How online merchant accounts work

online merchant accounts let you accept credit cards online

You can increase online sales and profits by accepting credit cards on auction sites or your own e-commerce Web site. No matter if you have your own merchant Web site or simply sell stuff on eBay, credit cards can become a vital part of your business. By accepting MasterCard, Visa and other credit cards using an online merchant accounts, you offer convenience to your customers while increasing online sales and profits.

1.Equipment needed for an online merchant accounts

The nicest part about electronic commerce is that you can make sales from just about anywhere in the world. For online transactions, you simply need access to the Internet, either through a high-speed cable or DSL connection at home or the office. A laptop equipped with a 3G Internet card adds real mobility to your online business.

2.Setting up an account

The first, and arguably most important, step of the online credit process is setting up a merchant account with a credit card processor, also known as an "acquiring bank." This financial institution acquires or accepts credit card transactions from your Web site, even if it did not issue the credit card.
Without this type of account, you will not be able to accept credit cards from customers. The bank deposits the daily proceeds from sales into this account, deducting all service charges and fees as well. Opening a merchant account requires approximately the same effort as applying for a credit card. You fill out an online application with your personal information and wait for an approval notification from the processing company. The bank will then validate your information and, if you are considered a good credit risk, open the merchant account.
With every credit card transaction, there are fees, however. You will be charged a small fee for each sale, plus a monthly maintenance charge. There also is an "interchange fee," which you, as a merchant, have to pay to your acquiring bank for processing your credit card transactions.

3.Opening the online payment gateway

After you have been approved for a merchant account, you then need to contact an online payment gateway provider. This company acts as the middleman between you and the credit card issuers. The provider encrypts the credit card information, passes the data to your credit card processor and sends the approval or decline message back to your Web site.
On a Web site, the gateway takes the form of a virtual "shopping cart" or "buy now" button, which can be added with software supplied by the gateway company. Customers browse your online inventory, adding selections to their cart before heading to the "checkout" page, which is where their credit card information is processed. online payment gateways also screen for questionable transactions, helping to reduce the number of bogus transactions and online fraud.

4.Virtual terminals

If you don't have your own Web site, most acquiring banks will allow you to set up a "virtual terminal," which is a secure Web site. Customers can call you with credit card information, which you can then enter by hand into a form on the Web site. The purchase is then approved or declined by the credit card issuer.

What you need to know about third party merchant accounts

1.What are third party merchant accounts?

Vendors that offer third party merchant accounts are sometimes referred to as "payment gateways." These vendors accept credit cards online for you and charge you a small fee for the service. These fees are usually based on a percentage of the credit card sale. For example, PayPal charges a flat fee of about 3 percent of each sale. This means that if they process a $100 sale for your company, you will incur a $3 fee.

2.Benefits of third party merchant accounts
There are many benefits to using a third party merchant account, especially if you have a small business or a new business. First, many vendors that offer third party merchant accounts have well established reputations for secure transactions. This will make new customers more comfortable doing business with you. Another benefit offered by vendors of third party merchant accounts is that the fees are inexpensive when compared with the fees associated with opening, maintaining and using a standard merchant account.

3.Selecting a vendor for payment gateways
There are several factors that you need to take into consideration when selecting a vendor to provide your company with third party merchant accounts. First, you will want to look at the reputation of the credit card processing company. You will also want to examine how they handle disputed charges and credit card fraud. Next, you will want to examine its fee schedule and weigh it against the fee schedule used by standard merchant accounts. You will want to select the third party merchant account vendor that has the reputation and fees that will make your relationship profitable.

What is a merchant account?

In simple terms, a merchant account allows a business to accept credit card payments and may offer other merchant services, too. A merchant account can be obtained through a credit card company, a bank or another payment processing provider. Your company can only accept credit cards and receive related merchant services through the use of a merchant account.
What is a merchant account?A merchant account is a contract between a business and a bank, which extends a line of credit to your business through that merchant account . A merchant account can also be created directly with a credit card company, such as Visa, MasterCard or American Express.
An intermediary service provider is another company that can create a merchant account for you, enabling your company to accept credit cards. It actually holds the merchant account and offers merchant services to your business. PayPal is one example of an online payment processing company that does this. Without a merchant account, your business cannot accept credit cards.
In addition to a merchant account, the bank or third-party service provider you deal with may offer other merchant services, such as those that allow you to accept debit cards, electronic checks and gift cards. Merchant services also may include transaction tracking in real time. Depending on the nature of your business, a merchant account can be managed over the phone, online or through a credit card terminal. Some businesses may use a combination of all three.
Which merchant account services your company should use will depend on a variety of factors. Many companies that offer merchant services will analyze your business' situation to help you determine which type of merchant account or which merchant services you will need.

