Hundreds of thousands of new businesses open their doors each year in the US. The vast majority of them are small businesses, i.e., firms that employ fewer than five hundred people. According to the U.S. Office of Advocacy, small businesses account for 99.7 percent of employer firms.
Starting a new company is no walk in the park. There are hundreds to thousands of important decisions that must be made. In this article, we will focus on a single issue that every new business owner should carefully consider. We are speaking specifically about merchant service accounts.
What are they, exactly? Every business that accepts credit or debit cards must obtain a valid merchant service account. Issued by banks and other financial institutions, the merchant service provider performs a number of vital tasks. First and most importantly, it checks to see if a card is valid. Whenever the word “approved” appears on a card reader, the service provider has done his duty. But that is not where his job ends. The service provider must also collect funds. An electronic bill is typically sent to the customer’s credit or debit card company. Once the funds have been released, the service provider will subtract a certain amount from the balance before he sends it to the merchant. The entire process takes two or three business days.
There are two distinct types of merchant service accounts those for businesses that accept payments in person and those for businesses that do not. The first group includes traditional retail stores and the second includes firms that process payments over the internet, the telephone, or via mail order. These businesses are generally charged higher merchant service fees due to the fact that the card is not present.
You see, when a merchant processes a credit/debit card in person, he can ask for ID, check the signature, or request a pin number. These are tried and true security measures that have helped traditional retailers fight fraud and theft. But when the card is not present, the merchant has no way of knowing if he is doing business with the actual cardholder. That is why fraud and theft are far more common when the card is not present. It is also why these merchants are charged higher service fees.
Traditional Merchant Accounts
When payments are accepted in person, service charges are often quite affordable. Business owners who have good credit scores and a solid business history should have no difficulty securing rock-bottom rates. Because the risk of theft and fraud is so much less, most credit card companies will not charge traditional retailers even if they process a stolen card. This is not the case when the card is not present.
The average online merchant is forced to pay something called a chargeback every time a transaction is disputed or an item is returned. By comparison, when a regular retail transaction is disputed, the merchant can send his service provider a signed and dated copy of the receipt to prove that the transaction actually occurred. More often than not, the provider will then deny the chargeback request made by the customer’s credit or debit card company.
Internet Merchant Accounts
While the rates and fees may be higher and the risk of a chargeback is greater, few online sellers can survive without a valid merchant service account. Over ninety percent of all online sales are completed with a credit or debit card. The rest are made with checks and money orders, which can take weeks to arrive and days to process. Personal checks can also bounce and buyers don’t always send them when they agree to a purchase. Electronic payments are the quickest and most reliable way make money on the internet.
Service rates and fees for online merchants vary widely depending on the market the merchant competes in. If the merchant ships fruit baskets or flowers, his rates should be quite reasonable. On the other hand, if he runs an online casino or an adult entertainment website, his fees could be much higher. These merchants are often forced to apply for high risk merchant accounts, since chargebacks are quite common in their respective industries.
Which to Choose?
Many traditional businesses have started selling their goods on the internet. Offering items online gives them the ability to sell to shoppers anywhere in the world. Will they need an online merchant service account? Well, it really does depend. If they already have an account and only a small percentage of their total sales are made online, they may not need another one. Their service provider may simply agree to charge them at a slightly higher rate for their online sales.
When a merchant sells most of his wares on the internet, he should always apply for an internet merchant account. Even if he sells a few items in the flesh, fines and penalties may be assessed if the merchant tries to pass himself off as a traditional seller.
Always consultant your merchant service provider if you have any questions about the kind of account you need.