Author: John Conde (Google+)
In the early stages of launching an online store a decision needs to be made: how will customers' payments be processed? This needs to be determined before the site is developed as different payment options may require radically different forms of implementation. But how do you choose? Is price the single most important factor? What are the other factors?
In the pages ahead we are going to compare a true merchant account and gateway to third party processors. As the comparison unfolds the differences between each type of merchant account will be exposed by comparing the two side-by-side using real world examples. A custom-built, web-based calculator will assist us.
Before comparing a true merchant account to a third party processor, it will be helpful to have a clear definition of what each is.
A true merchant account is just that, a "true" merchant account. You, the merchant, apply with a processing bank, usually through a sales agent, to have the right to have a merchant account dedicated solely to your business. The merchant account is for your business alone and you are responsible for it in every way. You will also be responsible for providing a gateway as it is not included with the merchant account (some processing companies or sales agents will have one bundled with their merchant account but technically they are separate and you are usually free to use your gateway of choice). Basically, your merchant account is direct with Visa and MasterCard (and American Express and Discover Card if you choose to accept their members' cards) and you must abide by their rules.
A third party processor allows your business, or even you as an individual, to use their merchant account to accept credit card payments. You apply with the third party processor and they make the decision based on their own set of criteria as to whether or not you will be allowed to use their services. The third party processor's bank doesn't even know you exist. A form of a payment gateway is automatically included as you must process all sales through their system. The third party processor holds all of the cards as they make all of the rules that you must obey. They are held responsible for the merchant they are allowing you to share through them and they hold you responsible for how your transactions affect it.
Sometimes choosing a third party provider is the obvious choice due to specific circumstances that makes a true merchant account impractical or impossible. The most common circumstances include:
Not everyone who wishes to accept credit cards is eligible for a true merchant account. Possible reasons someone would not be able to establish a true merchant account might be:
The four major credit cards (Visa, MasterCard, American Express, and Discover Card) all require applicants to be legally registered businesses. Individuals are not allowed to process credit cards for personal use. This includes using their business' merchant account for personal use.
The Match File, also known as the Terminated Merchant File, is the blacklist of the credit card processing industry. If you are on this list you essentially will never be capable of establishing a true merchant account again until you rectify whatever resulted in you being added to the list in the first place.
Accepting credit cards online is a risky proposition. Fraud rates are substantially higher when compared to traditional retail establishments. Some merchandise is also riskier then others. This includes electronics and other high ticket items. Combine a high risk item with the high risk Internet environment and establishing a merchant account for your business suddenly becomes very difficult.
As risk is the single most important factor in the merchant account world, personal credit becomes a major factor in a merchant's ability to establish an account. Since new businesses typically do not have established credit, merchants must use their own personal credit to support the business. Merchants who have no credit or poor credit will find themselves unable to secure a merchant account, or they find that they can only secure one with prohibitively high rates.
True merchant accounts have additional fees not often associated with third-party providers. These include monthly fees just for having the merchant account open and often times a minimum expectations for fees incurred (called a monthly minimum). This is in addition to gateway fees which typically include a set up fee and a monthly fee as well. A merchant could be looking at spending a couple hundred dollars just to get started and then $50 each month without ever accepting a credit card. For a small merchant, who may only process a few hundred dollars a month, this can wipe out their profits. Third-party providers typically eliminate the monthly fees and some do not charge a setup fee as well. The only time a merchant will incur a fee is when they accept payment via credit card.
Not everyone who wishes to accept credit cards online has the means to implement a complex API. Many merchants are non-technical and have little-to-no programming experience. They have the know-how and drive to get their store online but simply can't handle the more advanced payment methods. Third-party processors handle the bulk of the payment process thus simplifying accepting credit cards online greatly. They usually provide you with some simple to code to place on your website. The third party processor then takes over from there.
Besides the key points detailed above, there are other things to keep in mind when considering choosing a third party processor. Some work in their favor. Others do not. These points are: