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Merchant Accounts - What You Need To Know

by Yisroel Goodman

For a free e-book called "The FoolProof Guide to Accepting Credit Card and Check Payments," by William Hamilton, click here.

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Why should I get a merchant account?

Customers want a convenient and safe way to send payment. Money orders and checks are not very convenient nor are they safe. As a vendor, you want to close the transaction quickly. If you have to wait for the customer to remember to mail you a payment, there are too many things that can break the sale. So credit cards are a method by which the customer can place the order quickly.

What about payment services like Paypal?

There are drawbacks. Both buyer and seller must register for an account with the same service. The charge may appear on the customer's card as a charge from the service - not the actual merchant. Some sellers complained about payments being accepted into their accounts which they did not want. Sometimes a minor problem led to an entire account being restricted (something which rarely happens with real merchant accounts) and payments continued to be accepted into these restricted accounts (which would NEVER happen with a real merchant account). Payment services often allow scammers to hide their identities. Disputes often go from the buyer to the buyer's credit card to the payment service and then to the seller. There are too many points along the line where the ball can be dropped and an innocent party made to pay for it. There is little incentive for the service to fight on behalf of the seller. Even if all the proper efforts are made, it is often determined that a scammer used a loophole in the system to perpetrate the fraud. If there is no money remaining in the scammer's account (and there wouldn't be) the victim loses.

With a merchant account you deal directly with the buyer and decide if you want to charge the card. With a payment service all you know about the buyer is what the service tells you. If the buyer used a stolen credit card or changed addresses, you wouldn't know about it. I did have a buyer try to get back his paypal payment made to me because I shipped to an old address from which he had moved years before. That was the only address I was given by Paypal because the buyer had never updated it. Fortunately Paypal ruled in my favor. With a real merchant account the buyer could not have made such a mistake. So while services like Paypal and Google are basically safe if some common sense is used, they still add complications which can make it less safe.

Since almost anyone can get a paypal account, many buyers have decided that a seller who has his own merchant account is more reliable than a seller who only accepts payment through a service. Many buyers do not want to join a payment service in order to make a purchase. Many sellers have discovered that having their own merchant account not only gives them a more professional appearance to their buyers, it also gives them more protection against fraud.

What about CCnow and Propay? Aren't these merchant accounts?

Not really. Companies like CCNow and ProPay allow merchants to pretend to have a merchant account. I will assume that CCNow (which I haven't used) works similar to ProPay (which I have used). The merchant validates the customer and enters the transaction at the site. There are no monthly fees, statement fees or minimums; it is strictly pay-as-you-go. Payments are not automatically accepted; the merchant must accept them. The merchant uses his own judgement and does not rely on a third-party to validate the customer. Charges appear on the statement with the merchant's name. However, there are still some disadvantages. The transaction fees are high. Propay has a fee to open the account (last I checked it was $35 annualy), a 3.5% percentage and a transaction fee of about 70 cents (35 cents on the acceptance and another 35 cents on the withdrawal. You can make one withdrawal which encompasses several transactions.) CCNow's rates are even higher. There are limits. Propay limits individual transactions to no more than $250 and no more than $1,000 per month, unless the merchant signs up for a different account with higher fees. Even though it appears to be a real merchant account, it isn't. Propay is acting as the middle-man. Charge backs are reported to Propay, who may or may not contact the merchant in time to dispute them. As for validation, in about 20 transactions I made with Propay, it reported a zip code mismatch every single time. I even charged my own card and it reported a zip code mismatch, though I had been living at that address for over 12 years. When I contacted Propay, they blamed it on typos, on the issuing bank, on the AVS system and would not for a moment entertain the notion that there might be a problem with their software. This was several years ago so they have probably fixed it by now.

I spent months researching merchant accounts, for myself and also for a series of articles I wrote for auctionbytes.com. I discovered that while most of them advertise "free application," they ALL have a fee for opening the account and this fee ranges from a low of $25 to as much as $500. Having opened five different merchant accounts at different times, here are my conclusions.