5 big mistakes to make when choosing a merchant account

Searching for the perfect merchant account might be exciting -- it means your business is moving up in the world. Using credit card processing online makes it easier for your customers to get the products and services they need, which means more money for you. However, it is a bad idea to let your eagerness take control.
Here are some merchant account mistakes that are common with business owners.

1. Believing in free: You might be amazed to discover that many credit card processing companies advertise a free merchant account option. You think, "Wow, that's a great idea!" But put the brakes on for a second and read the fine print. Free, in this case, doesn't actually mean free. A free merchant account is one that does not charge a monthly or annual fee for services. Instead, they simply charge by the transaction, which at first, sounds wonderful. However, they have to make their money somewhere, and they'll often accomplish this on the back end of credit card processing. In other words, you'll probably pay more for each transaction.
2. Failing to read the contract: Before you sign up with a merchant account, find out exactly what the company charges for when it comes to credit card processing. Will you be charged a set-up fee? Extra pennies when the transaction amount exceeds a certain threshold? Processing fees? All of these are important to know. Beware: A merchant account will not necessarily advertise these charges when you first investigate their services. Make sure to ask for a copy of their contract, terms and conditions or service agreement. Comb through it to find out exactly where your cash will be going.
3. Not asking about withdrawals: A merchant account service might try to make a few extra bucks by holding on to your cash for a few days (up to two weeks) before releasing it to you. Obviously, this would be a major disappointment if you count on that cash to be available when you need it. Before you sign up for credit card processing, learn exactly how and when you can access your funds. Fortunately, a reputable merchant account will not impose restrictions on fund access unless there is a chargeback or some other extenuating circumstance. If you find this type of language hidden in the contract, find another credit card processing firm.
4. Failing to report. When you sign up for a merchant account, you will need to supply the credit card processing company with certain information such as the type of business you run, your sales volume and other proprietary data. If you supply incorrect information or change how you use the merchant account, you could be in trouble.
5. Not considering fraud protection. When you sign up for a merchant account, ask if fraud protection services are included with credit card processing. If not, you and your customers could be at risk for scams. It is always best to go with a safe and secure firm that cares about protecting its clients.
Having a merchant account is a great way to improve the efficiency of your business, but make sure you read the fine print and get numerous quotes before making a decision.

Choosing a Merchant Account Provider

A merchant account is set up through a bank or an online merchant account provider for a retail or online organization in order to accept credit cards as payment from customers. A merchant account is not a bank account. The merchant account provider's job is to place the money you earn from credit card sales into your bank account. It used to be that merchant accounts were only offered by banks and providers to retail businesses that were located in a physical location. But with online shopping gaining popularity over the past several years, merchant account providers have started providing accounts to online business owners as well. Even though most banks still do not provide online merchant accounts due to the constant concern over credit card fraud, there are an increasing amount of online merchant account providers that offer services especially to those merchants that market their products online. Because of the high number of merchant account providers out there, it is important that you research all aspects of them, what services they provide, and especially the costs they impose, so that you don't lose precious profits.

When looking into merchant accounts and providers, be aware that there are two types pf payment processing that they will offer. These are manual and real-time processing. Manual processing requires that the credit card number be delivered through a phone transaction, fax transaction, or an online order form. The order is processed manually by contacting the payment processing company (through an Internet connection) to verify the credit card number, or by using a point of sale machine to swipe the card at the time of purchase. This type of processing is more secure, less costly, and ideal for a low-volume merchant in a physical store location. Real-time processing is perfect for web-based merchants because the credit card is immediately processed at the time an order is placed. Pending verification and approval of the credit card, the customer receives notification (via e-mail) that his or her order is accepted and fund transfer is approved. This is the less secure of the two processing options.

There are costs associated with opening and sustaining a merchant account. Not all of the fees are necessary, and not all merchant account providers will charge them. One type of cost is the application fee, which covers the costs of processing your application, whether you open an account or not. A number of merchant account providers will waive the fee if you decide to open an account. And some merchant account providers do not charge this fee at all. There is often an annual fee associated with a merchant account as well. Merchant account providers charge this fee simply for holding an account with them. Another common fee is the statement fee, a monthly fee that can be as much as $25 per month, and is supposedly imposed by the account providers in order to cover their own costs. Yet another fee is the discount rate, which the merchant account provider earns from each of your sales, usually between 2 and 4 percent. The fixed transaction fee, like the discount fee, is also based on each sale, but the provider takes the same amount regardless of the cost of the product purchased, usually .20-.30. Usually, buried in the fine print of your agreement with your provider is a termination fee. Because some providers require a lengthy commitment period more than 2 years, this fee applies if you cancel your account early. There are also various miscellaneous fees that are levied on your account. Often, these charges are withdrawn if a customer requests a refund, and wants the amount credited back to their card. There are many costs associated with an online merchant account, and it can cut into your profits. It is important that you evaluate different the merchant account providers you are interested in so that you save yourself money down the line. You can also use your current sales information to guesstimate the costs of your merchant account.

