Do You Need a Merchant Account?
If you’re just starting or growing your business, you may be wondering whether you need a merchant account. If you sell products or services, then the answer will likely be “yes.” According to the Federal Reserve Bank of Atlanta, credit card payments accounted for 27% of transactions in 2020.
An increasing number of consumers prefer credit and debit card payments to cash. In fact, consumers now expect the option to pay with credit cards. A merchant account allows you to accept credit card payments, giving your consumers more freedom in how they pay for your goods or services.
Merchant Accounts For Various Industries
Because different businesses and industries have different needs, there are different types of merchant accounts. Some types of businesses are considered higher risk than others, but generally, there are merchant accounts for nearly all industries. However, high-risk companies typically have to pay higher fees.
What Types Of Merchant Accounts Are There?
There are a few types of merchant accounts. These include:
- Traditional: Brick and mortar businesses, such as retail shops and restaurants, do business from a fixed location and typically need a traditional merchant account. Setup and transaction fees are generally lower for these businesses because they process card-present transactions.
- E-commerce: Merchant accounts are available for businesses that sell products or services online.
- Mobile: Businesses that travel to events or markets (e.g. food trucks) will need to accept mobile credit card payments and use mobile credit card processing equipment.
- Merchant (Payment) Aggregators: Businesses that are just starting or unable to open a merchant account with a bank may use merchant aggregators. Examples of merchant aggregators include Google Pay, PayPal, and Apple Pay.
- High-Risk: Businesses that are deemed high-risk may need a high-risk merchant account, which has higher fees and stringent requirements that must be met. A business may be considered high risk if it sells certain products or services (gambling, software, ticket sales, etc.), has a history of excessive chargebacks, has a subscription program, or has high monthly sales volumes.
The right type of account for you will depend on the type of business you run and how you plan to accept payments.
What Are The Associated Fees?
Merchant accounts come with fees. The types of fees you pay will depend on a few different things.
The first thing you need to know is that there are three primary pricing models for merchant accounts:
- Flat-rate: You pay a flat fee for each transaction, a percentage of each transaction, or a mixture of the two.
- Interchange pricing: You pay a processing fee for each transaction. Some merchant account providers will mark up this fee.
- Tiered pricing: You pay a fee based on the type of payment method used, how the payment was made, and other factors.
We go into more detail about pricing models later on in this article.
Along with fees associated with the pricing model, there are other costs you will need to consider.
Universal Account Fees
Some fees apply to all merchant accounts regardless of their pricing model. These are universal merchant account fees, and they include:
- Transaction fees: These are the fees you pay for each transaction. It may include a percentage or an authorization fee.
- Authorization fees: These are fees charged each time a card is swiped, even if it’s declined.
- Assessment fees: These are the fees charged by cardmember associations, and they cover things like fraud prevention and network operations.
In addition to the fees above, you may also have to pay scheduled fees. These can vary greatly and may include:
- Monthly minimum: Payment processors may have a monthly minimum requirement for revenue. If you don’t meet that requirement, you may be charged a fee.
- Annual or monthly fee: Some merchant account providers will charge a monthly fee or a percentage of transactional revenue.
- Statement fees: If you don’t receive digital statements, you may be charged a fee for the expense of printing and mailing statements.
- Processing commitment: The provider may require a certain number of transactions per month. If you fail to meet these requirements, you may be charged a fee.
- Payment gateway: If the merchant account provider has its own payment gateway or a third-party service, you may be charged a payment gateway fee. It’s important to note that not every payment processor will charge this fee.
Other fees may also apply, but we’ll touch on these situational fees later on.
How Do I Know How Much I Will Pay In Fees?
The fees associated with merchant accounts can be complex and confusing to new merchant account holders. How will you know how much you will pay in fees?
The answer depends primarily on the pricing model used.
However, it’s essential to read through the fine print and clarify fees by reaching out to customer support before opening a merchant account.
Alternatives to a Merchant Account
Can you still accept credit cards and digital payments without a merchant account? Possibly. There are alternatives to merchant accounts, but these options also have their own pros and cons.
Merchant (or payment) aggregators are the most practical alternative to a merchant account, and these include:
- Google Pay
- Apple Pay
Aggregators act as a third party, and they’re responsible for processing your payments. They use the master merchant model. Essentially, they represent a large number of small sub-merchants (that’s you!) and process payments from their accounts.
One advantage of payment aggregators is that accounts are quick and easy to set up. However, some businesses find that they wind up paying much more in fees compared to a more traditional merchant account.
Is There a Fee Breakdown on My Merchant Statement?
