Understanding basic credit card processing
I am trying to understand the elements in charging a credit card on the
net, please tell me if this is correct:
1. The owner of (goods/data selling) site, opens a merchant account
(through his bank or a credit transaction clearing company) to become
a 'merchant'. This allows him to accept specific credit cards at a
certain 'discount rate' that depends on the bank/clearing company and
negotiation.
2. The merchant has to choose a transaction clearing company that will
process the transaction according to the user credit card info and
amount charged. The clearing company receives a commission as well.
3. The bank, issuing credit card company and clearing company work out
everything and eventually the merchant receives his part.
Is this outline correct?
Are there any other possibilities, maybe cheaper/easier ones to process
credit cards (assuming i will get a merchant account)?
Any recommendations for low commission banks/clearing companies?
You have the most important part correct: the need for a merchant account.
You can't establish credit for your business if you don't use your own
merchant account. In addition, if you plan to accept Discover, American
Express, Diner's Club, or Carte Blanche, you'll need to apply with them
separately from your merchant account, although you can usually get the
forms from your merchant service provider.
The bank or ISO that provides you with merchant services should receive the
lion's share of the fees. Sometimes the bank is partnered or aligned with
what is known as a third-party processor. An example (not a
recommendation, though) is Wells Fargo bank and CyberCash. When you open a
merchant account with Wells Fargo, they will offer to set up with
CyberCash. That is not to say that you could not choose a different third
party processor, it just means that Wells Fargo recommends CyberCash, and
normally this means discounts for the merchant since the bank and processor
have an alliance. You should try to find out what the breakdown of fees is
between the bank and their recommended third party processor, so you can
price other processors and compare. The way the fees normally divide up
is:
1) discount rate is charged by the bank on every sale and paid to
Visa/MasterCard
2) flat per transaction fee is charged by both bank and processor and is
used to cover transaction-oriented costs
3) monthly statement/gateway access fee is charged by both bank and
processor and goes to pay for either statements (in the case of the bank)
or online access to your processing information (with the processor)
4) application/setup/software fee charged by both bank and processor to
cover application and setup costs
There may be other fees, but those are the usual ones. Like I said above,
make sure you get the breakdown of who is charging what. If the processor
is charging anywhere near as much as the bank in any of the categories
except maybe the setup/software fees, that should raise a flag. If the
processor is charging a percentage rather than a flat per transaction fee,
that should raise another flag.
The discount rate is usually applied at the time of sale and this
percentage never gets to your merchant account, but funnels through the
bank and is paid to Visa/MasterCard (or one of the other card issuers).
The bank normally deducts the flat per transaction fees and the monthly
statement fees from your merchant account once a month. Make sure you
notice the difference: the discount rate is charged against sales, while
the flat per transaction fee is normally applied for every transaction,
including charges, credits, authorizations and batch closings. Study your
schedule of fees to see what each one of these transactions will cost you.
The flat per transaction fee is where the bank gets its money to pay the
bills (so to speak) associated with moving money around. It is also where
the processor gets their income. Again, the bank should get the biggest
slice (since they do more for you) although this can be offset somewhat if
the bank gets a cut of the discount rate. The processor should not be
charging a percentage.
Ok, that's enough information for anyone to gag on. There are a few other
details to consider, though:
1) Customer service. Can you get satisfaction with the bank? How good are
the accounting options offered by the processor? Are you receiving good
detailed statements? Will the processor help you get started with sample
code and tech support?
2) Alternative processing options. Can you use the same merchant account
to do mail or phone orders? What about walk-in sales using a swipe
terminal?
3) Other services. Does the bank or processor know who to recommend for
order fulfillment, premium fraud screening, web design and hosting, and
other commerce-related needs? What about international merchants?
There are many more issues, but those will get you started. Most
importantly, find a bank and processor that will talk to you and answer all
of your questions. There is nothing more frustrating than having the
ability to charge cards, but not getting the support to get started or not
being able to reconcile your monthly statement.