Before you get started traveling down the road to getting a merchant account, it's important to become informed so you don't make the same mistakes that many other merchants have.

What is a merchant account?

A merchant account is a special account that is set up for a business to accept and process credit card orders.  Credit card information is passed securely to a processing bank.  The processing bank makes sure there is enough available credit in the customers account, and if so, they then deduct the appropriate funds from the account.  If there are not enough funds, the card is rejected and a message is displayed.  Assuming the funds are available, the money is transferred to the merchant's business checking account within 2 to 3 business days.

Requirements

In order to get a merchant account there is a series of information that you'll need, having this information handy will help considerably:

• Business checking account (some providers set you up with one)
• Copy of a voided check (if you use your own business checking account for funds to be deposited in)
• Articles of incorporation, business license or reseller license. (A 'Certificate of Assumed Name' from your county Register of Deeds office may be all that is required. These only cost around $8.)  The purpose of this is to prove you are a legitimate business.
• Photocopy of your return policy information
• List of trade references
• Photocopy of recent tax returns (may or may not be needed depending on monthly sales volume you expect through your merchant account)
• Photocopy of your drivers license
• Social Security Number of the principal owner (to run a credit check)

Frequently Used Merchant Account Terms

Here are some of the frequently used terms you'll hear:

Discount Rate:  A discount rate is a small percentage that is deducted from the total cost of an order.  This is one of two processing costs that are involved when accept credit cards.  Example:  2.00% discount rate on a $100 purchase = $2.00 deducted from the order.  Discount rates will vary depending on whether your swipe or don't swipe a customers credit card at the point of sale.

Transaction Fee:   This is the second of two processing fees that you'll encounter with a merchant account.  It is a small fee that is charged in addition to the discount rate.  As with discount rates, transaction fees will vary depending on whether you swipe or not swipe a customers credit card. 

Gateway:   Refers to the passing of credit card information from the merchant's website to the processing bank.  This is a secure procedure.  A few examples of payment gateways are Authorize.Net, ECHO, VeriSign, among others.  The only time a gateway is needed is for Internet merchants.  Retail merchants do not need a gateway.  Many merchant account providers charge a monthly gateway fee, however not all do.

Charge back:   When a customer disputes a charge on their credit card and asks their credit card company to remove the charge.  Some charge backs occur when a person doesn't recognize the company name on their credit card statement, others will say they never received the goods they ordered when they actually did, etc.

Reserve:  A percentage of each total sale that is held for a length of time to cover any chargeback related issues.  Usually only applies to high risk merchants.  Typical reserves are 10%.  Money held in the reserve is later released to the merchant.  The amount of time the money is held is up to the merchant account provider, review their merchant agreement for details.

Monthly Minimum:   This is the amount of fees you must meet each and every month, usually $25. If month sales do not make the monthly minimum the merchant account holder must make up the difference.

Card Verification Value (CVV2/CVC2):  Three-digit security number that is printed on the back of most credit cards. Requiring this number on order checkouts can reduce credit card fraud and chargeback instances significantly when used in addition to AVS protection, some 29% according to Visa.  American Express cards have a 4-digit security code printed on the front of their cards.  Requiring the security code at checkout may even save you on processing costs as well.

Factoring:  When used in e-commerce, the term is applied to companies that offer to process credit card transactions through their own merchant account rather then having the merchant purchase their own, in exchange for a percentage of the transaction. This is an illegal practice and will result in heavy fines.

Real-Time Processing:   The processing of a credit card transaction immediately after the purchase has been made. Real-Time is the preferred choice for Internet-based merchants.

Batch:   Is a collection of credit card transactions that are saved for submitting at the end of the business day.

Authorization:  This is the process where permission is granted by the card issuer (the financial institution) allowing the payment transaction to proceed. It is during this process that the issuing bank checks that the available credit on the card is not exceeded.

Address Verification System (AVS):   Checks to see that the billing address given by the customer matches the credit card. If you opt not to use AVS, VISA and MasterCard will not support your transactions and will charge you an additional 1.25% on those sales. Most merchant accounts come with AVS at no extra charge.