Dy-Mystifying Internet Merchant Accounts

Updated July 10, 2008

Of all the elements of ecommerce, the Internet merchant account remains the least understood and perhaps most delicate component of building an online business. At the same time, there is a lot at stake in selecting a merchant account provider, and making a poor choice can result in numerous complications and unexpected long-term costs. When it comes to accepting credit card payments online, there's much more than meets the eye - and it pays to understand the wider issues and nuances before committing with a provider.

Often, businesspeople new to the Internet will focus on one merchant account issue: discount rate. The discount rate is the flat percentage taken from each credit card transaction by your merchant account provider (the ISO or acquiring bank). A reasonable rate is important. Unfortunately, many merchants never look beyond the discount rate to analyze other charges, fees, and limits. Nor do they reflect on issues like customer service, provider reputation, or how a provider performs risk assessment on your business.

With some ISOs offering shady solutions and many other providers pushing one-size-fits-all commodity merchant accounts, selecting the right provider - one that balances integrity and affordability - can be a daunting task. You don't have to travel far on the Web to find an unwary merchant who, seduced by a too-good-to-be-true discount rate, effectively sabotaged business by choosing a disreputable provider.

Complaints lodged against merchant account providers all have a familiar ring: sudden rate increases, long term lock-in contracts, undisclosed fees and add-on charges, high monthly-minimums, heavy rolling chargeback reserves, punishing chargeback fees, and surprise limits imposed upon your monthly revenue intake. A common adjunct to these problems is, quite logically, the inability to contact a customer service department when limits or complications grind business to a halt.

Ultra-low rates rarely equate with merchant friendly policies. Rather, scrutinize such rates critically and look at the total picture - from chargeback policies to monthly minimums to transaction fees. Look for hidden costs in the small print and look for ways a provider can 'pad your bill' with add-on fraud protection charges or 'gateway' fees. And make sure their rate structure corresponds comfortably with your business model and pricing strategy.

Overnight approval, unsolicited e-mail ads, and greedy pop-up application forms should also serve as warning signals. In most cases, reputable merchant account providers do not act impetuously. In fact, merchant account application should entail evaluation - and the rates, limits, and charges you pay will depend on variables like your business model, your credit history, and how long your business has been in operation.

'Risk assessment' is performed to determine rate structures. Certain products and services are rated differently than others for risk. Factors like a credible, professional web presence can influence the underwriting process - as can an application submitted under the auspices of a security-minded payment processing service. Here, being associated with a trustworthy e-commerce ally can strengthen your position. Merchant account approval (and favorable results on risk assessment) can be leveraged by the fact that your credit card transactions will be consistently reliable and processed through several levels of anti-fraud protection.

For new companies or businesses with imperfect credit histories, it can be especially helpful to apply for a merchant account through a reputable payment processing company - one that is partnered with reputable banks for merchant account services.

While merchants can go directly to banks or ISOs for merchant accounts, they may end up facing the headache of putting together - piecemeal - all the other e-commerce components of their website (like credit card processing and catalog and order systems). Or they may end up saddled with a commodity payment processor that is resold by the ISO for profit. This means that the reliability, security, and scalability of your payment processing can come down to a dice throw.

In other words, 'holistic' e-commerce solutions (that integrate payment processing and order management systems with the merchant account) forestall much of the turbulence that comes from coordinating a merchant account and e-commerce platform with numerous vendors. Perhaps more importantly, vendors offering integrated solutions depend on a healthy ongoing relationship with their clients. It does not serve their long-term interests to align your business with disreputable merchant account providers.

Still, it always pays to ask questions, to take a hard look at your merchant account and e-commerce vendors before you sign on with them. Move beyond price to evaluate security protocols, reliability of provider, and the degree of customer care you will receive. Analyze policies and determine the right merchant account provider for your business model.

In the final analysis, these factors - not a tenth of a percent difference in discount rate - will determine the scale of your online profits.