All About Merchant Accounts

Whatever your business is, if you're serious about selling on the Web you need to be able to accept payments from your customers. While there are many different payment methods, the most popular include accepting credit cards and in order to do so you'll need to set up an Internet Merchant Account, which is subtly different from a standard "swipe machine" type merchant account and, in the UK, substantially more expensive because the UK banks are still very wary of online trading.

Setting Up An Account

Merchant accounts are accounts that accept and hold credit card transaction monies. These accounts can be established through merchant service providers (MSPs) such as banks or via independent service organisations (ISOs). At the time of writing there are few if any ISOs in the UK and offshore accounts are the only option if the high street banks and their extortionate charges are to be avoided. Offshore accounts are relatively cheap but have obvious risks associated with them.

Banks are generally viewed as secure and reliable, but are generally more selective when deciding for whom they will open a merchant account. ISOs tend to be more flexible but are willing to accept more risk, since they are neither monitored nor regulated. However, they charge a premium for accepting the risk associated with your business, so be prepared to pay more.

A merchant account for online business is similar to a merchant account for mail order business; the risk is associated with the fact that you don't have the physical credit card to scan. It used to be that banks were reluctant to open merchant accounts with businesses that hadn't been in operation for at least two years with all sorts of other stipulations, but today, most banks will open merchant accounts even for new businesses, if they have a history with you. If you haven't been in business for two years, talk to your personal banker -- where you have your own current and savings or mortgage accounts -- to see if they can give you a merchant account. If you've been in business for two years, go directly to your business banker and apply with them.

When you apply for a merchant account, you'll need to supply the bank with the average order size and the average monthly amount that you expect to be running through the account. Estimate conservatively. You may be asked to keep a percentage (or even a full month's estimated order total) in an account to cover fraud. If you round-up to impress the banker, you're going to end up paying more in tied-up capital. Tell him what you expect to be processing the first or second month. If by the sixth month you've far exceeded that amount, he'll find you to discuss increasing your reserve, but you've got your account, and you've got a thriving business.

What You Need

In addition to procuring a merchant account for credit-card acceptances, e-traders also need a shopping system built into the website and a method of taking/processing credit card information via a secure server and handling transactions between you and your bank. There are a number of packages available to provide a shopping system (such as Actinic) but these are often difficult to customise fully to the style of a particular website and usually look like they have been "bolted on".

All Hitchman e-commerce websites come with built in catalogue and shopping cart systems that integrate perfectly into the website at no more cost than most packages... plus our system has more features than most packages and can be customised for specific applications. In addition to all this we have our own secure servers enabling us to take and store confidential information online which we can make available for a small annual fee. This enables smaller vendors to take credit card information online and put it through a swipe machine as a "customer not present" transaction.

For "real time" online payments there are a number of service providers in the UK (including SecPay, Protx, NetBanx and WorldPay) enabling you to connect your website to your bank's merchant account and many of the high-street banks have their own (generally more expensive) services to go with their merchant accounts. The Hitchman shopping system can be connected to most of these providers but it is always best to consult with us first as there are a couple of systems we do not consider their security to be adequate (one of them is a major high street banking system!).

So in summary, if you buy a website from us the only other things you'll need are:

w A swipe machine and a standard merchant's account

OR

w An Internet merchant account from your bank (costs around £300 + a small percentage for each transaction depending on your business and it's perceived risk).

w A payment service provider. We recommend SecPay or Protx (costs around £20 per month for low to medium number of transactions with no setup fee. Worldpay and Netbanx cost around £400 to set up and they will hold on to your money for 30 to 60 days).

NB. We do not recommend Instant Payment Notification (IPN) services such as PayPal, NoChex and Fastpay for serious commercial websites. These services usually require membership with complex signup procedures for your customers, restricted payment amounts and poor/no customer service. However we can accommodate them if required.

What Kind Of Authorisation Progress Do You Need?

E-traders need to anticipate how many transactions will occur on their site. There are two types of authorisation processing: batching and real-time. Batching, used frequently by smaller merchants, is done by hand offline. Once orders are sent by customers, through phone calls, faxes, or online forms, they are processed manually. This can be accomplished through several methods such as swiping through a terminal or using PC-based authorization and settlement software. Since fraud is such a problem online, and because small merchants are least able to bear the cost of fraud, small merchants should consider batching payments, taking steps to guard against fraud, before assuming they need real-time processing.

By contrast, real-time authorisation provides credit card purchases to be approved or declined immediately. Some e-commerce sites use this method to try to save time and money through automating the process, but many sites, especially smaller ones, don't need real-time authorization and its added expense. Wait until you see large volumes of inventory or products ordered electronically (such as content or software downloads), before investing in this solution. It sounds like less trouble, but it requires constant monitoring because any downtime in the payment processing is time during which you can't accept orders! You must determine your needs along with your customers. If done properly, a customer won't even know whether their payment is being processed in real time. As long as you give your customer an order number on the thank you page, they will think their order has been processed. You have every right to "begin" the fraud/credit limit check at that point. Customers aren't entitled to your products until they've proven they can pay for them.

E-retailers also need to determine which merchant account provider fees will work for their businesses and which could kill them. There are various fees that merchant account providers charge e-retailers, and many vary significantly. Merchants should figure out if the fees charged will outweigh potential profits. Common fees include:

Discount rates: the percentage of bank card sale amounts that the acquiring financial institution charges merchants for transaction settlements. This depends on the average order size that you quote the bank. A larger order size will usually result in a smaller discount rate. Generally about 2-3 percent.

Intercharge fee: amount that merchant's acquiring financial institution pays consumer's issuing financial intuition for every credit card transaction settled. Transaction fees can be anything up to 50 pence per charge. Discounters selling lots of low-cost products could get killed in transaction fees.

Equipment and Installation: these costs include hardware/software, set-up and programming. If you're purchasing an e-commerce solution from us it generally works out more cost effective to use our system than to get us to customise packages such as Actinic, however we can integrate packages into our Content Management system.

Monthly Fees: also includes minimum fees, may cover total charges, statements, and excess usage.

Reserve Costs: some banks hold back a percentage of merchant transactions to cover contested charges. Chargeback fees can also be charged when disputes are settled in favour of credit card holder. Fraud often takes the form of disputed charges, which, in the U.K., are almost universally settled in favour of the card holder. This means that in addition to losing the amount of the sale -- after the product has been shipped -- the merchant loses the bank chargeback fees. Also, if the merchant has too many chargebacks, he's at risk of losing his merchant account. Merchants who think they're going to set up shop without a customer service phone number will likely lose more than the cost savings of no 0800 number in chargebacks. High chargebacks also result in an increased reserve requirement. Begging your banker to let you keep your merchant account is much worse than begging to get him to give you one.

The good news is that depending on your provider, these fees can greatly differ, and most can be negotiated. E-retailers need to do research compare rates and services, apply these to their specific costs, and then make an informed decisions.

Provided you do your homework and shop around, you should be able to offer your customers the ease of credit card payments without adversely impacting your business and increase sales along the way.

So, the bottom line is... speak to us then speak to your bank!