From the standpoint of a merchant or a purchaser, there’s only one number – one price tag, one credit card, and one transaction. But what many of us don’t see is what transpires between financial parties when the transaction is being processed. The buyer sees the price tag as a whole, i.e. $100 while the merchant receives an amount of less than that at the end of the transaction.

As a business owner, it is important for you to know and understand what happens in between the time a transaction gets captured and the time it settles. It won’t make a difference as to the amount that you receive at the end of the day.  However, at the very least, you know what goes on behind the scenes and will thus be in the best position to make decisions regarding your merchant account, your products/services, and the price that you have set.

There are two parties in a credit card transaction that are not visible. One of them is what we call the card-issuing bank. This bank is the bank that has issued the credit card to the customer. And then we have the acquiring bank that serves, what I would like to call, as the middleman in an online transaction. Commonly, they’re known as merchant banks that go on to process the payments and then take a fee from the amount.

Here’s what the process looks like. When a customer surfs onto your website and agrees to make a purchase using his/her credit card, he releases his/her credit card information to you, the merchant, via your website. The online shopping cart system that you use will send the data along to the acquiring bank. At this point, the acquiring bank will process the information, and updates and coordinates the information within a short span of time. Within this time, you’ll be amazed at how much information is being passed back and forth between the acquiring bank and the issuing bank.

The issuing bank is the very bank that holds all the personal details to the customer’s credit card account. So, the bank’s going to check the credit line and if everything’s OK, the bank will approve the transaction.  Subsequently, the bank passes this information down to the acquiring bank.

Both banks take a fee out of the transaction deal and the fees taken usually depend on the pact that the banks have tied up. So, if the customer pays $100 for a product, what the merchant would get is, perhaps, something along the lines of $86.21. I’m just pulling a figure out from the sky, so, there’s no need to panic…yet!  (Actually, the amount a merchant eventually receives for a given online transaction should be 96.5% to 98% of the total amount of the transaction – assuming the merchant is employing the services of a reputable merchant account provider.)

The relationship between the acquiring bank and issuing bank is bound by a contract whereby they have both agreed to an exchange of funds and between them, they have agreed to the rate of Interchange Fee which is set by the credit card association, i.e. VISA, MasterCard, Diners, etc.

In essence, the acquiring bank remits an Interchange payment to the card-issuing bank for every transaction.  How does the acquiring bank then get reimbursed, or even profit, from its role?  It charges an acquirer fee – the fee it assesses to the merchant (either directly or indirectly) for facilitating payment of the transaction.

Please note that some acquiring banks have a direct processing relationship with the major cardholding companies, such as Visa and MasterCard, and can provide processing capability to merchants.   Other acquiring banks work in concert with Independent Service Organizations (ISOs) or Merchant Service Providers (MSPs) to enable merchants to obtain credit card processing capability.

In general, banks that offer direct credit card processing to merchants employ more rigorous underwriting criteria, and charge relatively higher rates for a merchant account than ISOs and MSPs.  Although it is counterintuitive, it is generally cheaper to go with a merchant account provider that has a sponsorship with an acquiring bank than going directly with a bank to accept credit cards.

So, you see, there’s a lot more going on than meets the eye. Knowing what goes on behind the merchant account scene – by becoming familiar with the actors in the play (i.e., the card issuing and acquiring banks) – you’ll better direct the choices that you make, including the merchant account provider and the prices that you set for your products or services.

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To learn more about our merchant account services, please visit us at  http://www.intelli-collect.com.

An owner of a new restaurant, fastidious about understanding all aspects of the merchant account application, initially recoiled when she discovered that she had to sign a Personal Guarantee.  “I’m not going to assume any liability if things don’t work out with the business.  If the business is unsuccessful, I won’t be in a position to pay back anything anyway.  That I can personally guarantee.”

Two points immediately came to mind.  First, the merchant’s financial responsibility towards any merchant account provider is ongoing – not just at the termination of a contract or at the denouement of a business entity.  For example, a merchant cannot just close his/her bank account to avoid annual, monthly, termination and/or chargeback related fees.

Secondly, if a merchant is not going to assume financial obligation for processing related fees, then who is?  Let’s highlight the ominous chargeback scenario.  Imagine a merchant gets issued a chargeback in the amount of $1,000 for a particular transaction.  Upon a withdrawal attempt to retrieve the sum of money back from the merchant’s account, it appears that the account is closed.  It turns out that the merchant has closed the bank account and now the $1k cannot be issued back to the customer.  (Please note that merchants can win chargebacks, but for the point of the example, the merchant in question has done something untoward.)  Who is going to return the funds if the merchant is not willing and/or able to do so?   

Consider a merchant who simply goes out of business.  Is the merchant absolved from future chargebacks simply because their business is no longer in operation?  If so, in such situations, the merchant account provider is left holding the proverbial bag and must refund the funds back to the customer.  Quite frankly, merchant account providers are not in the business of assuming another party’s debt and thus require a business owner’s “Personal Guarentee.”

In essence, a Personal Guarantee is a legal pledge or promise that the merchant recognizes all fiduciary accountability and liabilities with a processing bank for all fees incurred as a result of their credit card processing.  This guarantee serves as a safety net for merchant account providers, who, due to the inherent risk of their business, must ensure that they are not held legally responsible for any merchant’s possible mismanagement of funds, deliberate fraudulent actions, and/or inability to assume their own debt.

