Choosing A Merchant Service Provider

I often get asked for advice on how to obtain a merchant account or how to select a good merchant account.  A merchant account allows you to accept credit cards for your business. I wanted to share with you a few thoughts about what merchant services are, some terminology they use, and how to select a good one.  I'll finish with a few personal recommendations.

Visa is by far the largest credit card company.  Forty-four percent of all credit cards and 48% of all debit cards are issued from Visa Inc.  The next most popular cards are MasterCard, American Express, and Discover.  When you sign up for a merchant account, you usually automatically get accounts with Visa & MasterCard. You usually apply separately to be able to take Discover and American Express cards.

There are literally thousands of companies that offer merchant services to customers.  In the end, there are only about a dozen companies that actually do the processing for  Visa, MasterCard, and Discover payments (American Express processes its own payments).  When you sign up for a merchant account, you're most likely signing up through a reseller of one of the dozen or so processing companies.

If you want to get really rich and make money gouging people, perhaps you should become a credit card processing company :) .  There are many fees you should be aware of, and compare among companies when choosing who to go with:

• Account type.  There are two account types, and they have different rates and fees.  The first is card present, and the second is card not present.  If you are doing mostly online sales, you'll want a card not present merchant account.
• Discount Rate.  I don't know why they use the word "discount", sounds more like an "interest" rate to me.  But that's the percentage of the sale the credit card company will take for every sale. 
  
  For cart not present accounts, this number is usually around 2.2% to 2.4%.  But be aware -- this quote is for the absolute minimum they will take.  You could get charged 2.2% if the card you were processing were a very basic credit card issued from a very basic bank.  However, most people that use credit cards use cards with bonuses -- such as cash back, airline miles, and so forth -- you actually end up paying for the bonuses as the credit card company charges you a much higher discount rate (such as 3.4% to 3.9%), so beware.  Make sure you ask the company what ALL of the discount rates are for all types of qualifying transactions.
• Transaction fee.  Credit card companies usually charge a few cents (10 to 25) per transaction, regardless if the card was declined or accepted.
• Billing fee.  Some credit card companies charge you so that you can receive your bill.
• Monthly Fee.  Some credit card companies will charge you a monthly fee to have the privilege of having a merchant account.  Take note that there are some companies that don't have a monthly fee.  Instead they have a....
• Monthly Billing Minimum.  The most common figure for this fee I've seen is $25.  That is, that you agree to pay the company at a very minimum $25 per month in credit card fees.  If you do more than that amount in credit card fees, you win.  If you do less than that amount in credit card fees, they win.
• Look out for other fees.  There may be other fees credit card companies charge, make sure you read all of the fine print and ask the sales person to disclose all fees or better yet, have them show you a sample billing statement and have them explain what all the codes and symbols on the bill mean.

The biggest complaint I hear from clients about their credit card companies have to do with the quality of their customer service.  I recommend doing a Google search for the merchant account company you're considering, and look at page 2 - page 6 of the search results.  You might see a few places where people have complained about the company's service.  Note: all companies have a few "pesky" customers and it's impossible to satisfy 100% of people 100% of the time, so read the entire review and see for yourself if you think the review is reasonable.

When I started my business, I began my search for a merchant account online.  There were many companies, and narrowed down my search to a few.  I also happened to contact my local bank.  Turns out that at that time, my local bank had a much better offer than what I found online.  I've been very happy to have gone through them for my merchant account.

I have personally had bad experiences with CyberSource, and have known others that have had bad experience with FirstData.  I have heard good things about Elavon.  Also, if you are a Costco member, I hear that they resell merchant accounts to members and offer really good rates.

Good luck looking for your merchant account company.  If you have experiences you want to share about your merchant account company, please share them in the comments for this blog post.

Comments

• I wish I had this information when I signed up with a merchant service provider. Great explanation. I would also recommend to read your statement details every month. Call your provider if you have questions about any charges. Sam's Club also offers merchant accounts. Thanks.
  by Barbara on 18 March 2010 at 7:08 a.m.
• My recommendation would be extremely cautious of companies offering good rates. There are many people out to make money in this industry and there is a lot of unethical practices, making it very easy to be taken advantage of. Ask around among your friends and other businesses. You will often get the best information this way. Lastly, I have found the best way to choose a merchant processor is to focus on complaints rather than positive feedback. Finding positive ratings on these companies isn't very easy, because people often aren't very fond of the companies they use. I tend to look for the companies with the fewest number of complaints.
  by Jon on 17 March 2010 at 8:18 p.m.

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