Merchant Accounts Unveiled

I have seen an increasing amount of BHW members asking how merchant accounts work, asking where to find them, and openly referring various companies to each other. Working in the industry at a banking level there are quite a few things that I think everyone should know before throwing themselves in with the lions.

Why would you want to even open an account when you can use PayPal, AlertPay, Money Gram or others? Because a merchant account is an account issued by a bank through a processor ok'd by a issuer (Visa, MC, etc). To make it short, in case you want to stop reading now, a processing account allows you much more flexibility if you open the right one. Also, personally, PayPal and those other guys are fee happy! They take a much higher % and present a much high risk for shutting you down as they are general. For each type of business with a real merchant account you need a MID, or a merchant ID number.

First off, for high risk accounts you will more than likely be required to do the banking offshore. In some cases you can find domestic solutions, but these are given to individuals and/or companies with strong financials and in stable markets. This doesn't mean you need to be doing over 50k a month! It just means you can't have a 400 credit score and deal in name brand replicas (which are illegal).

To start this process you may go out and search by asking on a forum like this, a search engine, or a referral from a friend. That "general" first search is going to hurt, I am going to set it right for our industry by defining and illustrating how merchant processing works. and describing the key players involved, as well as some to avoid.

KEY PLAYERS


1. Card Holder - This should go without saying much. A card holder is your customer.

2. Merchant - This would be you, the store owner. Congrats, you now have something to call yourself besides "failing entrepreneur" or "struggling internet marketer"

3. Acquiring Bank (Merchant Bank), Acquiring Processors, ISO's and MSP's -

Here is where you are going to need to pay the most attention.

An Acquiring Bank is the bank in which issues the account, the acquiring processor is the processing unit of the bank that handles the risk for the accounts, ISO (Independent Sales Organizations) and MSP (Merchant Service Providers) are THIRD PARTY sales agents for the Acquiring Banks and Bank Processors. Many banks and bank processors have their own ISOs and MSPs enlisted but a majority of the agents YOU WILL DEAL WITH are NOT DIRECTLY related to the bank.

Let me repeat that, you will probably find a 3rd party agent who takes you to a bank processor who is integrated with the bank. This 3rd party agent needs to be asked this important question:

Do you have a direct relationship with the bank?

I will tell you from experience, the answer will be no. They may say yes but approach with skeptism. Many 3rd party agents will take your account and shop it around to other 3rd party agents. This creates a higher rate and gives this industry a bad name. Your best bet for best rates is to find a DIRECT ACQUIRING BANK PROCESSOR This means you are going to an agent who is actually directly associated with the processing platform at the bank issuing your merchant account.

4. Issuers - Visa, MC, etc

HOW IT WORKS


Assuming you found your direct source, which 90% of you wont because you'll be sold by a 3rd party before you reach one as finding one is a "needle in a hay stack" [Luckily though, there is hope, you have one right here on BHW...for some accounts. Not all], here is how your transaction will work with the parties involved.




The blue arrows represent the transaction passing from the customer to the GATEWAY/TERMINAL, through the PROCESSOR, to the INTERCHANGE (Visa / MC) and to the bank where the customer has money. Once the bank says "OK! THEY GOTS THE MONEY!" The red arrows signal back to through the process to the shopping cart. The ugly colored arrows tell both parties its approved. The light blue arrow is the merchant (you!) giving the card holder (your customer!) a product, service, or whatever you are offering. Lastly, the green arrows are green for a reason, you made the monies. A successful transaction has been made.



So here is the conclusion. Deal with as direct a source as possible, keep your record clean, and you will have a great and prosperous life. Don't do any illegal or unauthorized mentions with the account because you get TMF'd (black listed) you are gone. No one will open you up one. If you have questions, please ask. This is an open discussion. The reason I decided to publish it is because wrong information gives this industry a bad name and there are a lot of bad apples.

I myself and am associated with a bank, my company is the processor for a high risk platform so we are the underwriting team who approves the accounts. We do not do them all, we do not accept everything, so please don't come asking me and think its an easy process. It is the best financial decision you can make to operate a real online storefront but it isn't for everyone. This is for people who are asking and I hope it finds you well.

Thanks

Thanks for the clear up. I don't personally have a merchant account at the moment, however, you're information is good on the subject. What would you say the fee's are for these sort of accounts?

Thanks for the heads up...Noted that. Thank you.

Originally Posted by TheFinal

Thanks for the clear up. I don't personally have a merchant account at the moment, however, you're information is good on the subject. What would you say the fee's are for these sort of accounts?

Fees determined on both large and small factors. A lot of companies will give you a vanilla offering but those should be taken with a grain of salt.

Some factors:

Offshore or Onshore - Be prepared to pay higher fees offshore as well as a potential incorporation fee in order to have a stable banking account located in the country of the bank.

Holds - You may have a reserve amount that the bank holds and releases at a later date. This is standard in a lot of high risk industries, this amount and time varies on your credit history, industry type, the bank requirements and current climate.

Rates - Again, this is dependent on the industry and the placement of your account, as well as credit and age of business.

There is a bank rate/interchange rate that is given by the bank to the processor, the processor is the one handling the risk so in order to take on the risk for your account they mark it up as well. It is, again, largely dependent on many things, but you will get a % + a transaction fee. If you are going through an agent know that you can negotiate these, sometimes. Sometimes the processor tells the agent it has to be fixed at one cost due to the nature of the business or credit history. Things change, when your industry comes under fire from the DEA, FDA, or another agency but is still legal and thus processed by a major card issuer be prepared to see accounts closed, rates higher, and merchants dropping like flies. This is why some industries have bubbles and its great to get in at the start, sometimes its also a good idea to hold on too. Higher rates mean less competition for the merchant if he can afford them.

Industries need to regulate themselves or the government steps in, it happens in every industry. The best example is the US Banking Industry, Wall Street and Security Trading Firms (all wrapped into one). They couldn't regulate the BS involved with the industry and the US had to step in, take over banks, investigate, and regulate it for them. Take this for our high risk industries, our _____ and _______. If the industries can do this they can survive merchant accounts too.

From my experience, a merchant account is a life line. Without one you don't have a business. PayPal is good for somethings, so are accepting checks, but neither appeal to the general consumer like old fashion plastic. This requires a bit of transparency as "Middle Men" (movie) is about the only public info people really know.

Here is another one:


Was just asked about agents who charge "Application Fees". While it is legal to do that, they are working for you and you may not be approved, most places with direct relationships do not. That is a key indicator, always ask what the application is for if it is mentioned. What do you have to lose right? Potentially time AND money if you aren't accepted.

The only "fee" you may ever need to pay is a Incorporation fee in the country of bank establishment in order to set up a new corporation that your domestic corp owns.

So, application fees = indicator to ask why.

For high risk merchant accounts you can always use MarketEngines which has been serving merchants for over 7 years!

perfect!!!