I have spoken to merchants who are concerned that merchant account providers will “go after them for everything they’ve got” if the business relationship does not work out.  However, again, the personal guarantee only pertains to the relevant rates charged for the merchant account and the credit card processing fees (including chargeback fees) that result from the acceptance of credit cards.  Generally, the merchant needs to be concerned with the following: Monthly fees, Monthly minimum fees, termination fees, and chargeback fees, with particular attention to the dollar figure for actual chargebacks lost.  Many business owners may not have incurred chargebacks and have no monthly minimum or termination fees, so the reluctance to sign a Personal Guarantee may be much to do about nothing.

Those who are highly suspicious or cynical may still buck signing any sort of personal guarantee.  Is there any way that these merchants can circumvent this requirement?  The following lists a couple of options:

-         Run a non-profit business – Many merchant account providers will waive the Personal Guarantee requirement for non profits or charitable organizations.  Those who are perceived to do good work on behalf of others may be considered less of a risk to engage in any type of deception – including financial.

-         Use your company’s strong financial standing – Of course, this option will not be applicable to new businesses that have not developed any financial history.  But for existing businesses, the balance sheet, including profit and loss statements, may appear very favorable to underwriters.  Why not use your assets, so to speak, to convince underwriters that your business is a sound risk even without any signed personal guarantee.

-         Establish a reserve – Merchants may have the option to provide an initial reserve amount and/or percentage of ongoing sales to the merchant’s acquiring bank as collateral against any possible chargebacks or other credit card processing related expenses.  With a reserve, a merchant account provider has disposable funds to use to pay back any debt amassed by the merchant.  Business owners must truly consider the pros vs. cons of a reserve because it impedes cash flow, and may not be recovered until 6 months after the reserve is established, including a half of a year after the merchant account has been terminated.

-         Offer a letter of credit – This is tantamount to a loan from the merchant’s bank.  This credit letter reassures the merchant account provider that they have access to funds, drawn from the merchant’s bank, should funds be owed to the processor.  Of course, the letter is considered a legal document and specifies the criteria that must be met for payment to be issued.  (Some merchant account providers may not accept such a letter of credit as they wonder about the rationale of merchants getting a third party involved in the process.)

Any of the aforementioned options may be broached with the merchant account provider.  Some are usually amenable to at least one serving as a substitute for a signed guarantee.  Others are more steadfast in their insistence that the personal guaranty be signed. 

Any responsible, ethical merchant account provider need not necessarily be overly concerned with this underwriting requirement.  Often, it never comes into play.  Providing one’s social security number may be more of a concern – but I’ll open that Pandora’s box in another article/blog entry.

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To learn more about our merchant account services, please visit us at  http://www.intelli-collect.com.

The e-business world is a highly competitive one.  Even brick-and-mortar businesses, including those who initially considered doing business online as ‘crazy’, are beginning to take an interest in joining us on the Internet bandwagon. Indeed, the appeal of running an online business is so across the board that maybe even the seven-year-old down the road has his or her own blog or website. Or maybe there’s a prepubescent kid who used to knock on your door selling cookies now has a Facebook-like thing going and is well on his or her way to being the next Internet Billionaire! Who knows?

But the point is this. Many people know how to start an online business and it has reached a point where the competition is so rife that you’re practically elbowing your way through a crowd every time you try to find a client. So what does a bunch of desperate online business owners do? They do this (at least too many) ….they either bend the truth or they opt for the ‘what they don’t know won’t hurt them’ tactic.

I suppose a lot of business owners rationalize that their customers will not be harmed if they don’t know the full details.  However, in my industry, the merchant account business, it’s impossible for the customer to not know something and not be hurt by it. That’s my basic principle: In the merchant account industry, whatever they don’t know now might cost them dearly later on! That is why, for me, being honest and transparent is crucial … my integrity as a (business) man is inevitably enhanced when I am blunt beyond belief. And besides, I’m not really good at lying … not to my kids, not to my customers.

Others might think that being too transparent would chase the clients away and that if the hard facts, sloshed-up mistakes they’ve made earlier on were revealed, the clients would run for their lives in the other direction. But the strange thing is that in all the time that I’ve been working for this online enterprise, being transparent works like a magnet!

The more truths I tell prospective clients, the more drawn they are to me. Every time I tell them that I made a mistake and some rates might be higher than others, it’s as if they’ve suddenly grown closer to me and become understanding about it all. It’s amazing and it’s not even a psychological trick! It’s just me being me … being read like an open book about the merchant account services that we offer. In fact, because of the honesty that I’ve shown them, many of my existing clients started pointing their friends and family members my way.

Sure … being honest doesn’t pay all the time and sometimes, I lose a client here, a client there. But at the end of the day, when you total everything up, you end up winning because you’ve been upfront about it, you can look yourself in the eye in the morning without cringing and you’ve got repeat customers who keep coming back and with referrals too!

Honestly speaking, being brutally honest about things can be tough. But if you’re an online business owner, take it from me … you’d rather be read like an open book instead of being anxious about showing others your weak side. When you try to protect too many ‘hidden truths’ in your online business, people might start thinking, ‘where’s the catch?’.

For me, if there’s a catch, I’ll show you the catch. If there isn’t one, I’ll tell you there isn’t one.

It makes my merchant account business a much simpler and more profitable one.

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