Payment Processing FAQ

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We frequently receive many of the same questions about merchant accounts and payment processing, so we thought it would be helpful to post this FAQ on our website. If you have a question that is not answered in this FAQ, do not hesitate to contact us.

What is a Merchant Account?

A merchant account is an account issued at a financial institution that allows you to accept payment for your products and services via credit cards. ⇑ Top

What is a Discount Rate?

Discount rates are a fee/service charge which is applied as a percentage taken from the charge that is being processed. For example, if your discount rate is 3% and you process an order for $100, the discount rate being deducted would be $3.00. ⇑ Top

What is a Chargeback?

A chargeback occurs when a transaction is reversed and the funds are taken back out of your account. Chargebacks are initiated for a wide variety of reasons, such as duplicate billing, credit card expiration, bank error and customer disputes. ⇑ Top

What is a Chargeback Ratio?

A Chargeback Ratio is a monthly percentage calculation derived from dividing the total revenue reversed by chargebacks into the total revenue processed. So, if you processed $1,000 of volume in one month, but $100 was reversed by chargebacks, your chargeback ratio for that month would be 10%. And this would be unacceptable. Generally, the credit card issuers will provide written warning to a merchant account holder if the chargeback ratio tops 1% in a given month, and if the problem persists for several months the merchant is at risk of losing their account. ⇑ Top

What is a Reserve?

A Reserve is a percentage of your processing revenue that the merchant account issuer will retain, or “hold back”, for a period of time, to mitigate against the risk that the issuer is absorbing by providing you with a merchant account. Generally, reserves are set at 5% or 10%, and begin to be paid back after 6 months. So, if the rate of reserve is 10% and you process an order for $100, then $10 would be retained by the merchant account issuer and held “in reserve” and paid back to you in 6 months. Of course, new reserves continue to be collected even after initial reserves are being paid back, so that the issuer always maintains a 6 month “float” to mitigate against risk. ⇑ Top

What is a Transaction Fee, and why is this a Potentially “Dangerous” Charge?

A Transaction Fee is a fee applied to each transaction. This fee is very important to be aware of, because many providers will “suck you in” with a low discount rate, but a high fee per transaction. Some providers charge as much as $1.00 per transaction. In a scenario where you are provided with a 2.5% commission rate, and $1 per transaction fee, and you process 500 orders at $40 per order, your commission charge would be $500, and your transaction fee would be $500. Most merchants focus on the commission rate more than the transaction fee, so this is a charge that you want to seriously look at in terms of your average number of orders and average order price. ⇑ Top

What are the Other Important Fees?

Other important fees to examine are:

  • Secure Gateway Fee (a per transaction fee applied by the gateway provider, and this ranges anywhere from 5 cents per transaction to 30 cents per transaction depending on the provider)
  • Chargeback Fee (a fee per chargeback, and this ranges anywhere from $25 per chargeback to $100 per chargeback, depending on the provider)
  • Monthly Account Maintenance or Membership Fee (a monthly fee charged for the use of your account) ⇑ Top
What is a Gateway?

A Gateway is the service that automates the payment transaction between the shopper and merchant. It is usually a third-party service that is actually a system of computer processes that process, verify, and accept or decline credit card transactions on behalf of the merchant through secure Internet connections. The payment gateway is the infrastructure that allows a merchant to accept credit card and other forms of electronic payment. So the primary function of the gateway is the clearing and settlement of transactions. The Gateway communicates the credit card information entered to a payment processor – the payment processor then accepts or declines the order based on that information and communicates this back to the shopper and merchant, and this process occurs within a matter of seconds. Transaction details are stored within the Gateway, and the Gateway also provides reporting functionality to the merchant. When referring to payment gateways used for Internet transactions, it may also be called an IP payment gateway. ⇑ Top

Can I use someone else's merchant account to do my transactions?

No, this practice is known as "credit card laundering" or "factoring." It is against the Visa® and MasterCard® agreement. Using someone else's merchant account to process your credit card transactions can lead to heavy fines and possibly more severe penalties. Also, at minimum you will put the other person’s merchant account at risk, and more than likely they will lose their account. ⇑ Top

What do they mean by Card Not Present?

Card Not Present is a term used to describe transactions, such as Internet, Mail, and Telephone Orders, where the consumer is providing his/her credit card number but not doing this in person. ⇑ Top

Why are Rates Higher for Card Not Present Transactions?

Face-to-face transactions, where the credit card is swiped in person, are considered less risky by banks. In face-to face scenarios, instances of fraud and chargebacks are significantly lower. As a result, rates are quite a bit lower for “Card Present” transactions as opposed to “Card Not Present” transactions. ⇑ Top

How Long Will it Take to Set Up a New Processing Account?

The turnaround time can vary from company to company, as this depends on a number of details including the company location, products sold, risk factors, and sales medium, to name a few. However, in our program it can take as little as 24 hours, and should not take longer than two weeks. ⇑ Top

How Often will the Merchant Account Provider Pay Me my Money?

This varies depending on the provider. Some remit payments weekly, others every 2-3 business days, and others on a daily basis. Obviously, from an accounting standpoint the daily remittances save much time and trouble, so this is an important feature to check up on when reviewing your merchant account terms. ⇑ Top

Are all Internet Merchant Accounts compatible with all Shopping Carts?

No. Shopping cart companies make their software compatible only with specific secure payment gateways. In addition, merchant account companies work with different secure payment gateways so their clients can process credit cards online. Some merchant account companies even provide their own gateway solution. In most cases, whatever the gateway, it will include a shopping cart functionality. So this is only an issue if you have a specific shopping cart integrated with your business in such a way that it is imperative that you continue with the same shopping cart, and if this is the case then this is an area you want to check up on. ⇑ Top

I have a credit card swipe terminal from a previous merchant account, is it compatible other companies?

Probably. You will certainly need to have it reprogrammed to work with your new merchant account. There are some companies that only work with certain terminals, be sure to inquire before signing up. ⇑ Top