Understand Merchant Accounts and Their Fees

By: Delilah Obie

To accept credit cards, you must establish a merchant account, which is a special bank account for handling the revenue (and fees) from credit card transactions. Your merchant account provider (MAP) -- a bank or other institution that processes online credit card transactions -- will verify the credit card, process the transaction, and deposit the results into your account, usually within two to four days.

If you operate a brick-and-mortar store and use a merchant account, the same vendor may be able to process your online transactions directly through a commerce-enabled Web site with Web-based credit card processing software. Charge.com and CyberCash are examples of Web-based payment processors who enable credit card and other forms of electronic payment transactions.

Some MAPs will not allow a large volume of purchases to be made when a card is not present, such as for charges made over the Internet or by phone, fax, or mail. If you have such a MAP, you will need to obtain a separate merchant account to process your online transactions. This situation arises because financial institutions and the Visa/MasterCard card associations have different criteria for evaluating the potential risk involved in credit card transactions in which the card is not present.

Your MAP will charge you some combination of fees to get started. Most charge an application fee, which is seldom refunded if your application is denied. When you open an account, you may be charged software licensing fees, if applicable, and you may be required to purchase hardware or equipment, such as a point-of-sale (POS) terminal.

Shop around for the best value on application and setup fees. As competition among providers increases, these fees are being reduced or waived. Application fees typically run from no charge to an industry standard of around $300. Some MAPs refund this fee if an application is denied, while others consider the application fee nonrefundable.

Software requirements also vary widely, from using Web-based applications hosted on your provider's server free of charge to purchasing and installing software that may cost from $500 to $1,200 or more. In some cases, all that's required is a personal computer with Internet access, but depending on your business needs, a POS terminal may be necessary. POS terminals are the devices you see in most retail locations that are used for processing credit card transactions. These terminals come in bare-bones models and fully loaded editions with integrated printers and real-time processing capabilities. Purchase prices range from about $550 to $1,600, and lease prices range from $15 to $50 per month.

A transaction fee is a flat fee charged for each transaction. Credit card transaction fees may be assessed by the financial institution that handles your merchant account, the Internet payment service (such as CyberCash) that enables the merchant to accept online payments from their customers and securely processes these payments, or both. You may be able to receive separate invoices from your financial institution and the Internet payment service, but in many cases, this fee is presented to merchants in one invoice from your financial institution and ranges from $0.20 to $0.50 per transaction. The transaction fee is based on the financial institution and the risks associated with the merchant, including:

• The type of products and services being sol
• The market segment in which the merchant competes
• The method in which products and services are being sold and delivered
• The prices of the products and services offered
• The expected sales volume of transactions
• The merchant's credit history

Discount rates are percentages taken from each order. Expect to pay discount rates from 1.75% to 3.95%.

Beyond these fees, many MAPs have also established minimum annual revenue requirements, sometimes as high as $1 million and as low as $25. Some MAPS also require security deposits or "revolving" accounts to ensure that you'll pay for any charges that are contested by a customer. These amounts are usually based on the type of product you're selling and the price of your goods and services, your credit history, and the length of time you've been in business. Each MAP offers a different mix of fees, but regardless of the MAP, these costs can add up quickly.