Merchants are charged every time someone swipes, inserts or taps their card. Fees are based on different transaction types, and you’ll always be charged a fee for valid transactions. Your merchant statement should have:
- Deposit summary
- Breakdown of all fees
Any fees that are charged by the payment processor will be found, in detail, on your statement.
How to Read Your Merchant Statement
Your merchant statement has a lot of pertinent information on it, but there is also a lot of additional information that is of less importance. When you receive your first statement, it can be overwhelming to go through it to see what fees you paid during a given period.
However, if you break the process down into four steps, you’ll be able to read your statement like a professional:
Step 1: Glance Over the Document for Important Information
First, you want to be sure that you’ve received the correct statement. At the top of your statement, you’ll be looking for a few bits of information:
- Merchant Number
- Deposit Account Number
- Amount deducted
- Company name
Review all of this information to ensure that you’ve received the correct merchant statement and that the funds are going to your main account. Immediately below this basic information, you’ll find the “plan summary,” and this is a brief overview of:
- Each card brand that was processed
- Sales by brand
- Total sales amount of sales by brand
- Average ticket
- Discount rate
You may see some additional information on the plan summary, but this is some of the most important information for a merchant to view.
Step 2: Pricing Model Used
Different merchant processors follow different pricing models. You’ll find this information under the Deposits section of your statement, often under a section called “Plan Code,” but this may be something different on your statement.
The code often refers to the type of plan model in use, which is likely one of the following:
- Flat-rate, which is easy to read because all of the transactions are charged at the same rate. If you process a lot of debit transactions, these plans may have a much higher transaction cost.
- Interchange-plus plans offer the easiest pricing model to understand because they list the markup and wholesale fee for each transaction.
- Tiered plans will include non-qualified, qualified, and mid-qualified transactions and each of these will have a different rate. Qualified transactions have the least risk of chargeback and carry the lowest rate.
- Subscription or Membership pricing models, which can be beneficial if you have large debit transactions, are charged a monthly fee and then have a minimal transaction fee.
You’ll notice the Plan Code or pricing model used listed on your statement.
Step 3: Discount Methods
Fees come out of your account either daily or monthly, depending on the terms you have with the vendor. Your statement will have a discount paid that can help you understand whether you pay a monthly or daily discount.
Daily discounts use the term less paid discount on the statement. You’ll see that the processor charges their fee before settlement and other fees at the end of the month.
Monthly discounts are easier to read because they’re lumped together at the end of the month for you to calculate easily.
Step 4: Break Out the Calculator
Finally, you’ll be near the end of your statement and want to determine the fees you paid during the month. The best way to determine how much the processor marks up their charges is by doing the following:
- Find the “total fees charged”
- Subtract interchange costs
What’s left? Markup. This is what you’re being charged to have the payment processor handle all of your card payments.
Types of Pricing Models
The four main pricing models include:
For more details about each plan, please refer to Step 2 in the previous section.
You’ll come across numerous fees when looking over your statement. While some fees may be attached to every transaction, there are other situational fees that you may find on the statement.
Let’s take a look at what these fees actually mean:
- Address Verification System – is a fee of about $0.01 that is charged for a transaction that requires the verification of the user’s address.
- Batch Fee – a fee, often a flat fee, for settling multiple transactions in one big batch.
- Cancellation Fee – also known as a termination fee, may be charged when terminating an agreement with the processor earlier than the contract allows.
- Chargeback Fee – an additional fee for when the customer returns an item.
- PCI Non-Validation – a fee that means you’re either not PCI compliant or your system isn’t sending over the PCI verification properly.
- PIN Debit Transaction – a fee when accepting a transaction that needs PIN verification.
- Retrieval Request – a concerning fee that occurs if the customer flags the transition. Once flagged, the issuing bank will need to gather evidence and receipt of the transaction, and this will cost a fee.
- Voice Authorization – a fee that involves making a call to authorize a transaction.
You may also see application or setup fees on your account, and these fees are initial fees assessed when you have a new system setup or sign on with a merchant service provider.
Fees to Watch for
Some fees are more concerning than others, and it’s up to the merchant to know what each fee means on their statement. Unfortunately, you may come across “red flag” fees that should lead you to question the processor.
- Assessment Fee – a common fee that some merchants may inflate. You can double-check the fees charged by the card association in question.
- Discount Rates – if you notice that the discount rate is higher than normal or tends to fluctuate, contact the provider to learn more about the fees.
- ERF/Integrity Fee – a fee associated with a purchase where something went wrong, such as a cashier swiping a card that has a chip.
If you do notice any random fees that don’t make sense to you, inquire about them. There are some merchants that make up their own fees. Transparency isn’t a quality of all merchant service providers, but you do have a right to call the processor and question any fees you want to be clarified.