Solve the Payment Processing Problem

During the early stages of launching your online store, you'll need to make a number of critical decisions. Perhaps the most important of these is the way in which you'll process your customer payments. You can choose to process the orders yourself using a true merchant account, or use a third-party processor. The method that you decide on could affect the implementation of your entire web site.

But how do you choose? Is price the single most important factor? What other factors are involved? In this article, we'll uncover the answers to these questions by comparing a true merchant account to third-party processors. We'll expose the differences between the two methods by comparing them side-by-side in real world examples, using a custom-built PHP calculator to aid us in our quest. Let's not waste any more time!

The Basics

Before we dive into the comparisons, let's take a closer look at these two methods. With a true merchant account, you, the merchant, apply with a processing bank (usually through a sales agent) for 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're also responsible for providing a gateway to it, as this is not included with the account. (While some processing companies or sales agents will bundle a gateway with the merchant account for convenience, they're separate entities and you're usually free to use any gateway that you prefer). Basically, your merchant account is a direct account with Visa and Mastercard (and American Express and Discover Card, should you choose to accept payments from their members), so you must abide by their rules.

A third-party processor allows businesses and individuals to accept credit card payments through its own merchant account. Instead of applying directly through a processing bank, you apply through the third-party processor, which uses its own set of criteria to decide whether or not you'll be eligible to use their services -- the third party processor's bank doesn't even know you exist! A payment gateway of some form is automatically included as you must process all sales through the third-party processor's system. The third-party processor holds all the cards, as they make all the rules by which you must abide, and they will hold you responsible for how your transactions affect their merchant account (the one that they're allowing you to share).

When to Consider a Third-Party Processor

When access to a true merchant account is impractical or impossible, a third-party processor is the obvious choice. When would this be the case? In situations such as those that follow.

• The applicant is unable to acquire a true merchant account. Not everyone who wishes to accept credit cards is eligible for a true merchant account. Reasons for this may be:
  • The applicant is not a registered business. The four major credit card groups (Visa, MasterCard, American Express, and Discover Card) require that all applicants are 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 applicant has been blacklisted. The Match File, also known as the Terminated Merchant File, is the blacklist of the credit card processing industry. If you're on this list, chances are that you won't be able to establish a merchant account until you've rectified whatever caused you to be added to the blacklist.
  • The applicant poses a high risk. Accepting credit cards online is a risky proposition. Fraud rates involved with online credit card payments are substantially higher when compared with traditional retail establishments. Certain types of merchandise may also pose a higher risk than others, such as 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.
  • The applicant's personal credit is questionable. As risk is the single most important factor in the world of merchant accounts, personal credit becomes a major factor in a merchant's ability to establish an account. Since new businesses typically don't have established credit, merchants must use their personal credit to support the business. It's likely that merchants who have no credit or poor credit won't be able to secure a merchant account, and if they do it will be one with prohibitively high rates.

• The applicant only processes small volumes of transactions. True merchant accounts are liable to incur additional fees that aren't associated with third-party processors. This includes a monthly fee for having the merchant account open, and often a monthly minimum fee is charged if a certain level of activity is not met by your account. In addition, there's also the monthly gateway fee, as well as the gateway setup fee. Tentatively, a merchant is looking at spending a few hundred dollars just to get started, followed by $50 a month, regardless of whether or not any transactions are made. For a small merchant who only processes a few hundred dollars of transactions a month, paying fees like this could wipe out their profits. For such a merchant a third-party processor would be preferable as fees are charged per transaction, eliminating the monthly fees and, in most cases, the setup fee as well.
• The applicant is a non-programmer. Not everyone who wishes to accept credit cards online has the means to implement a complex API. Many merchants are non-technical with very little programming experience. While they possess the know-how and drive to get their store online, they simply can't handle the more advanced payment methods. Third-party processors handle the bulk of the payment process, making the process incredibly simple. They'll usually provide you with a few simple lines of code to place on your web site, and take over payment matters from there.

Other Points to Consider

Besides the key points that we've just talked about, there are other elements to keep in mind when considering a third-party processor.

• Third-party processors do not perform credit checks.
• They'll usually accept high risk businesses without higher rates.
• Rates are not negotiable.
• They can not be used with a separate processing gateway.
• The third party processor's name appears on your customers' credit card statements.
• You can discontinue the relationship at any time without incurring a penalty.
• It can take up to one month to receive any deposited funds.

When to Consider a True Merchant Account

When the idea of accepting credit cards online is posed to them, most merchants assume that they'll need a merchant account with a payment gateway. There's a good reason for this assumption, as all reputable online merchants use true merchant accounts. The reasons for this include:

• Large volumes of transactions are processed. Although true merchant accounts incur fees that are not otherwise associated with third-party processors, merchants who process large volumes of transactions will pay less with a true merchant account because they'll receive a better discount rate. The discount rate paid to a third-party processor can be as high as 6.00%, with a transaction fee of a dollar or more. A true merchant account can offer rates less than half this. As a result, a merchant's savings with a true merchant account grows as the volume of transactions made on their account rise. Large volume merchants will easily clear the threshold that makes a true merchant account a financially superior option.
• Merchants have total control over the account. Since you've opened the merchant account specifically for your business, you have total control over it. It's your name that appears on the credit card statements of your customers, you deal with customer support directly, and you have more freedom as to how you can use the account. Third-party processors tend to set rigid rules as they risk losing their merchant account if it's determined to facilitate too many rule violations.
• Merchant accounts offer transparent checkout. Most gateways offer an API (Application Programming Interface) for interacting with their services. This allows a programmer to communicate with the gateway directly from the merchant's web site instead of taking the customer to the gateway's web site and then back again. The transaction appears to be processed directly on the merchant's web site, alleviating the problem of customers leaving the web site because they don't feel comfortable with the purchase process.
• Merchant's portray a more professional image. Most customers have a preconceived notion of what a professional website is. In the scope of this article, this means a seamless checkout process with pages that have the same look and feel as the rest of the website. It also means never leaving the website to complete the transaction. Using the API of a true merchant account allows you to achieve a transparent checkout that maintains the air of professionalism that's expected from your customers.

Other Points to Consider

• In applying for a true merchant account you'll undergo a full credit check.
• A merchant account can't be used for personal use.
• High risk businesses will pay much higher rates.
• Rates are negotiable.
• A merchant account can be used with a separate processing gateway.
• Your business name appears on your customers' statements.
• You may be locked into a multi-year contract.
• Funds are usually deposited within 1-3 business days.