A merchant account is an agreement between a business and a financial institution to extend credit. The business receives the money it is owed for goods or services immediately (minus any fees), but agrees to settle accounts with the merchant service provider instead of the customer. Some businesses, like restaurants or online retailers, consider accepting credit cards as part of their service to customers. Others, like clothing stores or house-cleaning services, cannot afford to do so since they are paid directly by their customers. In this case, merchants apply for a merchant account through a bank or third-party service to facilitate credit card transactions.

Types of Merchant Accounts

There are two types of merchant accounts: retail accounts used to process credit card transactions at brick-and-mortar stores and online accounts used to process online purchases. An online merchant account may be general purpose, which can be used for all ecommerce websites, or dedicated, which is offered by the processor for business that only accept specific brands of cards.

Merchant service providers offer three levels of pricing structures for their services: tiered, interchange plus and flat-rate.

Tiered Pricing Structure

This is the most common type of structure because it’s simple to understand and requires little explanation. It also means less hassles since processors can offer standard rates to all businesses; they only need to inform merchants who fall outside of these parameters. The downside is that it requires more considerations for businesses to decide if they can afford the rates; sometimes, this structure may even increase the cost without giving any benefits, like increased transaction limits or lower fees.

Interchange Plus Pricing Structure

This type of structure gives merchants individual control over the price breakdown by allowing them to choose which rates they want included in their final cost. This will lead to more transparency; however, there are risks involved since businesses might not be able to understand the full scope of fees if they don’t have the necessary expertise.

Flat-Rate Pricing Structure

This type of pricing structure functions like interchange plus, but gives businesses a set percentage on top of the total transaction cost. Flat-rate pricing structures are great for businesses who don’t want to pay extra for services they aren’t using or if they don’t have time to analyze their expenses closely.

Types of Fees

Processors charge fees that vary depending on the payment type, business structure, location and transaction volume. Although business owners can get a better understanding of their expenses by looking into these categories, it’s still a good idea to review them all before signing contracts with providers.

Authorization Fee

This fee is assessed when a customer makes a purchase and doesn’t cover the total transaction. Instead, it’s used to verify that there is enough money in the account to cover the cost of the purchase.

Transaction Fee

This fee doesn’t only cover processing expenses; it also covers customer service and refunds should any issues arise with their purchases. Businesses typically pay this fee based on the sale amount, meaning that larger transactions will have a higher transaction fee than smaller ones.

Transaction Fee Plus Cost-Per-Transaction Fee

This is a type of pricing structure that consists of a single fee for both processing and customer service. This makes it easy to include everything in one price without having to worry about other fees, but the downside is that businesses might pay higher prices if their transaction volume is low.

Monthly Fees and Monthly Minimums

Some merchant services providers require merchants to pay monthly fees regardless of whether they process a lot of transactions or not. This is usually associated with business who don’t have high transaction volumes, but can still be expensive over time if their credit card expenses are very low.

Per-Transaction Fees for Non-Qualifying Credit Cards

These are fees associated with credit cards that aren’t given the same treatment as standard ones, like corporate cards or prepaid credit cards. Often times, these transactions will be charged at a much higher rate than normal since they can’t always be authorised beforehand. This type of fee is often labelled as “non qual” or “enhanced” to denote the difference between regular and non-qualifying transactions.

Monthly Minimums

Financial regulations require merchant services providers to charge merchants for at least one transaction per month, but there are some companies that still do this even if businesses generate less than $10 in revenue. Since these amounts can be very low, this structure can continue to be expensive for businesses that don’t process many transactions.

Early Termination Fees

Since it’s never easy for businesses to switch providers, some companies ask customers to pay an early termination fee if they choose to cancel their contract before the end of its term. This is usually associated with long-term contracts or contracts that include an annual percentage, which can make it difficult for businesses to switch if their provider introduces higher rates.

Account Setup Fees

Most providers don’t charge this fee since it’s already built into the cost of processing credit cards, but some companies will still try to charge merchants in order to set up new accounts. This usually includes a one-time fee per processing account that’s designed to cover the expenses involved with opening a new merchant services account.

Business Structure

The different types of business structures (sole proprietorship, partnership and corporation) affect the way credit card payments are processed and charged by merchants. This is because sole proprietorships and partnerships don’t have the same legal structure as corporations, which is why their billing prices are often higher.

Business Age

The average age of a business can affect the way transactions are processed, especially if its bank account has been open for less than three months. This is because some providers will increase rates during this period in order to cover the costs associated with opening a new account and processing transactions.

Industry Type

Some industries pay more for credit card processing than others, such as finance or insurance businesses that process larger transactions on a regular basis. These businesses typically need to work with providers that don’t charge monthly fees in order to keep their costs under control since they often have high transaction volumes.

Industry Segment

The way a business is segmented within its industry can also influence the rates it pays for credit card processing. This usually has to do with the type of products and services that are being offered, which can affect a merchant’s transaction volume and transaction average. For example, a travel agency that specializes in package vacations would typically have a high transaction volume and average than an agency that only offers airfare and hotels.

Number of Locations

The number of locations you operate can affect your rates, especially if you work with point-of-sale equipment. Most providers offer reduced rates to businesses with multiple locations since they usually process larger transactions at different physical locations.

Card Type

Different types of cards have different processing fees since the costs involved with transactions vary from type to type. For example, a standard credit card typically has a higher fee than a private label or secured credit card – which is often used by businesses to process larger transactions. Since these differences can vary depending on your provider, it’s important to review your account statement and call the company if you notice any suspicious charges.

Application Type

The type of application that’s submitted to a merchant services provider can also affect rates, since some providers offer reduced rates to new customers with established businesses or those that process larger transaction volumes on a regular basis. These applications typically include automated application approvals that ask basic questions about your business, so it’s best to work with providers that only require one application if possible.

Payment Method

The way you accept payments can affect the rates you pay for credit card processing, especially if the business is looking to accept payments over the phone or via mail order. Many companies offer reduced rates to business owners who process a high volume of transactions via a particular payment method. This is because they know that doing so will help them pay the costs associated with these types of transactions.