Archive for the 'Merchant Accounts' Category

Visa and MasterCard forbid Internet merchants from using software or equipment that does not support the Electronic Commerce Indicator. Electronic Commerce is when the cardholder’s information leaves possession of the cardholder and travels through an open connection, such as the Internet, to reach the merchant. In order to designate this type of transaction, the Electronic Commerce Indicator (ECI) must be included on the payment transaction message format to show that the transaction originated form an Internet source. This indicator is assigned in the point of sale product utilized by the merchant. Credit card information sent via email does constitute a transaction needing the ECI in the transaction to the processing bank.

Visa U.S.A. introduced a penalty structure effective June 1, 2000, for acquirers who fail to identify an electronic commerce transaction with the correct electronic commerce indicators. MasterCard International introduced a penalty structure effective August 1, 2000, for acquirers who fail to identify an electronic commerce transaction with the correct electronic commerce indicators.

If a merchant’s software sends an ECI (values of 5, 6, or 7) the transactions are noted as a secure ECI transaction and must be using a secure form of processing card data. These transactions are eligible for CPS rate programs. If the software sends up an ECI value of 8 or 9, the merchant is processing the card data in a non-secure format and the transaction cannot qualify better than EIRF (i.e. the highest rate you can pay for a transaction).

All terminal products that are certified to pass an ECI send a value of 8 because this is a non secure way of processing electronic commerce transactions. But there aren’t any credit card terminals currently supported to handle ECI. This means you must use special software or a gateway only. Visa and MasterCard employ 250 employees whose sole purpose is to find web merchants who violate this policy. Violating could result in fines, your account being terminated, and/or you being blacklisted for accepting credit cards.

I recently stumbled upon a blog entry suggesting that gateway providers and merchant account providers both want merchants to get chargebacks. This was clearly written by someone who does not understand how the credit card processing industry works.

Fraud is the number one concern of every single credit card processor bar none. The security and fraud department is the largest growing division for every one of them. For some merchant account providers it is even larger then their underwriting department!

First of all, let me debunk the myth that they are all after the chargeback fees. First of all, the gateway providers don’t get one red cent from them. Zero. They do not benefit from chargebacks at all. But they do stand to lose a customer who gets their merchant account closed from having too many chargebacks (more on that later). Those very same customers may also default on payment for their gateway fees. Once again, no positives for the gateway providers.

As for the credit card processors:

1: The typical chargeback fee is $25. This covers the cost of an employee dealing with the chargeback. That’s it. Someone has to physically handle each and every chargeback presented to an merchant account provider and they need to get paid.

2: Let me explain how chargebacks works. If a consumer requests a chargeback for an online transaction they get their money back every time. Period. Because 75% of all credit card fraud occurs online (even thought is accounts for less then 10% of all transactions) Visa and MasterCard always side with the consumer on chargebacks related to Internet purchases. But what if the merchant doesn’t have the money in their account? Or at all? Guess who pays for it? Their processor does, that’s who. So every time a chargeback is done the merchant account provider stands to lose the entire amount of that sale. I hardly think they like that situation much less encourage it.

If you’ve ever experienced the underwriting process of an merchant account provider you would see that the vast majority of the time dedicated to underwriting an account is spent on fraud prevention. It’s on their minds before the merchant ever has an account.

It is also important to note that Visa and MasterCard start fining merchants and their merchant account providers who have too many chargebacks. Once a business experiences more then 1% of their sales as chargebacks they are subject to fines up to over $100,000 per month. This is because Visa and MasterCard don’t want merchants who are that much of a risk. The merchant account providers don’t want those accounts either not only because of the potential fines they face but the potential loses they face in unrecovered chargebacks. So, merchant account with a number of chargebacks simply lose their accounts and usually are unable to ever accept credit cards again.

(I did comment in that blog but my reply was never posted. I guess they didn’t like their theory being undone.)

For many merchants Paypal is a viable option for accepting online payments. But which version of Paypal is right for your business? According to Paypal, Paypal basic is intend for:

Businesses that want an easier, quicker way to start accepting credit cards online. Set it up in minutes. You don’t need a separate merchant account or gateway.

Paypal Pro is intended for:

Businesses that want the functionality of a merchant account and gateway and more control over the customer experience. Website Payments Pro requires a technical, API-based implementation.

To simplify Paypal’s explanation, Paypal Basic is for small “mom and pop” style businesses who do not plan on growing their online store. Paypal Pro is for merchants who wish to maintain a professional appearance and grow their business.

There are two main differences between Paypal Basic and Paypal Pro: your potential processing fees and monthly fees. Paypal Basic offers four tiers of fees which are based on your previous month’s processing volume:

• Merchants who process less then $3,000 per month
  • Percentage Rate: 2.90%
  • Transaction Fee: 30¢
• Merchants who process more then $3,000 but less then $10,000 per month
  • Percentage Rate: 2.50%
  • Transaction Fee: 30¢
• Merchants who process more then $10,000 but less then $100,000 per month
  • Percentage Rate: 2.20%
  • Transaction Fee: 30¢
• Merchants who process more then $100,000
  • Percentage Rate: 1.90%
  • Transaction Fee: 30¢

Paypal Pro offers only three tiers of fees which are also based on your previous month’s volume. The fourth tier for very high volume merchants is eliminated. Also, Paypal charges an additional $20 per month to have the Paypal Pro service.

This may sound obvious, but you would be surprised how many new merchants don’t do this. But once you have established a new merchant account you should run a test transaction for $1. Why? Because:

1. You want to make sure your credit card terminal works properly

   There’s no better way to make sure your equipment is setup properly then to use. Make sure it communicates with your processor successfully and prints out a complete receipt for you.

2. You want to make sure your credit card terminal is setup properly

   Is it your business name at the top of the receipt? Is it spelled correctly and have your correct address and phone number?

3. You want to make sure you receive your deposits

   This is the best reason of all to so a test transaction. You want to be sure that the $1 transaction you processed actually gets deposited into your business checking account. If there is an error somewhere that is preventing you from receiving your funds, you are better off discovering this by “losing” $1 rather then $1,000 (or more). If you don’t see that $1 in your business checking account within three business days or so, call your processor and see what the story is. You just might be saving yourself a huge headache and nightmare.

What exactly is the monthly minimum fee? Well, this is a fee which guarantees the merchant will be paying a minimum amount each month in processing fees. If a merchant’s discount fees do not equal their monthly minimum fee they will be charged the difference between the two in addition to their discount fees.

Example:

A merchant has a discount rate of 2.50%, a monthly minimum of $25, and a monthly volume of $600. The discount fees for the month will be $15.00 (.025 * $600). Because their discount fees are less then their minimum fee ($15.00 < $25.00) they will be charged an additional $10.00 as a monthly minimum fee ($25.00 - $15.00).

So, what is the purpose of this fee? Merchant account providers and their sales agents make their money by taking a very small percentage of every sale a merchant processes. Naturally this can be very lucrative. But, if a merchant is very small, they won't make very much money from them. So, to make up for this, they charge this monthly minimum fee. Then, when the merchant has a slow month, this fee is incurred and the merchant account provider still makes their profit from this merchant.

This fee is not required by Visa and MasterCard to have an account with them. Many processing companies offer merchant account with excellent rates without the monthly minimum fee. So, if you are shopping around for a merchant account and are told that you will have a monthly minimum fee, say, “Thanks. But no thanks”.