Merchant accounts aren’t just for large organizations with multiple locations across the country; they’re a major part of a small business’ success as well. Without small businesses having the ability to process credit cards, their chances of profitability are limited.
However, it’s not just about getting a merchant account—you should know what to look for in a credit card processing company so you don’t get stuck in a contract you’re unhappy with, and learn what all of the fees on your statement mean in order to understand what exactly you’re paying for.
You have to process to profit
Although cash remains king, small businesses have to be able to accept debit and credit cards because an increasing amount of consumers rely on them to make purchases. Think about your own buying habits: Do you usually use a credit or debit card or cash when making a purchase?
As a result of consumer preferences, small business credit card processing is extremely important. Business owners should take the time to research different credit card processing companies in order to find out which account would best suit their needs but not empty their wallets.
The 3 components of merchant services
There are 3 key elements of merchant services. Business owners should take interest in each one when looking to obtain a merchant account since they all play a role in the type of merchant services you will receive.
- Merchant Acquirer – the company with whom you negotiate rates and sign a contract with for merchant services
- Processing Platform – the company with the infrastructure to process electronic payments to ensure you get paid for transactions you process
- Funding Bank – the bank that guarantees payments to your bank account so you can get paid long before your customers pay their credit card issuer
Even if you like your merchant acquirer, you may not necessarily be happy with the products and services provided to you because it’s processing platform and funding bank may not be as impressive. For example, not all processors offer mobile payment solutions, and not all funding banks offer next-day funding.
Understanding your statement
When you have a merchant account, you should understand what you’re being charged for. Your business’ credit card processing statement is useless if you don’t know what it means. Here are just a few merchant account fees that will probably show up on your statement.
Every time a customer uses a credit card to make a purchase, the card’s information is sent to your merchant service provider’s processing platform, who in turn securely passes this information to the company that issued the customer’s credit card to authorize the potential purchase. The processing platform then confirms the authorization to you in order for you to complete the sale. For this reason, most merchants pay an authorization fee.
The processing platform notifies you once a transaction is settled, or completed. Most merchant services companies charge you either an authorization fee or a transaction fee, but some charge you for both.
A batch fee covers the cost of a batch settlement. A batch is a group of authorized transactions. This means that these transactions have been completed, but you haven’t received the money for those sales yet. Most businesses “batch out” or send a batch of transactions to the processor at the close of business. Some merchant services companies charge merchants for each “batch.”
This is where your merchant acquirer’s funding banks come in. When you batch out your terminal or POS system, the processing platform transmits the authorization and transaction information to the funding bank, who then transfers the money to your account. Every time a batch settlement takes place, you are charged a batch fee.
This is pretty self-explanatory. When you first sign up with small business credit card processing company, you’ll have access to new POS systems and terminals, which have to be installed. Often, you have to pay a set-up fee after the initial installation.
Make sure you ask about this beforehand because there are some providers who won’t mention that they’re going to charge you a set-up fee. So by the time you find out about the bad news when you’re bill comes in the mail a month later, you will already be their client. In addition, set-up fees are very often negotiable, so merchants can often avoid paying any set-up fees.
Monthly Minimum Fee
Only businesses that do not process a certain amount for a particular month will be charged a monthly minimum fee. For example, your business processed a total of $100 for the month of January and your credit card processing company’s minimum fee is $20. However, the $100 only covers half the cost. This means you’ll have to pay the other $10 through a monthly minimum fee. As with set-up fees, monthly minimum fees can be negotiable. If you’re new to credit card processing, and uncertain about how much credit card volume you’ll process, it might make sense to push for no monthly minimum fee.
Chargebacks refer to when consumers are reimbursed for a purchase made with their credit card. Usually, someone will ask for a chargeback if there is a suspicion of fraudulent activity on the particular card or if they feel their card was charged in error.
What typically happens is the consumer will contact the card issuer requesting a refund and the card issuer will get in touch with the business where the transaction took place to verify the card holder’s claim. Whether or not the business owner issues the chargeback, a chargeback fee will be included on his or her next credit card processing statement to cover the costs of the investigation process.
There are countless other credit-card processing fees that often read like ancient hieroglyphics to the untrained eye of a business owner. Small business owners new to credit card processing are wise to sign with someone they know and trust, and who will be able to get them answers to all of their questions.