Credit card processing merchant account - Obtaining a Merchant Account for your Online Business. In order to start yo

To operate an online business successfully, you need a way for customers to pay you. This typically means accepting credit card payments, which requires a merchant account. A merchant account acts as a bank account that temporarily holds funds from credit card transactions before transferring them to your business bank account. Understanding your options for obtaining one can help you choose the best fit for your online store without overspending.

What is a Merchant Account and Why Do You Need One?

A merchant account is a special type of bank account that allows your business to accept credit card payments. When a customer uses their credit card on your website, the funds are first deposited into this merchant account. After processing and verification, these funds are then transferred to your regular business bank account. Without a merchant account or a similar payment processing solution, you won't be able to accept credit card payments directly from your customers, which is essential for most online businesses.

How Can You Obtain a Merchant Account?

There are several common ways to set up credit card processing for your online business, each with its own advantages and considerations:

1. Obtaining a Merchant Account from Your Local Bank

Many businesses consider their local bank first. If you have a good relationship with your bank, you might be able to avoid certain security deposits. However, local banks are often better equipped to handle traditional retail stores. For online businesses, they may:

• Charge higher discount rates (the percentage of each transaction you pay to the processor).
• Require a substantial security deposit.
• Only support a limited number of major credit card networks (e.g., Visa and Mastercard, but not American Express or Discover), potentially requiring you to open accounts with multiple banks to accept all major cards.

As the discount rate increases, your profit margins decrease, so it's crucial to compare rates carefully.

2. Working With a Merchant Account Broker

Many online businesses prefer using a broker to arrange a merchant account due to easier approval processes and often more favorable terms. Brokers frequently specialize in online businesses, leading to high approval rates, even for applicants with less-than-perfect credit or a bankruptcy history.

Key aspects of working with a broker:

• Security Deposits: Brokers often require reasonable security deposits, and sometimes none at all.
• Discount Rates: The discount rates offered by brokers are typically more competitive than those from traditional banks for online businesses.
• Application Fees: You can expect an application fee, which generally ranges from a few hundred dollars.
• Equipment and Software: Beyond brokerage fees, you'll need to account for the cost of a virtual terminal and necessary software to process credit cards automatically. These can be purchased outright or through monthly installment plans. Costs for these tools vary widely, potentially ranging from a few hundred to a couple of thousand dollars, depending on the complexity and features.

It's important to research brokers thoroughly, check references, and understand all associated fees, including any hidden costs, before committing.

3. Utilizing a Fulfillment House's Credit Card Accounts

A fulfillment house can manage various aspects of your business, including order taking, customer service, database maintenance, and shipping. For payment processing, you can leverage their existing merchant accounts. Customers would typically call a toll-free number provided by the fulfillment house to place orders or resolve issues.

Considerations for this option:

• Outsourcing Benefits: It can significantly reduce your operational headaches, as the fulfillment house handles much of the "dirty work."
• Higher Fees: While convenient, the fees for payment processing through a fulfillment house are usually higher than direct merchant accounts, often ranging from 5% to 8% per transaction, compared to typical discount rates of 2% to 3%.
• Suitability: This approach is generally best for small-scale merchants with lower monthly order volumes. For businesses with high revenue, the increased percentage fees can become cost-prohibitive.
• Online Sales Limitation: You might lose sales from customers who prefer to make direct online payments rather than calling a toll-free number.

4. Using a Third-Party Billing Company

A third-party billing company allows you to accept payments on your website by connecting your checkout process to their secure order forms. When a customer is ready to pay, they are temporarily redirected to the third-party company's website to complete the credit card transaction.

Key features and considerations:

• Payment Transfers: Your earnings are transferred to you periodically, with payment timeframes typically ranging from 15 to 60 days.
• Varying Plans and Rates: These companies often offer a range of plans with different payment periods and discount rates, which can also vary based on your business volume.
• Initial Fees: Account setup fees for third-party billing companies generally range from a few hundred dollars.
• Discount Rates: Discount rates can be higher, potentially ranging from 5% to 12%, making it a more expensive option for accepting credit card payments.
• Best Use Cases: This solution can be ideal for businesses with low transaction volumes and high-priced products, or for international businesses that need to accept payments in U.S. dollars without the complexities of obtaining a U.S. merchant account directly.

Frequently Asked Questions

What is a "discount rate" in credit card processing?

The discount rate is the percentage of each credit card transaction that the merchant pays to the credit card processor. For example, if your discount rate is 2.5% and a customer makes a $100 purchase, you would pay $2.50 in fees for that transaction. A lower discount rate means more profit for your business.

Can I get a merchant account if I have bad credit?

Yes, it's possible. While traditional banks might be hesitant, merchant account brokers often specialize in helping businesses with less-than-perfect credit or even bankruptcy records secure approval. Third-party billing companies may also be more flexible with credit requirements.

Why might a local bank not be the best choice for an online business?

Local banks are often structured to serve brick-and-mortar retail stores. For online businesses, they may impose higher discount rates, require larger security deposits, and might not support all major credit card networks, potentially forcing you to manage multiple accounts.

What are the main types of providers for credit card processing?

The article discusses four main types: traditional local banks, specialized merchant account brokers, fulfillment houses (which process payments as part of a broader service package), and third-party billing companies (which handle the payment gateway and processing for you).