So You Think You Found the Best Internet Merchant Account?

July 21, 2008

For serious Internet businesses, selecting a merchant account provider is one of the most critical decisions you will make.

And for companies with unique ecommerce needs, high monthly revenue intake, or risk management issues, choosing the right merchant account provider - one that can meet your special needs, help your business grow, and approve your terms of business - is a defining "make or break" ecommerce moment.

That's because all merchant account providers are not alike, and the merchant account you select for your business can either help you achieve business goals, or, as is too often the case, hamper your business growth, drain you with exorbitant hidden costs, and even grind business on your website to a halt.

So you think you've found the right merchant account?

If you've based your decision on an ultra-low discount rate, free application processing, and guaranteed instant approval, then you've probably settled for a commodity merchant account provider who will, in turn, treat you as a commodity - as another faceless merchant rigged to their system. Any unique business requirements you have - especially when it comes to eliminating monthly limits or taking time to underwrite your business fairly - will be overlooked and you will be forced into a one-size-fits-all merchant account arrangement.

For those businesses promised instant approval and overnight set-up, you may find that once the merchant account underwriting department really takes a look at your business model and credit history (two weeks later), your approval could be revoked or you may find yourself saddled with an entirely new fee, rate, and policy structure - one that can make life on the Internet very difficult.

When it comes to merchant accounts (and ecommerce solutions in general), hasty, uncritical decision-making will backfire every time. The key here is to slow down and talk with an ecommerce provider about your specific needs, short-terms expectations, and long-terms goals so you receive the right merchant account for your business - one with merchant-friendly policies that will support, not sabotage, your ecommerce campaign.

Unfortunately, too many merchants are lured in by too-good-to-be-true discount rates and instant approvals, only to later have their business paralyzed by too low monthly limits, inflexible policies, long-term lock-in contracts, as well as "undisclosed fees" and "add-on costs". It follows that when you in are in dire need of assistance, you may discover that your merchant account provider's customer service department is a message machine, an e-mail address, or an infinite loop of hold Muzak.

As an example of what can happen with commodity merchant account providers, let's take a look at chargeback policy. With many Internet merchant accounts, if you receive a single chargeback, the merchant account provider will turn around and hit you with a chargeback fee and then impose limits on your revenue intake and begin holding your money. That's a rolling chargeback reserve - one that can freeze a large slice of your proceeds for up to several months on a continuing, rolling basis.

Often, merchant account providers implement a reserve or chargeback rate from the outset of your relationship, denying you a percentage of the revenue your business earns from day one. Even more common is the extremely dilatory fashion in which money is transferred from your merchant account (essentially a clearing house) to your own business bank account. Many providers are notorious for sitting on your money long, long after your transactions have settled.

Other major, very common complaints about merchant account providers revolve around the arbitrary monthly limits that frequently shut transaction processing down, usually just as a business is hitting its stride. For businesses that expect to transact a moderate to high volume of revenue per month, these limits can literally paralyze your business - and there is no guarantee a limit will be raised to your satisfaction, or without other penalties, or even in a timely fashion. Again, 'intangibles' like customer service really do count.

The irony in all of this: In most cases, merchants suffering from discount-rate tunnel vision will spend a great deal of time wrangling over a tenth of a percentage difference in a merchant account rate without realizing that this slight difference adds up to 10 cents for every 100 dollars processed. The question these merchants may want to ask themselves is: Do I want to jeopardize the success and long-term scalability of my business for that tenth of a percent difference? Is the perceived gain of landing a low-rate merchant account more important than a having one that actually serves my business well?

Clearly, all merchant account providers are not equal - and despite the many fly-by-night providers and ISOs, there are also providers out there offering flexible, merchant-friendly policies with competitive rate structures. Of course, these providers use far less aggressive marketing tactics, they don't make outlandish promises, they will not approve you overnight, and they may possibly charge you a nominal fee to process your application. However, these providers will work with you to establish a flexible, custom-fit solution that won't restrict your business or entangle you in a web of fees.

Working with a payment processing company to obtain an integrated merchant account and ecommerce solution is also a sound strategy, and many payment gateway companies work closely with merchant account providers - and their underwriting departments - to help their clients acquire a suitable merchant account. In fact, it's in their interest to do so as a payment-processing gateway company.

Here, businesses seeking to avoid monthly limits and rolling reserves, as well as businesses with higher-risk models may find merchant account relief working through an established, security-minded gateway company. Why? Because the merchant account underwriting and risk assessment results will already be leveraged in your favor due to the transaction security and anti-fraud protocols utilized by the credit card processing company. Under these circumstances, security (AVS, CVV2, Negative Database Checking), as a major component in the risk assessment equation, is a known and controlled variable. Therefore, as a client of the processing company, you can enjoy the benefits of their existing relationship with the acquiring merchant account provider.

The point is, if you want to differentiate merchant accounts by discount rate (essentially reducing your selection criteria to a commodity pricing logic) then you'll get precisely what you pay for: a cookie-cutter solution. If your business wants more from a merchant account, and you have individual needs, then selecting a merchant account should also be based on criteria like policy, reputation, and customer service. And with the latter, there's no reason you still can't find a solution with competitive rates, as well as generous monthly limits, no rolling reserve policies, chargeback rates, or surprise fees.

As in any industry, merchant account providers have hard costs associated with their business and they need to make money somehow, somewhere. Ultra-low rates and instant approval do not signal acts of charity and good will towards men and, if anything, should be eyed with suspicion as an indicator of other merchant account pitfalls. Look before you leap. In the final analysis, it will be the policies and quality of your merchant account provider - not a few tenths of a percent difference in discount rate - that will determine the scale of your ecommerce success.