What is 3rd Party Credit Card Processing?

With all of the industry mumbo-jumbo, it's hard to understand what the difference is between having your own merchant account of using a third party processor. But it's actually not as confusing as it needs to be.

When you sign up for a merchant account, you are essentially opening a bank account. You are given a merchant ID number (MID) and you are responsible for reaching out to customer service, etc if something isn't working properly. You'll be given a terminal to process the credit cards and the money you make off of those transactions will be transferred to your merchant account or another bank account of your choosing.

When you use a third party payment processor, you are using that company's merchant account (not your own). You aren't given a MID. You pay them to process your credit card transactions for you. Typically the rates are a higher than that of a traditional merchant account, but that depends on how much volume your business does.

There are advantages and disadvantages of using a third part processor. The advantages include:

1. Businesses can often get a approved more quickly and when they are just starting out.
2. If you're doing less than $1000 per month.
3. There are often no monthly fees for the account.

Of course, there are some downsides:

1. The fees end up being more if you are doing more than $1000 per month as a rule of thumb.
2. When you are processing online, customers are taken off of the website to the third party's site to process the payment.
3. The name of the third party processor is what appears on the customer's statement, not necessarily the merchant's name which can get confusing.
4. The money that you earn from the credit card transactions can be held for a longer period of time than that of a traditional merchant account.

Three of the most well known third party payment processors include PayPal, Clickbank, and 2Checkout.

Top Credit Card Processors of June 2012

Apparently there is a website, topcreditcardprocessors.com, that ranks the top 10 credit card processors in the US. I am guessing this happens every month, even though this is the first time I've heard about it. Here is their list:

1) Leaders Merchant Services

2) National Bankcard Inc.

3) Cornerstone Merchant Services, Inc.

4) Electronic Transfer Inc.

5) PaySimple

6) Heartland Payment Systems, Inc.

7) Merchant Warehouse

8) SafeCharge.com

9) Charge Anywhere Direct.

10) First Data Corporation

After seeing this I was really curious as to how this website determines which companies are in the Top 10. I looked up the "evaluation criteria" that they use, which is as follows:

1. How reliable the actual credit card processing service is.

2. How quickly customer service can handle/fix an issue.

3. How much volume the processor can handle.

4. How "stable" the service is. (This sounds a lot like the first one to me, they probably could be combined.)

5. Whether or not the company can accept automatic payments/charges.

According to the press release, topcreditcardprocessors.com also contacts customers of the companies to talk about their experiences. What stood out to me is that the customers were referred to as "references" which means that the processing company tells the evaluation team who to contact. Obviously the payment processor is going to have them contact the people who will give rave reviews. It's just like a job interview; you don't give out the contact info of people who won't sing your highest praises.

The other thing that sounds a little strange to me is that you have to apply to be evaluated. So this isn't a completely thorough review of all the processing companies; only those that have applied. How do we know that only 10 companies applied and that's why they are the "top 10"? 

I checked out their full disclosure and they state: "Any rankings are ultimately based on subjective opinions; our rankings provide a glimpse into whom we believe would rank #1 or #2, etc. based on our exhaustive research process.  We believe there is no one company that is the right fit for all potential buyers. The rankings are strictly our opinions based on our research process."

OK, that makes sense. So I read further. "We charge a standard fee from agencies and software developers for our time to evaluate."

Aha! I knew it. So it's a pay-to-play type of thing. I suspected that. It's kind of weird to pay to be evaluated to try to be the Top 10; I guess it's just good press for those companies.

What the Heck is a Qualified Rate for Processing?

One of the biggest questions people ask me is about how credit card processing pricing works. The cost is always one of the biggest things on a merchant's mind. The pricing for payment processing varies from company to company but it is always typically based on risk; the riskier your business model is and the method by which you are accepting transactions, you can expect to pay a higher rate.

The rates are broken down as follows:

1. Qualified Rate: This is the lowest rate that a merchant will pay when they accept a credit card. You can get a qualified rate when you physically accept and swipe the card to process the transaction (this is called card present). As you can see, this really only applies to businesses that have a physical location. If you are taking card numbers over the phone or through your website, you cannot get the qualified rate because those methods are considered more of a risk for fraud.

2. Mid-Qualified: Also called a partially qualified rate, this is the middle of the road of what you will pay and typically means that you are not physically swiping the customer's credit card into the terminal. The mid-qualified rate can be used if you have to key a credit card number into a terminal (instead of swipe) or if you have a website that uses a virtual terminal to process payments. This rate is the lowest rate an eCommerce store or telephone order operation can receive.

3. Non-Qualified: This basically means that you are not qualified to get the lower rates; this one is the highest. When people use special kinds of credit cards, like business credit cards or rewards cards, their transaction often will get charged the highest rate. In addition, if there is a situation where a card is acepted without the address verification being performed, that transaction will get the non-qualified rate. 

