A Merchant’s Guide to the Payment Processing Industry: Credit Card Processing Companies Vs Banks

For many years, banks enjoyed a monopoly over offering merchants credit card processing services, otherwise referred to as providing businesses with merchant accounts. It was the banks that maintained individual merchant accounts, housed the processing platforms, handled authorization and connections to the major credit card companies. Over time, the processing rates they offered to businesses … Continue reading “A Merchant’s Guide to the Payment Processing Industry: Credit Card Processing Companies Vs Banks”

For many years, banks enjoyed a monopoly over offering merchants credit card processing services, otherwise referred to as providing businesses with merchant accounts. It was the banks that maintained individual merchant accounts, housed the processing platforms, handled authorization and connections to the major credit card companies. Over time, the processing rates they offered to businesses looking to accept credit cards became higher and higher as they realized they were the only game in town. Eventually, the need for third-party processors arose as banks realized that supporting everything from A-to-Z wasn’t as profitable to them as it was cumbersome. Banks still play a major roll when it comes to processing credit card transactions, and it’s true that you can still obtain a merchant account through your local bank. However, savvy business owners take time to evaluate all their options before deciding whether to maintain a merchant account with their bank or with a third-party merchant services provider.

Here are some things that a MSP (merchant services provider) can offer you that your bank may or may not handle:

1. Authorization: When a credit card transaction occurs, a processor acts as the “middle-man” between a merchant’s acquiring bank and a buyer’s/customer’s issuing bank. They make sure that each transaction is authorized against the purchaser’s credit limit, route the request to the appropriate card association (Visa/MasterCard/Discover/AMEX), and receives and transmits batch deposits for each merchant on a daily basis. Each third party processor has to be certified and connected to the major credit card companies in order to conduct business.

2. Fraud Detection: Third party processors can provide services that monitor transactions for potential fraudulent activity. This watchdog feature, where a processor’s software “red flags” transactions that don’t seem to make sense, helps prevent credit card fraud. For example, if you use your card to purchase a pack of gum at your local convenience store in Boise, Idaho and then, one hour later, that same card is used to buy a fur coat in Tampa, FL, the software that your processor uses will flag that transaction and attempt to prevent the counterfeit transaction from going through.

3. Chargebacks: A chargeback is what happens when an error occurs while entering the transaction data, when an item or service arrives to the customer not-as-described or damaged, when a customer did not receive an item or service they paid for, or when there is an identity theft occurrence where card information is stolen and used to make fraudulent purchases. Chargebacks need to be resolved, whether it is the customer or the merchant at fault, and it is the third party processor’s duty to resolve them. They are a huge inconvenience and can cost a processor (or bank) a lot of money due to their merchant’s errors. This is why any credible MSP will have a risk department that evaluates whether a merchant should be approved for a merchant account, essentially based on chargeback and fraud risk.

4. Settlement: A third party processor can clear transactions after authorization. When a transaction takes place, a merchant doesn’t just receive the amount of the sale immediately. It has to go through authorization, interchange, and approval from the banks. There’s a whole transaction cycle that takes place before a merchant receives funds. At the end of each day, a merchant batches their terminal (sends out an information data file of all their transactions for that day) and sends the batched file to their processor. The processor reviews that file and sorts the transactions by card type and assigns rates to each transaction based on card type. After the processor completes all this “behind-the-scenes” work and within a certain period of hours (usually 48-72), a merchant will receive a deposit into their bank account for the amount of that day’s transactions.

Some banks can act as a direct processor by partnering with a payment processing platform. This allows the bank to focus on what its core strengths are and not invest millions of dollars into the technology required to maintain its own platform.

So why not go directly to your bank? Why even look at a third-party processing solution or a merchant services provider? First of all, just because they’re a bank doesn’t mean they’re entitled to better processing rates. They offer merchant accounts so that they can add an additional revenue stream to their bottom line (aka: they’re out to make a profit), just like any other business.

Your bank may end up offering you the best rates when you’re shopping for a merchant account, but they won’t extend extra value-added services that many of the upper-echelon merchant services providers will be able to supply you with. When choosing a third-party processor, see what other services they can offer you and your business. Some offer website development, marketing services, promotional materials, business cash advances and gift card/loyalty programs that your bank will not offer. These services are generally provided at super-discounted rates in hopes that you’ll sign up with that particular MSP in order to take advantage of their affordably priced business solutions. Especially if you’re a start-up, those little extras can add up in savings, while saving you time and the hassle of obtaining these services from alternative companies.

My personal recommendation would be to decide whether you need the extra services a third-party processor, or MSP, can provide. If you’re a new business, I would recommend you take advantage of their offerings because, more than likely, you won’t be able to find those services cheaper elsewhere. Next, shop around to find out who can offer you the best processing rates. The number of transactions you process each month and your monthly processing volume will generally be the determining factors when getting rates from multiple companies. Do a mini-background check to verify the legitimacy of your “Top Three” processors to make sure they’re on the level. Beware of processors that don’t disclose their addressed location, as they could be fly-by-night operations attempting to appear larger than they really are. Make sure you read your processing agreement carefully to avoid any misunderstandings and unexpected fees down the road. Choose what solutions works best for you based on your business’s unique needs.