There are some folks who shop by price alone and look for what is (or seems to be) the cheapest deal. There are some who understand that other factors may influence the bottom line. Do you want to deal with a company whose support desk often consists of a telephone answering machine? You can save on your startup costs if you do. But what would the long-term ramifications be? Perhaps it really isn't a "savings" when you take into account that the company with the higher fee provides a manned support line, electronic check processing, free shopping cart software, and a secure order form for your customers.

You also have to be very careful. Unfortunately, there is a lot of dishonesty in the merchant account arena. Like the stereotype of the sleazy used car salesman, providers often mention those areas where their rates are lower and fail to mention those areas where they are higher. Some outright lie.

Shortly after I had opened a $195 account with Charge.com, I came across a "no application fee" account with Aaacess.com, also called First Alliance. After speaking with Aaaccess at length both on the phone and via email, I was led to believe that they did offer such an account. Charge.com has a price guarantee in which they claim they will refund the difference if you find a cheaper account. I contacted them about Aaacess. Charge.com refused to believe that such an account was possible and would not refund my application fee unless I closed the account. So I closed my Charge.com account, received a full refund, and opened one with aaacess.com. I should have suspected something when there was a $49 gateway fee that had never been mentioned. Still, $49 was better than $195. So I opened the account.

The account was opened within a week and it did function exactly as I expected it to - with one exception. Providers of merchant accounts always tell their account holders to have a liberal return policy. What they don't tell them is that the providers keep the fees, even on immediate refunds. When someone ordered a $200 item and then changed their mind, the $6 I was charged to put through the transaction was not refunded. This is fairly standard in the industry. Most merchant accounts will not refund charges. (Score one point for Paypal and Google checkout.)

I have been offering my customers discounts for using payment methods which don't cost me money. Six months after opening my merchant account, I found that most of my customers were using other means in order to save money. A traditional merchant account charges a monthly minimum of $25. This means that you pay $25 a month in charges even if you never process a transaction. This is in addition to a $10 gateway fee and a $10 statement fee. I was not processing enough transactions to warrant paying $45 a month. Then I found two companies offering no-minimum merchant accounts. I decided that I would rather pay 3.5% with no minimums, gateway or statement fees. That's when Aaacess hit me with a $250 cancelation charge. This charge had never been mentioned in all of our conversations nor was it in any of the documents. I called them, emailed them and faxed them to send me a copy of any document I had signed mentioning this charge. They never responded, other than to withdraw this amount from my bank account. When I finally got them on the phone, they referred me to another number which has been disconnected. They did not answer subsequent calls. I was able to get my $250 back by going to my bank and reversing the charge.

When you open a merchant account, you get the ability to charge Visa and Mastercard. You have to apply for American Express and Discover separately. A lot of business people use American Express. However their rates are higher. Fewer people use Discover but their rates are lower.

Don't fall victim to sleazy marketing tactics and hidden charges!

Make sure you ask the right questions:

What does it cost to open the account?
What are the monthly fees, statement fees, gateway fees, annual fees, per transaction fees?
Is there any long-term commitment? Are there any closing/cancelation fees?

The cheapest account may not be the best for you. Then again, it might be.

For small vendors or new sellers starting out, a no-minimum account is the most cost-effective solution. For established sellers doing $1500 a month or more in credit card sales, look for a standard merchant account with the lowest fees and good support. If you want a customized form for your own web site, the source code to our own ASP shopping cart, or have general questions about adding credit card processing to your site, email us.

E-OnlineData offers competitive rates and they have temporarily waived the $79 set up fee for merchants we refer to them. They have been recommended to me by others and the people I have sent them have been satisfied. Note: I do get $5 for each person I refer. This is not my motivation. I can get the same or more from other vendors. Also note that while I am getting $5 for referring you, you are saving $79 if you sign up with my link. Incidentally, charge.com offered me $100 per referral, but since I feel their rates are too high, I am not recommending them. If you see the $79 charge on your E-Onlinedata application, call them up and remind them that they promised to waive it for my referrals.

E-OnLineData.com