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Before the Auction: Considering a Merchant Account

It's a phrase that's often batted around by auction sellers in chat rooms and on message boards. But what the heck is a merchant account, really? How do you get one? Moreover, why do you need one? Our tip answers all of the above, discussing both the pluses and minuses of using a traditional or online merchant account.

The Basics
Essentially, a merchant account is a bank account, allowing a retail or online business to accept credit cards from its customers. In the past, merchant accounts have been reserved for retail businesses with physical stores. Furthermore, traditional banks have been slow to embrace e-commerce and offer their merchant services to small Web-based businesses. Though some retail banks, such as Wells Fargo, are joining the online revolution, odds are that your local bank will not have a merchant account tailored to your individual e-commerce needs.

To fill the void, a new breed of online merchant account companies has emerged, dubbed Independent Sales Organizations or Merchant Service Providers by the banking industry. Partnered with traditional merchant banks and online credit card authorization providers, such as Signio, Cybercash, and Authorize.net, which license the use of their "virtual terminals," ISOs and MSPs allow online sellers to apply for a merchant account and process unsigned, non-swipe credit card transactions through their computer and the authorization provider's network. With a merchant account, you will be able to service your customers immediately and get paid within 48 hours. Also, your company name will appear on your customers' credit card bill.

Complicating Factors
There is a catch. Regardless if you obtain a merchant account via your local bank or an online ISO, you'll have to jump through some hoops. Number one, you will have to fill out an application and pass a tough personal credit check. In providing a seller a merchant account, the ISO or traditional bank is essentially offering the merchant a line of credit. As a merchant account provider, the merchant bank is initially responsible for bad sales and customer charge-backs from the credit card companies (Visa, Mastercard, American Express). The merchant bank requires a credit check so it knows you can reimburse it if one of your sales goes south. Also, some states, such as California, require that you have a fictitious business, listed with your city hall, before you can obtain a business account and subsequent merchant account.

Once you pass the credit check, you'll also have to decide how you are going to process your transactions. Whether online or in a retail setting, merchants pay a setup fee for a physical processing terminal or access to a virtual terminal. As mentioned above, the physical or virtual terminal facilitates authorization of the customer's credit card. For online transactions, setup fees can run between $400 and $1,000. Also, note that non-swipe online transactions (mail order, telephone, and Internet) have a higher "discount rate" than a retail credit card transaction using a physical swipe terminal. Online merchants pay 2.3 to 2.9 percent per sale and a 35-cent transaction fee. (This money is divided between the ISO, bank partner, and credit card company, which sets an "interchange rate"--its percentage.) The merchant account rate on an offline retail transaction is considerably lower at 1.7 percent.

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