More than likely, you will have a long relationship with your merchant account provider. Therefore, you should have the utmost trust and confidence in them. Your provider should offer various services that will give you options in making your business transactions run smoothly. They should be able to accommodate several brands of credit cards (Visa, Mastercard, Discover, American Express, etc.), in addition to providing other payment alternatives, such as PayPal. They should have a record of impeccable service and reliability. They should also be first-rate customer service providers. Any problems should be handled discreetly and quickly. Despite the seeming necessity of having a merchant account provider, it can make or break your business with its fees and service. That is why it is important to know the ins and outs of a merchant account provider, and to choose one carefully.

CTOPAY Validated PCI DSS Compliant by Trustwave

HONG KONG and CHICAGO, IL--(Marketwire - December 17, 2008) - Ctopay, a global online merchant account provider, has announced compliance with the Payment Card Industry Data Security Standard (PCI DSS). Trustwave, the leading provider of on-demand data security and payment card industry compliance management solutions to businesses and organizations throughout the world, performed the PCI DSS compliance validation.

PCI DSS is the payment card industry security requirement for entities that process, transmit and/or store cardholder data, and has been endorsed by all the major card brands -- Visa Inc., MasterCard Worldwide, Discover Network, American Express and JCB. Under the PCI DSS, payment service provider compliance requirements are segmented into three levels based on the number of transactions processed and/or transmitted annually.

To validate compliance with the PCI DSS, Ctopay had to demonstrate compliance with 12 stringent security requirements by thoroughly reviewing its IT environment and information security policies and procedures. To maintain their compliance, Ctopay has enrolled in Trustwave's on-demand compliance management solution, TrustKeeper® to have the necessary tools to support on-going compliance such as quarterly network vulnerability scans.

"As a payment service provider, we need to maintain a secure environment not only for our business, but also to ensure the security of our merchants who use our services globally to process e-payments," says Wiky Ding, chief technology officer at Ctopay. "Security of cardholder data is a priority for our organization and Trustwave has helped us achieve the highest compliance standard."

"Ctopay is taking a leadership role by securing their environment to protect every transaction they process," says Robert J. McCullen, chairman and CEO of Trustwave. "Trustwave's full suite of compliance solutions has increased Ctopay's network security capabilities, creating a more secure environment for themselves and their customers."

"By working with Trustwave, Ctopay is taking the necessary steps to secure payment practices as an integral part of their business," says Sophia Chen, director of Northern Asia Pacific for Trustwave.

About Ctopay
CTOPAY is a global online merchant account provider based in Hong Kong and with branches/offices in China, Europe and Africa. Ctopay is providing professional online credit card and debit card payment service with its connection to the banks in China, Japan, Korea, Europe, US and Africa. And also, with our acquiring relationship with those banks, we could provide our clients with multi-currency online payment and settlement service.

About Trustwave
Trustwave is the leading provider of on-demand and subscription-based information security and payment card industry compliance management solutions to businesses and government entities throughout the world. For organizations faced with today's challenging data security and compliance environment, Trustwave provides a unique approach with comprehensive solutions that include its flagship TrustKeeper® compliance management software and other proprietary security solutions. Trustwave has helped more than 30,000 organizations -- ranging from Fortune 500 businesses and large financial institutions to small and medium-sized retailers -- manage compliance and secure their network infrastructure, data communications and critical information assets. Trustwave is headquartered in Chicago with offices throughout North America, South America, Europe, Africa, China and Australia. For more information, visit https://www.trustwave.com/.

Third party payment processor or merchant account?

Those new to e-commerce and payment processing may not know the difference between a merchant account and a third party payment processor company. A merchant account is an account with a financial institution (a bank) to process credit card transactions. When you have a merchant account for e-commerce you must also use a payment processor to pass information between your site and the merchant bank.

Getting a merchant account is not much different than applying for a credit card. You must fill out a credit application and go through an approval process. There are montly fees for the merchant account and the payment gateway, and typically there are monthy minimums. These fees can be in excess of $100/month not including your processing fees. If you are not processing a high volume of sales a merchant account may cost you more money than it makes you.

