Credit Card Processing - The Inside Scoop



If you’re getting ready to select a credit card merchant account processor there are a few things you need to be aware of before you sign on the dotted line, and after your start processing.   Here are the basics.

Rates and Fees:  The contract will cover the rates and fees that the company will charge you.    MasterCard, and Visa have what are called interchange tables.   These list the actual fees that you processor will be charged by the card associations like Visa or MasterCard, for the charges you put though.   There are numerous different categories and types of cards each with a different rate.   So for simplicity most merchant account contracts contain what is called a qualified rate which is what you will be charged.   The difference between interchange and the qualified rate represents the profit that the processor makes on the account.  For example if your rate is 1.89% and interchange on a charge you put though is 1.20, the processor makes .69%.   So on a $100 transaction they make 69 cents.   Reward cards are typically priced as partially qualified and a card-not-present transaction such as a charge made over the internet is nonqualified.   Your contract will spell out what these rates will be.  In addition to that it is common to be charged a per transaction fee, a monthly account maintenance fee, and a monthly minimum processing fee.    The monthly minimum is not an actual fee, it is the difference between the amount of discount and transaction fees you paid subtracted from $25.  So if you do enough charges each month to cover the $25, nothing extra is charged.    Other fees are called per occurrence, and are only charged if something happens to constitute it.  A charge back fee is an example of a per occurrence charge.    Be sure you understand these fees upfront.

Contract Terms:   Some merchant accounts have a specified term, usually a year that automatically renews unless you or they opt out.  It is also not uncommon for a contract to contain a cancellation fee that you will be charge for closing your account before the initial term.    I have seen these fees priced as high as $750, and others base it on a percentage of your processing.    Free advice, don’t sign any contact unless you understand the terms and select a process that may be willing to waive the fee or not charge a cancellation fee at all as a matter of policy.  There are a few companies like Total Merchant Services that establish your account on a month-to-month basis so you can opt out if you choose without penalty.

Merchant’s Responsibilities.   After your account is setup and you begin processing there are a few things to be aware of.  The backend of the credit card processing system is complex but I’ll try to make this simple for you as the merchant.     In order to process credit cards you will need a merchant account from a bank or a registered Independent service organization.    The entity will process, batch and settle your charges each day, factor them and deposit the funds into your business checking account.  This all happens pretty much seamlessly.   However you need to keep in mind that you, as the merchant, have the responsibility for the legitimacy of the charge.   If a customer disputes a charge they have a right under the law to have it “charged-back” upon demand to their card issuer, which means the charge is debited from your funds until the matter is resolved.   In order for you to avoid these issues you need to make sure that you customer understands the charge, and if the card is present, have them sign either a paper or electronic receipt.  It’s advisable to have a liberal refund policy so that if a problem occurs you can resolve it with the customer and avoid a charge back.   An abnormally large number of charge backs can result in losing your merchant privileges.     Also be aware that charging in advance for a service to be delivered later poses a higher risk to the processing organization.   Therefore processors do not like to see lengthy pay-in-advance type charges.   Some processors have restrictions on how far in advance a charge may be put though.   You can however get approval on charge without settling it.   An example of that is a hotel.  When you check in they run your card but don’t charge it until you check out when you are presented with your final bill.    A couple of other no-nos are using your merchant account to charge another merchant’s products or services, or using your account for purposes not represented in your application.  

Speaking as someone that spent 14 years in the industry I can say that the vast majority of merchants never have a problem with chargeback’s or other negative issues.   Just use honesty in dealing with customers and common sense with your charges and you should never have an issue.

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