I have been doing this for a while now and i noticed alot of new business owners don’t quite understand fully how merchant accounts work and what fees are all involved. So i will briefly explain to the best of my ability.
What is a merchant account.
A merchant account is a relation ship between you (the merchant) a merchant service provider and a bank. This allows you to accept credit cards for your business and have the funds deposited directly into your bank account each day. If you go through your bank directly, the bank also acts as the merchant service provider. However usually, you will get better rates (especially for e-commerce merchants) going through a merchant service provider or MSP.
What is a payment gateway
A payment gateway is the internet version to a credit card machine you swipe your card through at brick and mortar shops. Right now Authorize.net has a monopoly over the payment gateway industry, mainly due to the fact most internet shopping carts and billing systems come pre-integrated with Authorize.net so most MSP choose to offer it. It is also one of the most secure gateways in the world.
Rates and fees involved with merchant accounts: Qualified Discount Rate
This rate is what you will be charged on each sale. It is a percentage of a sale that Visa/MC charges based on certain risk factors. Normal e-commerce qualified rates are around 2.25% meaning for every $100, you are charged $2.25 to process a credit card. This rate is charged whenever you process a U.S based credit or debit card.
Non Qualified Discount Rate
This rate is alot of times hidden from you by MSP. This rate is charged whenever you process a Non-U.S. or Business credit card. Usually this rate is around 3.95%. It is rarely if ever below 3.10% because this is the highest rate Visa/MC charge.
Transaction Fee
This is a fee to process a transaction, normally you can expect to pay between 25 and 35 cents.
Statement Fee
This is a fee not just for your paper statement, but it also covers the cost to staff 24/7 phone and technical support.
Annual Fee
Alot of MSP charge this because all aquiring banks usually charge an annual fee. This is were the bank makes its money. However some MSP don’t charge an annual fee, however that is usually because other fees are slightly inflated in other areas to make up for it.
Gateway Fee
This is charged for use of the payment gateway. usually this ranges from $10-$15
Monthly Minimum
This is charged only if you do not process any or process very little in sales. The monthly minimum is about $25 for all MSP’s. What that means is you must process enough to be charged $25 in processing fee each month. If you are not, you will be charged the difference. You will not be charge the whole $25. You will just be charged enough to bring your processing fees up to $25. The reason for this is because an active merchant account that does $0 in sales cost the MSP around $20-$25 per month to keep up and running. If you process at least $1,250 per month, you wont be charged a monthly minimum.
Merchant Account Myths Some MSP’s can give you better rates than other
This is not true, MC/Visa charge the exact same rates to ALL MSP regardless of how big or small they may be. 1 MSP may be willing to give you better rates, however he is being charged exactly the same as every one else.
You need a business license and bank account for a merchant account
This is not true, any person can obtain a merchant account without a business license or business bank account. you can sign up as a sole proprietor and have the funds deposited into your personal checking account.
A merchant account is the same as a paypal account
A merchant account is very different from paypal. Paypal is not a financial institution and is not regulated by and federal agency. With a paypal account your customer see’s paypals name on the credit card statement and paypal is in complete control of your funds and can freeze or limit your account at any time without prior warning or notice. Paypal does not let you accept credit cards manually (except with their virtual terminal for $30 per month) and unless you are processing less than $1,500 per month, paypal will actualy cost you more even though they do not have any “monthly fees”. Also, customers paying with credit cards attached to banned, limited or frozen accounts can not pay with that credit card though paypal. as of january over 2.5 million credit cards were banned from paypal.
I will add to this as things pop up in my head. if you have any questions regarding merchant services, send me a pm and i will be happy to answer them.
I also found this Wikipedia article about Payment gateway interesting, and add it to the list of recommended reading to better understand how payment gateways work:
Merchant Accounts: Merchant account is an important component of a , professional ecommerce web design so as to cater to the requirements of the individual customer. The formalities as regards the merchant account may involve some time as it would involve procedures like confirmation of identity and such other things. Therefore, it would be ideal to take care of the formalities regarding the merchant account right at the beginning so that it is ready by the time your ecommerce website is ready to start and there is no time lag that would affect your business adversely. It would be best to check with your banker or else there are also other good alternatives like PayPal that are available for convenience in online trading. The above essential elements of an ecommerce solution must be kept in mind before actually opting for a particular package. A good market research and analysis of what is available would help you in finding the best offer that is not only cost effective but also one that is best suited for your requirements. http://www.infyecommercesolution.com
I’m completely new to this stuff so it is a little overwhelming.
To clarify the payment gateway will take roughly 2% plus 20 cents for each transaction , and my merchant account will take another 2% plus 20 cents for each transaction plus their other maintenance fees. So when all is said and done I should assume at least 5-7% in fees for each transaction? And as a side note. One of my main concerns is security. In magento all credit card info is not held on the site once the transaction is complete the information is gone from my site?
Hi,
No. The payment gateway usually only takes a transaction fee of 0.5-0.10 cents. So when its all said and done, you pay between 2.2% + 30 cents on average assuming your rates are 2.2% + 25 cent transaction fee and $0.5 cent gateway fee.
Would you be kind enough to explain whether it would pay for us to sign up to paypal pro account. They charge 2.2%-2.9% per transaction (depending on the monthly volume) plus $0.30 per transaction to process credit cards. there is also a $30 per month fee and for this you also get a credit card terminal. is Paypal pro compatible with Magento and what are the advantages and disadvantages of a paypal pro v a standard merchant account?
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