2010 Lorraine Wolfe

Understanding Different Pricing Structures of Merchant Accounts

Setting up for a merchant account, the biggest problem someone can face is choosing the right pricing structure. Different merchant processing service providers offer a variety of pricing structures and all of them have their own set of pros and cons. The major player in this aspect is the interchange reimbursement fee which precisely can be defined as a schedule of fee. The amount of this fee depends on different factors such as type of card, the way in which the transaction is processed and other information regarding business and the transaction.

Another important term is ‘Discount rate’. Along with the interchange and other fees, every bank or merchant processing service provider creates profit by adding mark-up to all of the fees charged. The pricing structures defined below can have different effects on these fees and the overall cost.

Interchange Plus – this is probably easiest to understand structure, given that you already understand what exactly interchange fee is. It is a transparent model and passes interchange directly to the merchants, adding a fixed mark-up. Renowned credit card processing providers publish their interchange tables bi-annually.

Tiered Merchant Account Pricing- Generally it can range from two to six tiers. Although it is among the most widely used pricing structure, it may not be very cost-effective in comparison to newer models. Also, multiple tiers make it more complicate to understand the actual interchange fee and other charges that you get to pay.

Enhanced Recover Reduced (ERR) – This model combines both tiered and Interchange plus models with a few features of its own. It is one of the lower cost merchant solutions when compared to the tiered structure. However, it is not a transparent one like Interchange Plus. It uses a base qualified rate and may include hidden charges.

Flat Rate Merchant Account pricing- it is regarded as one of the best and profitable structure so far. The best thing is that the sales volume does not affect the processing charges. The service providers charge a flat monthly fee and the interchange cost is passed directly to the merchant on every transaction. Besides all these advantages, there is no mark-up at all.

A flat rate merchant account provides accountability and transparency to the Payment Card Industry. Business owners can go directly to Visa® and MasterCard’s® web sites and see the exact interchange wholesale rates charged to the merchant processor. Armed with that knowledge and your flat fixed fee plus a per transaction fee, it is impossible to pad statements with unnecessary surcharges and fees.

Another benefit to the latest industry trend is when your businesses sales and revenue increase your fixed flat fee does not increase unlike the other industry pricing. Of course if your transaction count increases your business will have more transaction fees. However the rate paid for the amount of volume processed will not increase. Business owners want accountability and because every dollar counts these days, why should your business not profit from the savings instead of paying the banks and the processors?

Affiliate Merchants – Thriving For a Better Relationship

Internet marketing is the buzz in the business. Some ten years ago small business enterprises and local merchants could not think of spending money on marketing campaigns and thus expand their business. In less than years of time the situation was altogether changed as a less expensive medium and platforms were available to all. The industry, Internet marketing, is in itself a universe whose limits are yet to be explored. Affiliate marketing is an offspring of the same and was born to delegate the tasks of Internet marketing.

Who are affiliate merchants?

With 6.6 billion people living in this world, there is enough a business enterprise can offer. However the number of business enterprises is also significantly high. Due to advancement in technology there is a business-mix wherein individuals and business groups operate at all levels – local, regional, state and international level.

Affiliate merchants are business groups or individuals who provide products or services to the people. These merchants are usually associated with industry sectors like retail, financial services, telecommunications, travel and tourism, gaming, etc. Affiliate merchants may be small players or may be industry giants like Nokia, Google, Microsoft, Sony, etc.

In the cut-throat competition the business enterprise have to adopt business and marketing strategies. Affiliate marketing is one such strategy and a business practice. In affiliate marketing the merchants allocate some promotional work to third party, called affiliates. Say there is a merchant who deals in Sony home theatres. In order to gain maximum profit, the merchant has to sell maximum number of units. He may sell it all by himself or avail the service of an affiliate. What an affiliate does is offer the home theatre which is provided by the merchant, and sell it to the people.

An affiliate does marketing, advertising and even online selling of the products and services of merchants. Affiliates have their websites and portals on which such exercises are carried over.

Merchants best prize:

If you will look at the whole scene carefully you will observe that it is a good deal for a merchant, be it a small player or an international brand. If we take marketing alone, with the exception of sales that incur from online purchasing, we will see that the websites offer economical means of sharing and distribution of information. An online advertising and marketing campaign does the same job as offline ones do, but at a lesser budget requirements.

One of the best things offered by affiliate marketing is that it is performance based. Thus a merchant spends or invests in marketing which in turn gets re-converted as returns.

If we talk about online purchasing, which can be tracked, the marketing practice allows a merchant to see his progress and the overall profits he would make. If an affiliate sells a product of merchant for ten pound, accruing a profit say one pound to merchant, the merchant won’t be unhappy giving him say a quarter. That is the best prize and for merchant it is the best deal.

Affiliates and Merchants – hand-in-hand:

A merchant gives an affiliate program and an affiliate gives his own website. But there is more than a simple affiliate-merchant relationship requires, in order to get accomplished. One main reason that affects the relationship is the wide communication gulf that separates the two.

Affiliate marketing itself suffers from the industry regulations and standards that have been formally approved. However the merchants and affiliates can share their interests move forward to achieve a common goal, which is mutual assistance.

A good affiliate program helps in ensuring good business relations with affiliates. Not everything is included in the program and for better understanding the affiliates have to look for better means of interacting with the merchants.