The majority of online sales are made through credit card payments. No eCommerce business can exist without accepting at least two of the most commonly used credit cards: Visa and Mastercard. To accept credit card payments, online stores maintain merchant accounts. However, many storeowners fail to fully understand how their merchant accounts work. This often leads to terminated accounts, frozen funds, higher than normal chargebacks and discount rates.
An eCommerce storeowner must familiarize him/herself with industry standards and best practices regarding merchant accounts. Understanding how merchant accounts work will allow you to reduce risks and potential problems.
- PCI compliance
Is your gateway provider PCI compliant? Avoid credit card fraud and protect your customers’ credit card information by making sure that your gateway provider complies with the Payment Card Industry Data Security Standard (PCI DSS).
- Front- and back-end compatibility
Is your order management software compatible with your gateway provider? Shopping carts act as a front-end for online stores, passing secured information to a payment gateway. It’s important to review the gateway services supported by your software before acquiring the shopping carts.
- Understand merchant provider fees and rates
Be aware of fees and rates that your provider requires and what these are for. For instance, set-up fees are charged for new merchant accounts although many providers do not charge this anymore. Chargeback fees (usually around $25) are incurred when a customer or issuing bank disputes a transaction because they do not recognize the transaction or it was a fraudulent charge.
It’s common to see 3 types of fees:
- Transaction fees – a small charge for every transaction processed, usually 30 cents to 50 cents per transaction.
- Discount fees – a percentage of monthly sales taken by the merchant account provider. Depending on the type of business, discount rates range from 2.5% to 5%.
- Monthly fees – the flat amount paid each month for account-related services.
Aside from these three, there are various other fees you may run into. Be wary of providers who offer suspiciously low rates. More often than not, they come with hidden fees.
- Use Address Verification Services (AVS) and CVV Numbers
Authentication allows you to reduce the chances of accepting a stolen card. Make sure that these are activated to eliminate or at least reduce the number of fraudulent orders.
- Overestimate your revenue expectation
Merchant providers are suspicious of sudden bursts of business activities. So if you expect your sales for the first month to be $25K, ask for $50K, then build up your business accordingly. If you business is highly dependent on seasonality, you will want to notify your agent/representative so that he can note this on your account.
In the Long Run:
Understanding how merchant accounts work will not only help you avoid problems, it will also allow you to maintain good business owner-merchant provider relations. To further strengthen good standing, avoid excessive chargebacks and avoid selling products or services outside what you declared in the service agreement.
Refrain from processing transactions for other businesses and unusually high processing volume. If a sudden increase in business activity raises a red flag, respond promptly to your provider when explanation is requested. Keeping your account in good standing will keep your account and/or funds from getting frozen.
Getting to “eCommerce heaven” is a marathon, not a sprint – but you can get better every week.
By: Shirley Tan
eCommerce Weekly Checklist: Understanding Merchant Accounts