If you plan to operate in today’s e-commerce world, you will have to provide a mechanism for accepting credit or debit card payments directly online.
The online electronic payment world is filled with jargon and the many participants in the processing logarithm can create a variety of confusing fees.
First, you will need a relationship with an ‘acquiring bank’, that is, a bank that is willing to ‘acquire’ the credit card information then process it and place it into your account. Brick and mortar retail stores usually have a card swipe system that connects them to the acquiring bank. In order to create the same transaction online, you will need to establish a merchant account. This type of account allows you to accept electronic payment. You can establish a merchant account with an acquiring bank (eg your bank, if they offer this service) or through an Independent Sales Organisation or ISO (sometimes called a PSP or payment service provider). These are third-party merchant account providers offering online packages that include the hardware and/or software you need.
You will be required to pay two types of ongoing fees.
The Interchange fee set by the credit card networks and split between the networks and the credit card issuing banks. This fee is made up of a percentage of the transaction plus a per-transaction fee. The exact percentage of the transaction varies according to a wide range of specific criteria such as what type of credit card it is, what is being purchased, who issued the card, your monthly transaction volume and many other factors.
A merchant service provider fee which is also a percentage of the transaction and may include a per-transaction amount.
These fees vary considerably from vendor to vendor. Banks apply different charges depending on factors such as the overall value of card transactions and the bank’s assessment of your exposure to card fraud. Providing banks with thorough information about your business is an important part of setting up a card-payment system. You will also need to pay set-up costs and sometimes an annual fee.
Typical fees are:
- Setup Cost: ranges between £50 and £250, if applicable £120 is the average.
- Annual Cost: normally around £150, but often not applicable.
- Monthly: The most standard charge especially from acquiring banks, around £10-25.
- PSP: Can be a commission of as little as 1% but often about £10 per month or 3-4%.
- Transaction Charge: 2.79% for an established business but up to 4-5% otherwise.
- Bond: your funds can be held by your acquiring bank for up to 60 days, especially if you do not yet have a strong operating track record. You can negotiate your Bond down once you have established a strong trading history with your acquiring bank.)
In general, online transactions are labeled as ‘card-not-present’ transactions, because you can’t physically check the card or the cardholder. If a transaction proves to be fraudulent, the money will be reclaimed from your bank account – known as a chargeback. Even if a cardholder-not-present transaction is authorised by the cardholder’s bank, you are not necessarily guaranteed payment. One way to guard against fraud is to work with a merchant account provider that offers access to the two major credit cards’ authentication services – MasterCard SecureCode and Verified by Visa.
How to choose a merchant account vendor
Read our article on ‘Choosing a Merchant Account Vendor’ for practical tips on evaluating online payment programs.