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Credit Card (Merchant) Processing Explained
Merchant Account Provider
There are many merchant card services companies on the Internet that are willing to help you set up a merchant account- for a fee. In Industry terms, these companies are called merchant account providers or Independent Sales Organizations. Make sure you research these companies before you pay for their e-commerce certified merchant services. Brokers namely set you up with a bank; they don't play an integral part in the operation of your credit card processing and online transactions. They make money by either an upfront fee, an application fee, or a per transaction fee. Their main goal is to place you with the bank that is suitable for someone with your credit history and that is experienced with Internet transactions.
Credit Card Processing Clearinghouse
When you have chosen a bank or a broker you will find that they usually "contract out" processing the credit card processing / transactions to a clearinghouse. When your website finalizes the credit card payment process in your shopping cart or online store, the Transaction Processing Clearinghouse is the organization that authorizes and validates the card (making sure the number matches the card and that sufficient funds are available).
Gateway
The final piece to setting up a merchant account to accept online payment is the gateway that connects you to the transaction clearinghouse. There are three common gateways:
Credit Card CardSwipe Machines
The machinery next to nearly every checkout register in the country. After the card is swiped, an authorization code displays, and is usually printed on a credit card transaction slip. The authorization comes from the clearinghouse that the store's bank contracts with, and it effectively assures valid payment to the merchant when the customer signs on the dotted line. This method is not needed for pure-play dot-com businesses.
Desktop Software
For e-businesses, desktop software can be used as the transaction gateway. Once you receive the credit card number via phone, mail, or email... the merchant manually enters the credit card numbers and payment amounts into the computer software, and transmits the list over the Internet to the clearinghouse designated by the bank. In a few moments, the clearinghouse responds with a list of good card and bad cards to allow the merchant to proceed as necessary. This software solution works better than the cardswipe machine, but may not work for large volume stores. It also requires re-keying data from each order into your computer, which can lead to user errors and can be time consuming.
Real-Time Web Gateways
There are several payment gateways to the transaction clearinghouse that can authorize and validate credit card payments while the customer is still online. These gateways provide a walkway from your website to a different modem channel to check the credit card status in real-time, a very complicated process if you were to do it on your own from step one. If you wish to use a real time gateway, which is most common with ecommerce shopping card software, make sure it is compatible with the system you are going to use. Our shopping carts are compatible with the major merchant account providers such as authorize.net.
Costs
The cost of setting up and maintaining a credit card merchant account depends on who you choose to provide your merchant account services and how many middlemen you go through. If you choose to use the MC shopping cart software , our organization will waive the set-up fee and the application fee for your merchant account.
Merchant Account - An account setup by a bank which allows you to accept credit cards. Your merchant account will deposit collected funds into your business's checking account every 24 hours.
Discount Rate - A percentage that is paid to the credit card company on each transaction. If a customer makes a credit card purchase worth $10.00 and your discount rate is 2.4%, you pay $0.24 for the $10 sale. A competitive discount rate is roughly 2.40%. Keep in mind that discount rates on the web are higher than that of brick and mortar stores. Make sure the rates that are quoted to you are for INTERNET sales.
Monthly Processing Minimum - The monthly processing minimum is the MINIMUM monthly fee you must pay to the credit card company. A competitive monthly minimum is approx $30. Example: If you sell $1000 in goods over one month, your total Discount Rate (see explaination above) would be $23.90. This amount does not meet the $30 minimum so the credit card company will round your charge up to $30. If the discount rate and transaction fees exceed $30, then you have met the Monthly Processing Minimum and the fee does not apply.
Real-Time Processing - This method of credit card charging authorizes and charges the customer's credit card at the time of purchase. This is the usual method for retail transactions.
Offline Processing - This method of credit card charging allows you to capture your customers' credit card information for charging at a later time. This is the usual method for recurring monthly charges.
Statement Fee - This charge is exactly as it sounds. The fee you pay for the bank to generate and mail you a statement outlining your transactions. Statement fees usually cost between $10.00-$15.00/month.
Transaction Fee - The amount charged per transaction. Most companies charge around $0.30. If you make 50 sales per month... the total transaction fee would equal (0.30 x 50 = $15.00).