Every business needs expansion for continued business survival.  Expansion of customer base is possible by providing customers the facility of paying by credit cards, necessitating the opening of a merchant account.  This article will provide certain tips that will help you in your selection of a merchant account provider or processor.

Merchant account tip #1:  Understand your business needs and select the merchant account that fulfills those needs.  Different types of merchant accounts suit different business models.  For grocery stores and other retail stores, a traditional merchant account with a card-swiping machine would be ideal.  For individuals and professionals, who due to their occupation have to be mobile, an Internet based or dial pay merchant account would be more suitable.  For restaurants with heavy traffic, wireless credit card swiping terminals may be most effective. 

When a physical card is present, such as in retail business transactions, the processing charge is less compared to when no physical card is present, like in dial pay, mail, fax, or Internet based models.  Thus, you have to select the merchant account that best suits your individual business model, yet still understand the program’s related processing expense.  

Merchant account tip #2:  Do your research thoroughly.  Look out for unadvertised and hidden costs.  Most of the reputable merchant account providers disclose their complete rate structure and you get no bitter surprises.  Excepting a couple of charges and fees, the rest of the charges are usually free.  Comparison may be done based on the following fees and charges (not all names are given here, as some charges are taken by processors who tend to give unknown and unique names):

·                                 Account opening fees

·                                 Account setup fees

·                                 Account termination or cancellation fees

·                                 American Express and Discover credit card setup fees

·                                 Bank setup fees

·                                 Batch fees

·                                 Cancellation fees

·                                 Chargeback fees

·                                 Credit card swiping machine rentals

·                                 Customer 24x7 support charges

·                                 Daily settlement fees or Daily closeout fees

·                        Declined transaction charges

·                                 Discount rates

·                                 Excess limit fees or Over limit fees

·                                 Hidden setup charges

·                                 Holdback fees

·                                 Lack of funds charges or insufficient funds charges

·                                 License charges

·                                 Minimum monthly fees

·                                 Non-refundable setup charges

·                                 One-time registration fees

·                                 Order cancellation fees

·                                 Pass through fees

·                                 Payment gateway setup fees

·                                 Per item gateway fees

·                                 Retrieval fees

·                                 Software charges

·                                 Statement fees

·                                 Technical assistance charges

·                                 Termination fees

·                                 Transaction charges

·                                 Voice AVS (address verification system) fees

·                                 Yearly or annual fees

Besides the above, you must also compare the qualified and non-qualified rates.  Credit cards originating from the processor's country may be levied a qualified rate, for example, whereas credit cards originating from foreign countries attract non-qualified rates, which may be from 3% to almost 5% of the sale amount.  You also have to settle daily transactions batch wise, other wise additional discount fees may be charged.  (Generally, businesses that accept corporate, government, foreign and certain rewards cards may likely face non-qualified transactions.)

For very high-risk accounts, processors may even require a reserve of approximately 10% to 50% of the monthly transaction volume besides a refundable deposit.  Merchants need to be very cautious of entering into any agreement where a reserve is required.

Merchant account tip #3:  Be aware of fraudulent and misleading advertisements, like those offering a free merchant account, 100% application approval with no documentation needed, etc.  As the hackneyed expression goes, “If it is too good to be true, it may not be true.”  (There exists companies, however, that do live up to their claims.)

You should verify the credentials of the merchant account provider before taking the account.  It is advisable not to take an account with any processor whose main clients include pornographic and gambling sites, as it may complicate your legal business with these immoral and illegal activities. 

Merchant account tip #4:  If your business model requires obtaining credit card swiping machines, then you should work out the cost regarding paying rentals or buying outright.  If you have to buy, then check the documentation regarding required software fees and the hardware cost.  Processors earn their revenue usually at the beginning by sale of hardware and taking application and setup fees.  Hence, you should be careful, if any processor insists on using or buying their hardware only.  Many processors install a secret code on the machine that can lock the machine and can be unlocked only by them.  This ensures that you cannot use the machine if you change your processor, even if you have bought the machine, thereby, forcing you to remain with the processor.  Therefore you should buy such a machine which can be used with any processor should you decide to change your processor.

Merchant account tip #5:  Read the application and all other documents very carefully, including the fine print.  Understand the various clauses.  Clarify all your doubts before signing the application.  Take your time; ponder it over for about a week or so, before entering into an agreement.  If any processor uses pressure tactics by means of making you sign immediately or within a day or so, then it would be advisable not to consider that processor.  Some may even say that if you delay, a credit check may be performed and if you do not meet the mark then your application will be rejected or in the case of poor credit history you may have to pay increased fees and charges.  Avoid such gibberish and such processors, as without your signature, nobody can perform your credit check, and your credit history does not affect charges and fees in any way, which are fixed for all approved merchant accounts of similar types. 

What is usually affected by your credit history is your approval of the merchant account and any reserve payable or not.  If you have applied for a merchant account, it does not signify that your merchant account is approved.  Approval is based on numerous criteria.  Certain processors take an upfront one-time non-refundable application fee, irrespective of your application being approved or not.  Even after your application has been approved and you have set up your merchant account with the necessary software or hardware, you should give some time before you start accepting credit cards.  During this time, test runs may be taken to see that the system is stable and reliable. 

