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Guest contribution by David Goodale of Merchant Accounts.ca.

Establishing a merchant account for credit card processing is a decision that has the potential to make a significant impact your business. You need a service that will be reliable and also provide a good value.

In this blog post we will explore some of the most important issues to keep in mind when researching to find a potential merchant account provider.

You want to be approved to use the service

Why begin by stating the obvious? It’s surprising how many merchants hyper focus on rates and overlook the importance of getting a good clean approval to use the service.

Every merchant account provider requires an application. To condense a fairly lengthy explanation, what you need to know is that every time a credit card processor clears a transaction they are liable if those funds eventually become disputed. Credit card processors want to work with good, reliable, honest businesses.

For that reason, many credit card processors will not support high risk products like online gambling or pornography. Taking a less extreme example, some credit card processors do not like working with startups. Each credit card processor will have unique application criteria, but they are all molded from similar concepts.

It’s important that when applying for a merchant account to know what questions to expect:

1) What are you selling?
As mentioned above some credit card processors have more tolerance for different types of products or services. It is important that you give your prospective processor a good understanding of what you are selling, without providing too much information (which could cause them to gloss over important details). If you are writing a cover letter spend 1, 2 or 3 paragraphs (depending on the complexity of your business) explaining what you sell.

2) How long has your organization you been in business?
This question is asked because a well-established business will be seen as less high risk than a startup. That is not to say that a startup can’t be approved, but if you have a strong business history, this will help strengthen the application.

3) Can you provide financial statements?
This question always tails behind how long you've been in business. If a company has strong financials it is most likely that the company will continue operating in good standing. Alternatively, if a company is cash strapped it is possible that it may not be able to continue operating as a going concern.

4) Are you currently processing credit cards?
By providing processing statements from your current processor it demonstrates that you know what you are doing and are able to keep the account in good standing. If your statements show a high level or chargebacks (disputes you’re your customers) it will not be desirable and is something that you should promptly address.

5) How much money will you process per month?
We will discuss this point in further detail below. However, you should have accurate and realistic projections ready before calling a prospective credit card processor. The amount of money you process will impact rates. Do not come up with a pie in the sky number, otherwise it will negatively impact the credibility of your application.

Consider the technical issues

An e-commerce transaction consists of 3 things:

1) A shopping cart. (Like VP-ASP)

2) A payment gateway

3) A merchant account

Your shopping cart must pass transaction information to the payment gateway in order for a credit card to be processed. The payment gateway will "talk” to Visa or MasterCard to determine if the customer has sufficient funds to pay for the order. If so, the funds are withdrawn from the cardholders account and transferred into your merchant account.

All 3 components of the e-commerce transaction must work together. It does very little good to establish a merchant account and not consider the technical issues. If you are using a shopping cart like VP-ASP, you will need to know which payment gateway options are available to choose from. The shopping cart and the payment gateway must be compatible.

Once you know what payment gateway you are intending to use this must be specified when talking to your potential merchant account provider. You should tell your sales representative what payment gateway you hope to use, and get a confirmation in writing that you will be able to use that payment gateway.

It’s worth noting that many merchant account providers include the merchant account and gateway bundled together so that you do not need to cobble together a solution between multiple parties. This is the most common approach in Canada and the UK. In contrast, some merchant account providers only issue the merchant ID (often referred to as a "MID”). This is the most common approach in the USA. If your merchant account provider does not include the gateway you will need to make sure to contact the payment gateway yourself in order to open an account with the gateway. In general, it’s almost always easier if your merchant account provider also includes the payment gateway as a part of the service. By doing so your technical concerns are reduced and you need only to make sure that VP-ASP (or whatever shopping cart you are using) works with the gateway that you are being provided with.

As a short side note, VP-ASP supports a very large number of payment gateways that can be found here: VP-ASP Supported Payment Solutions.

What to do if your merchant account application is declined

A decline is not the end of the world. As discussed above, in some cases you may be running a startup business selling a fairly high risk product or service. If that is the case you may not be approved. However, if that happens and you have chosen a good merchant account provider this should be the starting point of a negotiation in order to achieve a conditional approval.

If a merchant account application is too high risk, you can ask if you can pay a security deposit or rolling reserve in order to achieve the approval. This is where your credit card processor will hold back a percentage of your funds to offset the risk from potential chargebacks (disputes between you and your customer). The amount of the reserve is always a point of negotiation. The most important point to understand is that it’s about getting through the door. The terms of your approval, as your account matures, can be revisited. If you keep your account in good standing the amount of reserve can be reduced. This is usually done after 6 months to 12 months of processing.

