Finding Inexpensive Ecommerce Internet Merchant Accounts

Ecommerce internet merchant accounts are special in several ways:

1. Unlike retail merchant account situations, the card is never present so the risk of fraud and chargebacks is greater

2. Ecommerce merchant accounts can be more difficult to get from a local bank

3. More SSBs (Small Small Businesses) with shoestring budgets consider ecommerce internet merchant accounts

4. And most importantly... the use of a merchant account for ecommerce can be obtained without the business actually getting a merchant account...

... That last point is one of the more intriguing developments in credit card processing on the internet. It's called third-party processing. (more about this in a second...)

Blessing(s) and Curse...

What all of this means is that anyone trying to sell online faces several choices that standard, offline merchants don't. It's both a blessing and a curse.

The curse is that ecommerce internet merchant accounts carry higher fees due to greater fraud concerns.

The blessing is two-fold:

• There is a lively and competitive marketplace online for ecommerce internet merchant accounts (in other words, it is easy to comparison shop)
• Third-party processing offers the single best way for new online businesses to get an inexpensive merchant account ... without actually getting the merchant account!

If you've read the basics, you understand what a merchant account is and have a simple understanding of the process.

Decision Time!

So let's talk about your business and how to obtain an inexpensive merchant account for it...

• To obtain a merchant account (which is more or less a direct account with the credit card processing companies, like Visa, Mastercard, AMEX, etc.), a merchant will apply with a processing bank for the right to have a merchant account. The merchant is then responsible for that account, for setting up a payment gateway with the account, and for ensuring the proper use of the account, including limiting chargebacks and staying within set processing limits.

• A third-party processor, on the other hand, is basically a company that already has a merchant account with a bank and allows other merchants to use the account to process their credit and debit card payments. So the merchant doesn't apply to a processing bank, but rather the third-party company. This also means the third-party processor completely controls the merchant account. The merchant will process payments through the payment gateway the third-party processor has set up.

Just looking at those definitions, you can probably already form some pros and cons. So how do you decide?

When to get a third-party processor:

• If you are just getting started or only process a small number of transactions.

There are many fees associated with owning a merchant account, both at start-up and recurring monthly, regardless of the number of transactions processed. That can easily wipe out the earnings of a merchant doing a small number of transactions a month.

• If you want a solution that is very easy to implement

Generally, a third-party processor like Paypal will simply give you a few lines of code to place on your site to make a button, then handle all the back end issues, like shopping cart software and real-time credit card processing. Of course, things can be more integrated with APIs if the merchant so chooses.

• If you can't get a merchant account (or get one affordably)

No reason to be embarrassed. If you have poor credit or sell expensive or high-fraud items, it may be difficult to get a merchant account outright. And even if you can, the rates may be extremely high, again eating up all your fees.

While many merchant account providers brag about their acceptance rates, what they don't tell you is their published rates don't apply to these 'higher risk' merchants. There's a difference between being simply accepted and being offered a deal you can accept. By contrast, third-party processors have fixed rates and don't do credit checks.

When to get a true merchant account:

• If you process a medium- or large-number of transactions

Once you start processing in excess of 100 transactions on a monthly basis, ecommerce internet merchant accounts, even those with a slightly higher rate, start to look very attractive. Over time, the lower per-transaction rates will turn in your favor and you will pay less for the merchant account.

While the average cost of the items you sell matters, it is the number of transactions that will ultimately have a greater impact on the cost of payment processing on your site.

• Possibly if you want a more professional image

It sounds like the kind of thing a merchant account provider would tell you to get your business, but it has some truth to it. With a merchant account, it is your name that appears on your customer's receipts (not the third-party processor). You control your money (and account) directly. Since you have more flexibility in choosing the payment gateway, you can also consider a more sophisticated shopping cart and a more integrated payment process for the customer.

Are these make-or-break issues? Not for most merchants, certainly not as they start out. And using a well-known third-party processor essentially negates much of this concern.

Comparing prices...

Let's compare the most popular and best of the third-party processors, PayPal, to a generic example of ecommerce internet merchant accounts.

A couple fees to understand:

• Discount fee: A percentage of the sales price the processor takes
• Transaction fee: A flat rate charged per transaction
• Monthly fee: In this case, we'll include all those monthly fees you'll pay with a merchant account: Think statement fee, gateway fee, terminal fees, etc. etc.

For a complete breakdown of merchant account fees, click here.

Here's the breakdown:

Paypal

• Discount rate: Varies from 2.9% to 1.9% depending on volume (<$3k = 2.9%, $3k to $10k = 2.5%, $10k to $100k = 2.2%, >$100k = 1.9%)
• Transaction fee: 30 cents
• Monthly Fee: $0

Merchant Account

• Discount rate: 2.25%
• Transaction fee: 25 cents
• Monthly Fee: $27 ($10 statement, $17 gateway)
• Setup fee: $99 (or gateway setup fee or similar)

If you are a typical small merchant, a good average might be 20 transactions a month, with an average ticket price of $15...

• After one year, you'll pay $360 for the merchant account to process those transactions. You'd pay Paypal  $176.40.

Advantage: Paypal

• The price advantage remains with the third-party processor even if sales quadrupled, up to 80 transactions a month. ($783 merchant account vs. $705.60 paypal)
• ... and even if the average ticket price more than doubles to $40 ($1323 merchant account vs. $1248 paypal)

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SIDEBAR  How'd I figure that out? Easy, I used this free calculator (link opens in a new window)

After you've done a little shopping around, collecting information to compare prices and getting some quotes from quality ecommerce internet merchant accounts, go to this calculator and input the information.

Then make an informed decision on what works best for your business.

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Keep in mind, there are some very good advantages to ecommerce internet merchant accounts. You may decided they are worth a bit more.

... After all, while most consumers know and recognize Paypal, having your own branded payment processing through your merchant account will likely influence some buying decisions.

The Bottom Line...

If you are just starting out, the third-party processor is the way to go. You cede more control, but you gain great affordability, a critical issue for most small operations out there testing the waters.

Way, way, WAY too many of these 'small fishes' get suckered into ecommerce internet merchant accounts that eat all their early profits.

Don't get gobbled up! After all, you can always move up to a merchant account at a later date.

On the other hand, once you have grown more popular and are selling more items, ecommerce internet merchant accounts are the only way to go.

Here's the way to think of it...

You want to need a merchant account. You may not yet, but as soon as it is feasible, go for it.

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