One of the misconceptions of the pricing is that your business will fall into only one of the three rates, but any of your transactions can fall into the above rates. Each and every transaction may not necessarily get the same rate. Just remember, if you have a brick and mortar business, it is likely that the majority of your transactions will get the qualified rate. If you have a web store, you will never get the qualified rate but most of your transactions will be mid-qualified. And anyone can have transactions in which the non-qualified rate is applied when customers use what is considered "special" types of cards.

I hope that helped clear things up a bit!

Businesses That Don't Accept Plastic Lose $100 Billion in Sales Annually

Intuit announced today the results of their research on small businesses in the US and how they accept payments from their customers. Apparently 55% of these businesses do not accept credit cards and they are missing out. On the whole, $100 billion in sales is lost every year, averaging out to about $7,000 per business (15 million SMBs don't accept cards). When you hear $100 billion, you think "WOW!" But then when I heard it only averaged out to about $7,000 lost per year I didn't think that number was very impressive.

"Oh, just $7,000 per business? That's not much," I said to a group of coworkers. But one of them piped up and reminded me that these are small businesses and another $7,000 a year in sales could mean a lot for them. She's right.

It makes me wonder why over half of small businesses in the US just won't accept plastic. I mean, I do know why - the majority of them don't want to pay the fees - but they would still make more money if they just took the plunge. I have tried to convince many a merchant of this fact unsuccessfully. When you are a small business trying to make it, every penny counts and they don't want to hear about a service they have to pay for. But this doesn't stop me from trying to convince them otherwise every chance I get!

If you are interested in more fun payment facts from Intuit, they put everything in a cool infographic:

How Do I Set Up Credit Card Processing for My Business?

The first step in accepting credit card payments is the hardest: figuring out which company you'll work with for your merchant account. Maybe you know someone who likes their current processor and gives you a recommendation or maybe you've done some online searching. Both of these are viable ways to start shopping around and getting quotes.

Here are some tips to get you started:

1. It usually helps to get quotes from at least 6 different companies, since the rates and fees will be different with each one. You'll also want to see a copy of the agreement before your make a decision since this will be where any additional costs will be listed, on top of the rate your quoted.
2. Test out each company's customer service friendliness. Call them on different days at different times and see how long you are placed on hold. Are the people answering the calls pleasant and helpful? These are important factors to consider in the event that you need their support.
3. Determine which type of credit card terminal you are going to need. Are you a consultant that travels to clients? You will need a mobile processing account with a swipe reader for your smart phone or iPad. Is all of your business going to be conducted online? You'll need both a merchant account and a payment gateway. If at all possible, do not lease your terminal; buy it outright. Leases last for multiple years and you will end up paying way more than if you bought the machine right at the beginning.

For more information on getting a credit card processing solution that's right for you, check out this video:

What is a Merchant Account Cash Advance?

Did you know that many merchant account companies offer their merchants the option to have a cash advance? It works kind of like a loan (but is not a loan). You apply with the company and then set up a repayment schedule. The difference is that the merchant services company just withholds a predetermined amount of your credit card payment transactions in increments (usually daily or monthly) from your future sales until the advance is paid off. This is a nice perk, since you don't even need to handle the repayment yourself; it's all done automatically.

The process is simple, but most merchant account companies will require that your business "qualify" to receive an advance. Policies may vary but some general guidelines look like this:

1. Length of time in business: Most of the time you will need to be an established company with at least a year of business behind you. Some companies may require only 6 or 9 months.

2. Sales: You will need to have a decent history of monthly sales numbers. If you're not making any money at all, you're likely not going to be able to get an advance.

3. Type of business: Some companies only offer advances to certain business profiles, such as retail or restaurant. If your business is really non-traditional or "out there" you may have a harder time securing an advance.

A lot of merchants ask me why they have to show a good track record of monthly sales as part of the process. Their stance is that they wouldn't necessarily need an advance if sales are good. I tell them that advances are best used when businesses want to expand but don't currently have the capital to do so. Advances shouldn't be used to keep a sinking business afloat. Since it's not a loan, you have to actually have payment transactions since this is how your merchant company gets paid back (by withholding a portion of credit card sales).

Credit Card Processing: How It All Works

Understanding how credit card processing works is no small feat. It's almost like you need some sort of advanced engineering degree to wrap your mind around it. Still, it's important to know the gist of what happens when a credit or debit card is accepted for payment. Here's a helpful little diagram to get us started:

Photo credit: feeseeker.com

This is a really simplified version, but these are the steps that happen behind the scenes during that quick payment transaction. What a lot of new business owners don't know is that in order to be able to accept credit cards from their customers, they need to get a merchant account with a payment processing company. The payment processing company provides the business with a terminal to swipe the cards through. Not every business needs a terminal, however. If you are an online store, there is an extra step in the process above, known as a payment gateway:

Photo credit: merchantmaverick.com

The payment gateway in online transactions take the place of a credit card terminal, since online shoppers aren't able to swipe their credit card; they must type their card information on the payment page. The payment gateway transmits the card information to the card issuing bank for approval or denial and then payment gateway then relays the decision back to the website.

It's important to note that payment gateways and merchant accounts are two separate things, but you cannot get a payment gateway without having a merchant account. Again, payment gateways are only necessary when you are accepting credit cards online.