Merchant account tip #6:  Clarify all your doubts regarding the chargeback policy of the processor.  Usually the limit of chargebacks is 2-3% of the turnover, and if you exceed that threshold then your account may be terminated, in which case, obtaining a second merchant account from another bank or processor may be difficult.  Again, if the processor is not reliable and does not process the chargeback effectively in time, then you do not get time to justify your stand and thus you may have to eventually lose the chargeback.  You not only lose the funds generated from a sale but must also pay a chargeback fee to the processor.

Chargeback fees vary and you should look into the variance carefully, as in the long run, you are bound to face the issue of chargebacks.  However, reliable processors help to minimize chargebacks, by expediting the process.  The same applies for transactions that have been declined from customers who have shopped from your online store.  You have to pay a transaction fee, irrespective of the fact whether the transaction is declined or accepted; hence, a declined transaction fee is a net loss.  Unreliable processors may not inform you about them as they see declined transaction fees also as a source of revenue.

Merchant account tip #7:  Taking certain security measures like collection of credit card codes can minimize chargebacks.  On a credit card, there is an embossed card number, which the Luhn validation algorithm validates.  Besides this embossed card number, there is a Card Security Code (CSC) also known as Card Verification Code (CVC) or Card Verification Value (CVV). CSC, CVC, and CVV are only different names of the same anti-fraud device, given by different issuers. 

There are two types of CSC known as CSC1 or CVC1 or CVV1 and CSC2 or CVC2 or CVV2.  The first code (CVV1) is encoded on the magnetic stripe of the credit or debit card, and is used when the card is swiped.  The second code (CVV2) is not encoded on the magnetic stripe, but is a three-digit numerical value that is on the back signature strip of the Visa, MasterCard or Discover cards and a four-digit numerical value on the front right hand side of American Express cards.  It is usually printed instead of being embossed like the card number.  Some cards feature a separate panel for CVV2. 

The algorithm of CVV2 is based on the coded encryption of the card number and the expiry date of the card.  Only the issuer of the card knows the key to this code.  By means of these two CSCs, increased validation and physical possession of the card is verified.  However, to avoid or minimize card frauds, for 'card not present' transactions over the Internet, by fax, by phone, or by mail, the CVV2 may be required.  VISA forbids online merchants to store CVV2 once their transactions are complete, thereby, making card numbers unusable or less useable, if their database of transactions is stolen, corrupted, or compromised.  The use of CVV2 as an anti-fraud measure is of no use if the customer is enticed to enter the CVV2 along with the other card details via websites designed to cheat.  This is known as phishing.  Here, the victims are lulled into believing that their details are secure, but the phisher takes the CVV2 and wipes out their account by fraudulent purchases and/ or transfer of funds.  The use of CVV2 is not mandatory and thus many card issuers do not use it at all; nevertheless, its use promotes added security, and Visa, MasterCard, Discover, and American Express credit and debit cards actively support it.

Merchant account tip #8:  Undertake more anti-fraud measures like using Address Verification System (AVS), which compares the billing address entered by the customer with the address on file with the card-issuing bank.  Since people using a stolen credit card will never use the customer's address, these types of fraudulent transactions can be clipped at its roots.  However, AVS is currently available only in the U.S., and thus orders originating from foreign countries increase the level of risk.  You may follow up the purchased order by email, telephone, or fax for confirmation.  Large volume orders or suspicious orders should always be prior confirmed by email, telephone, or fax.  Although not a rule, however, emails from free websites like Yahoo!, Hotmail, GMail, etc., should always be checked for confirmations, as tracking them is near impossible.  On delivery of goods, get the customers signatures as a proof of delivery.  You may even post a warning message, that the customers IP addresses are logged and for fraudulent orders, these may be traced for further investigation.  You may even ask for photo identification like the driving license, if you are in doubt.  In a business to business (B2B) environment, asking for further identification is standard protocol. 

Merchant account tip #9:  As with all agreements, the onus of evaluating the merit and worth of the agreement lies with the buyer and not the seller.  The rule of caveat emptor (Latin for "Let the buyer beware."), applies here also.  Hence, you must do your research thoroughly before entering into an agreement for a merchant account.

One of the most important aspects to understand is the specified credit limit.  Here, it is always better to overestimate the monthly volume totals, average ticket and highest ticket.  When a merchant greatly exceeds the monthly volume or highest ticket, funds for such transactions may be held until the authenticity of the transactions can be confirmed. 

Moreover, after an application is signed, a merchant cannot claim that he/she was unaware of a stipulation.  For instance, unscrupulous merchant account providers may not disclose a cancellation fee but write one into a contract.  The merchant who closes an account will still have to pay a termination fee even if he/she avers that a given cancellation fee was never discussed. 

Merchant account tip #10:  Sometimes it makes good sense to follow the crowd.  Choose your payment gateway and your merchant account processor wisely, who have established, reputable, and verifiable credentials.  Many troubles will be eliminated that may crop up later in terms of undisclosed fees, poor support, almost zero prevention of chargebacks, frozen funds, and sudden very high increases in discount rates without any notice.

Many dishonest companies close down, declare bankruptcy and merge with bigger companies, who are not merchant-friendly, or have only a web presence with no physical address.  Such websites may very well be fraudulent and should not be considered at all.  Although stated at the very last, yet this is the most important merchant account tip; hence, it is stated again: Choose your payment gateway and your merchant account processor wisely, who have established, reputable, and verifiable credentials.  Yes, seek the lowest rate (not a merchant account tip but an obvious, logical strategy) but make sure that the company offering the best rate is on the “up and up.”