allows a merchant to swipe or key-enter a credit card's information as well as additional information required to process a credit card transaction. They may be connected to Point of Sale systems and typically have a keypad and network connection and may have a built-in printer.Automated response unit (ARU)
An ARU allows the manual keyed entry and subsequent authorization of a credit card over a cellular or land-line telephone. With this method, a merchant typically imprints their customer's card with an credit card imprinter to create a customer receipt and merchant copy, then process the transaction instantaneously over the phone.Payment gateway
A payment gateway is an e-commerce service that authorizes payments for e-businesses and online retailers. It is the equivalent of a physical POS the virtual terminal that can allow for a merchant to securely login and key in credit card numbers or b) have the website's shopping-cart connect to the gateway via an API to allow for real-time processing from the merchant's website.Level 2 or level 3 processing – purchasing cards
For business-to-business and business-to-government purchases, these interchange fees fall into one of 3 processing categories — Level 1, Level 2, or Level 3. Level 1 has the highest rates. Level 3 has the lowest rates. Level 3 detail refers to passing line-item detail; information generally found on an invoice; PO number descriptions, quantities….other details, level 2 refers to passing tax amount along with invoice/PO#. Both Visa and MasterCard apply higher interchange rates for commercial transactions that are accepted w/o level 3 detail. These are applied to the interchange before a processor adds their fee and range from.80%-1.5%When set up for level 3 processing transactions over $5,984.61 government, $8725 non-government, are eligible for high ticket interchange rates. Interchange varies from.50-1.45% depending on the type of card and size of the ticket.
Merchant account marketing
Merchant accounts are marketed to merchants by two basic methods: either directly by the processor or sponsoring bank or by an authorized agent for the bank and additionally directly registered with both Visa and MasterCard as an ISO/MSP.Marketing details are by card issuers like Visa and MasterCard and are enforced by various rules and fines. A few of the largest processors also partner with warehouse clubs to promote merchant accounts to their business member
Marketing by banks
A bank that has a merchant processing relationship with Visa and MasterCard, also known as a member bank, can issue merchant accounts directly to merchants.To reduce risk, some banks limit approval to merchants in their geographical area, those with a physical retail storefront, or those that have been in business for two years or more.
Marketing by independent sales organizations (ISO)/MSPs
To market merchant accounts, an ISO/MSP must be sponsored by a member bank. This sponsorship requires that the bank verify the financial stability and suitability of the company that will be marketing on its behalf. The ISO/MSP must also pay a fee to be registered with Visa and MasterCard and must comply with regulations in how they may market merchant accounts and the use of trademarks of Visa and MasterCard. One way to verify if an ISO/MSP is in compliance is to check a website or any other marketing material for a disclosure "company is a registered ISO/MSP of bank, town, state. FDIC insured".This disclosure is required by both Visa and MasterCard and will cause a penalty of up to $25,000 if it is not clearly visible. In almost all cases, if there is no disclosure, the company is likely to be an uninformed fourth party or worse.
Rates and fees
A merchant account has a variety of fees, some periodic, others charged on a per-item or percentage basis. Some fees are set by the merchant account provider, but the majority of the per-item and percentage fees are passed through the merchant account provider to the credit card issuing bank according to a schedule of rates called interchange fees, which are set by Visa, Discover, and MasterCard. Interchange fees vary depending on card type and the circumstances of the transaction. For example, if a transaction is made by swiping a card through a credit card terminal it will be in a different category than if it were keyed in manually.Discount rates
The discount rate comprises a number of dues, fees, assessments, network charges and mark-ups merchants are required to pay for accepting credit and debit cards, the largest of which by far is the interchange fee. Each bank or ISO/MSP has real costs in addition to the wholesale interchange fees and creates profit by adding a mark-up to all the fees mentioned above. There are a number of price models banks and ISOs/MSPs used to bill merchants for the services rendered. Here are the more popular price models:Three-tier pricing
The three-tier pricing is the most popular pricing method and the simplest system for most merchants to understand, if not the most transparent. The newer six-tier pricing, including additional tiers covering debit, business, or international cards is gaining in popularity. In three-tier pricing, the merchant account provider groups the transactions into three groups and assigns a rate to each tier based on a criterion established for each tier. A possible drawback from the merchant's perspective is that these "tiers" or "buckets" are variable from one processor to the next prohibiting any direct comparison from a tier-one provided by one provider to a tier-one provided by another provider.First tier – qualified rate
A qualified rate is the percentage rate a merchant will be charged whenever they accept a regular consumer credit card and process it in a manner defined as "standard" by their merchant account provider using an approved credit card processing solution. This is usually the lowest rate a merchant will incur when accepting a credit card. The qualified rate is also the rate commonly quoted to a merchant when they inquire about pricing.The qualified rate is created based on the way a merchant will be accepting a majority of their credit cards. For example, for an Internet merchant, the Internet interchange categories will be defined as qualified, while for a physical retailer only transactions swiped through or read by their terminal in an ordinary manner will be defined as qualified.
Second tier – mid-qualified rate
Also known as a partially qualified rate, the mid-qualified rate is the percentage rate a merchant will be charged whenever they accept a credit card that does not qualify for the lowest rate. This may happen for several reasons such as:- A consumer credit card is keyed into a credit card terminal instead of being swiped
- A special kind of credit card is used like a rewards card or a business card
The use of "rewards cards" can be as high as 40% of transactions. So it is important that the financial impact of this fee be understood.