Finally, if you operate a business in a very high risk sector you may find it very difficult to establish a merchant account. If so, you will have to research high risk merchant account providers. In general, it is always best to avoid high risk credit card processors. It’s not that high risk processors are a bad solution, but they will most often charge higher fees, and some may operate offshore in jurisdictions with less regulation. Some offshore processors may not be as reliable as lower risk domestically based credit card processors. If you are going to work with a high risk credit card processor you should do a significant amount of research into the company to ensure that you are making an educated decision.

Tips for negotiating a lower processing rate

It may seem obvious that getting a low rate is very important. However, many businesses overlook the obvious and all-too-painful fact that the rate you are quoted only matters if you actually end up paying it. In other words, don’t let yourself be mislead.

In general, the rate you will pay will depend on the trading volumes that your company processes. It should be fairly obvious that a company processing one million dollars per month in credit card sales will be quoted a lower rate than a company processing a few thousand dollars per month.

There are 3 pricing models that are common in the payments business. The first is flat pricing in which the rate never changes. This is the easiest model to understand. The other two pricing models provide a rate that fluctuates depending on the type of card that is being processed. For greater clarity, Visa and MasterCard charge a higher cost to the processor when a points or rewards card is processed in comparison to a basic card without any points or cardholder benefits. One pricing model is called "qualified and non-qualified pricing” while the other is referred to as "interchange plus” pricing. In general, interchange plus is much more transparent and easier for merchants to understand. It is beyond the scope of this blog post to do a full analysis of the different pricing models but a more in-depth article can be found here: Interchange explained.

What a merchant should understand is that effectively negotiating for the best rate can be a difficult challenge. When negotiating it is always best to do so from an educated standpoint. The first step should be attaining at least a basic understanding of the interchange table. If you achieve at least a basic understanding of interchange it means you will know the processors cost when clearing transactions on behalf of your company. This gives you two advantages:

i) It will help you spot and weed out suspect quotes. The credit card processing industry is one in which a business owner must be prudent. If a quote sounds too good to be true then it most likely *is* too good to be true. If you get a misleadingly low quote you should look at the type of margins your processor will be earning. If it looks like they would be taking a loss based upon the quote that has been provided you should ask them about it directly. If you get anything less than a straight answer move onto the next vendor. It’s important to point out that there are many fantastic, ethical and hard working credit card processing companies. A few bad eggs have earned an industry a less than stellar reputation. That is why when researching pricing it is very important to research your potential merchant account provider, and don’t be afraid to ask questions if in doubt.

ii) By understanding the margins and profit your prospective merchant account provider will have you can be more confident in your requests. Most people do not want to be unreasonable with their requests. For that matter, even if you don’t mind being unreasonable, it doesn’t make it any more effective as a negotiating tactic. If you understand the approximate margins your processor has built in for your account, you can be more confident when asking for a reduction to negotiate a better value.

Final Thoughts

A good merchant account provider is very much like a good web host: when things are going well you shouldn't be thinking of them at all. It’s an invisible service that runs in the background, there to do what it’s supposed to do in a reliable and non-invasive way. If you are constantly thinking about your credit card processor all the time, odds are that something is not working correctly or you are not happy about some aspect of your service.

Rates are very important, but they are not the be-all and end-all when it comes to establishing payments. Consider the support standpoint, and the fact that your payment processor effectively becomes an invisible partner in your business. Do you feel comfortable with the people you are working with? Did the sales person helping you take ownership of the process and make you feel confident with the service? Will they remain available to you as a point of contact for support after you are setup? Does your credit card processor (or prospective credit card processor) have a good reputation in general? Is the servicer reliable? Do you find the reporting easy to work with?

Choosing a credit card processor is an important choice, but it doesn’t have to be nerve wracking experience. With a little bit of research and by educating yourself you should be able to secure an excellent solution and good value when it comes to finding your credit card processor.

About the Author

This article was written by David Goodale, CEO at Merchant Accounts.ca. David is an expert in international and cross-border e-commerce payment processing. David founded Merchant Accounts.ca in 2001, which is Canada’s longest established payment processing company to specialize in international e-commerce. Over the past 13 years he has supported clients across the globe with the rollout and improvement in their global e-commerce strategy.

If you have questions about the content in this blog discussion, about establishing a credit card processing solution, payments across borders, or anything related to the e-commerce transaction flow, you can contact David Goodale at:

David Goodale
888-414-7111 ext. 5



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