What exactly is a Third Party Processor?

A common question we see asked online is, “What exactly is a Third Party Processor”? Well, a third party processor allows other businesses to share their merchant account. This means the merchants who shares their account doesn’t have to apply with a merchant account provider. They apply directly with the third party processor.
The ramification of this are as follows:
1) You have to follow the rules of the third party processor. Because it is their account and they are responsible for it their rules are tighter then a normal merchant account’s rules. They can shut down your account at any time for any reason. Same goes for holding your funds.
2) Their name appears on your customer’s statements. Because it is their account their name is what will appear.
3) Their rates tend to be higher then a normal merchant account because they have to mark it up to make a profit. But other fees, like monthly fees, may be waived which is a good thing.
4) They tend to accept people that merchant account providers don’t. This includes people with bad credit. Merchants who have had their merchant account closed can usually still use a third party processor.

How Merchant Accounts Work

This is a brief description of how credit card processing works. Credit card processing has two parts: Authorization and Settlement:

Authorization

Keep in mind this all takes ~2 seconds for an online transaction and about 15 seconds for a dialup transaction:

1. Cardholder presents the card (or the card number, expiration date and security code) to the merchant.

2. The Merchant communicates the card data to their Merchant Account Provider. They use either a credit card terminal, a POS system communicating over the internet or, in the case of an online transaction, a payment gateway, to communicate that data.

3. The Merchant Account Provider communicates the card information to the VISA or Mastercard network. Usually this is done via an intermediary, a larger Payment Processor (see "Merchant Account Supply Chain" and "Who Makes Money From My Merchant Account").

4. Mastercard or VISA asks the cardholder's bank (these days usually a credit-card specialist) if the funds are available. If the funds are available, the transaction is authorized and the money placed on hold in the shopper's account (i.e. their available credit is reduced by the amount).

5. The issuing bank tells VISA / Mastercard what the result of the transaction was (either Authorized or Declined).

6. VISA / MC communicate the result back to the Merchant Account Provider

7-8. The Merchant gets the result and exchanges goods with the shopper.

Settlement

9. At the end of the day the Merchant sends the day's "batch" of transactions to the Merchant Account Provider. If the merchant is using an online gateway or an IP-based terminal the batching is probably done automatically and is never really noticed by the merchant. If using an older dialup terminal the merchant probably has to hit a special button to initiate this process.

10-12. The merchant account provider sends the results to Visa / Mastercard

13. The Issuing bank adds the amount to the cardholder's bill - the merchant no longer concerns themselves with the cardholder, unless there is a Chargeback or a Refund, because they will get paid no matter what. Collecting from the cardholder is the Issuing Bank's responsibility.

14. The Issuing bank transfers the money to the Merchant Account Provider, using an ACH (Automated Clearing House) transfer.

15. Your Merchant Account Provider deposits (again using ACH) the proceeds into your business checking account.

Selecting an Internet merchant account provider or third party processor

Shop around and then shop around some more - this is a very confusing section of ecommerce. If you make enquiries with a company and they don't respond within 24 hours, or are somewhat vague in their responses - run like hell away from them. Banks are notorious for utilizing poorly trained salespeople rather than those with hands-on product knowledge or an understanding the complexities of ecommerce. Ensure they explain all charges to you thoroughly by enquiring about the following rates:

Statement - the charge each month for issuing you statements on all transactions

Application fee - some institutions will charge you for the privilege of applying for an account, regardless of whether your application is successful or not.

Setup fee - once your application has been approved, there may be other fees associated with establishing the account.

Discount Rate - a percentage deducted for each product sold. Also known as the Discount qualified rate

Mid-qualified and Non-Qualified rate. A higher rate for transactions that don't qualify for the discount rate. Usually applied in circumstances where AVS is not checked or the card is keyed in by the merchant.
Transaction fee - added to the discount rate, a flat rate on each transaction

Monthly Minimum - what you will be charge regardless of the level of sales each month
Reserve - some providers require you to maintain a certain level in the account to cover chargeback fees.

Chargeback - the killer fee which may cost you up to US$30 per fraudulent transaction (which includes any client disputing a transaction successfully).

Internet merchant accounts and third party credit card processors

Some type of Internet merchant account is necessary in order to have a place to receive funds from credit card sales.
Internet merchant accounts can be gained from most major banks. A word of warning - your bank will more than likely charge like a wounded bull for such an account because of the "risk" involved.
You're probably better off utilizing the services of companies such as Ctopay who specialize in ecommerce and can tailor a merchant account/payment gateway solution to suit your needs.