Small Business Financing

Learning the Language of Merchant Accounts

A simple guide for understanding the lingo of merchant accounts.
Latest posts by Andy Lax (see all)

Do the terms “transaction fees”, “ACH fee” and “Internet gateway fee” make you go “huh”? Do you feel like you’re hearing Charlie Brown’s teacher saying to you, “mwa-mwa-mwa-mwa”?

When going about setting up a merchant account, know the lingo before you buy. This will help you locate the best possible deal and keep you from becoming prey to unscrupulous merchant account predators/providers.

Merchant Accountese 101

When considering different merchant account providers, it is critical to know their language or what I call merchant accountese. Rule #1: If you know what you are talking about, you are less likely to be taken for a ride.

Discount Rate

Let me first begin with the term Discount Rate. This term may be confusing as I’m not sure where the “discount” comes into play, but I digress. The discount rate is basically the merchant account fee that is charged on credit card transactions. It is important to know that on-site transactions (swiping cards) are less expensive than purchases made online or when credit card numbers are inputted manually. You can expect, on average, a 2.5% discount rate for online purchases.

Transaction Fees

Now, moving onto Transaction Fees. Simply put, this is the cost incurred when a transaction takes place and is usually linked with the discount rate. When checking out various merchant account providers, you may note an equation that looks something like this:

2.5% + 30 cents per transaction

This indicates a discount rate of 2.5% and 30 cents charged for each transaction. One little note of fact is that a transaction fee is charged regardless if the transaction is approved or not. What is the average transaction fee you may ask? It is usually between 20-30 cents depending on the type of sale.

Address Verification Service Transaction Fee (AVS)

If you have an online business and make sales over the Internet, it is required that you have an address verification service (AVS) system. This is a fraud preventative measure that checks the customer’s billing address with the address noted on the credit card. Address Verification Service Transaction Fee (AVS) averages 5 to 10 cents per transaction.

Internet Gateway Fee

At the expense of sounding ludicrous, if you don’t use an Internet payment gateway, then an Internet Gateway Fee will not apply to you – obviously. On the other hand, if you do, there is a monthly fee that can amount to as much as $30 and doesn’t include other fees your merchant account charges per transaction. You will also – more than likely – be charged an additional gateway transaction fee that normally runs 5 to 20 cents per transaction.

Are you having fun yet? Are you soaking up this information like a sponge? There is more to come, so let’s continue.

Voice Authorization Fee

There will probably be a point in time where your normal method of taking credit card payments is experiencing a glitch or the occasional hiccup. In such cases, it may be necessary to use the phone to complete a transaction. This is where the Voice Authorization Fee comes into play. This fee normally ranges between 75 cents to $1.50. The word “OUCH” may be the first word that came to your mind, but remember that this fee will only apply on rare occasions (at least let’s hope so).

PIN Debit Transaction Fees

When debit cards are used for purchases and PIN numbers need to be entered manually, PIN Debit Transaction Fees will apply. This fee is normally a flat rate (no discount percentage added) and runs around 70 cents.

ACH, Daily Discount or Batch Fee

Once your business day has ended, your total sales will be transferred into your bank account. There is a fee for this service that ranges between 5 to 50 cents and is known as an ACH, Daily Discount or Batch Fee. If no transactions were made on any given day, this fee should not be charged to your account.

Application/Set Up Fee

Some merchant account providers charge an Application/Set Up Fee. There is no need to explain this fee, as it is self-explanatory. However, many providers skip this fee altogether, so search around!

Monthly Statement / Support / Service Fee

Now on to the Monthly Statement / Support / Service Fee. This is a monthly fee of approximately $10 to $15 charged to your account for these services. Your merchant account provider should provide you with a toll-free number for full back-up support and assistance when needed.

Monthly Minimum Fee

Explanation of the next fee – Monthly Minimum Fee – is best explained with a math equation. Basically, it is the amount that you would need to pay toward your merchant account expenses should your monthly transactions fall below the amount predetermined by your merchant account provider when you set up your account. You may need to say that sentence to yourself two or three times before it fully sinks in. If you do not fall below the minimum amount for a given month, then this charge would not apply.

For example, let’s say you process $800 in credit card purchases one month, your discount rate is 2.5% and your monthly minimum is $25. (Here is where your calculator will come in handy). You would calculate:

$800 x .025 (2.5%) = $20

As you can see, you did not meet your monthly minimum of $25. Therefore, it would be necessary for you to pay the difference or a monthly minimum fee of $5.

Surcharge / Partially Qualified / Non-Qualified Fees

One of the more insidious fees that are not always explained in full when setting up a merchant account is Surcharge / Partially Qualified / Non-Qualified Fees. This fee usually ranges anywhere between 0.5% to 2.5% and applies to certain credit cards such as company credit cards, rewards cards, government cards and those used internationally. So, when speaking with different merchant account providers, get clear answers regarding these fees before signing on the dotted line.

Reprogramming Fee

If at any time you need to update a portion of your transaction set up, a Reprogramming Fee will be applied to cover the cost of reprogramming both your hardware and software.

Annual Fee

The same as credit card accounts, merchant accounts also charge an Annual Fee. This is billed for running your account throughout the year.

Chargeback / Retrieval Fee

In this day and age of credit card scams, fraudulent transactions and disputes made on sales, merchant account providers want to recoup on the time spent to resolve these issues. If a dispute were to occur, a Chargeback/Retrieval Fee will be added to your account. This fee usually runs around $25 and is only applied if a dispute arises.

Cancellation / Termination Fee

Since there are fees involved in setting up a merchant account such as administration costs, credit checks, server maintenance, etc., many merchant account providers have a Cancellation/Termination Fee in place. This is the fee you would pay should you decide to close or cancel your account. Depending on which provider you choose, this fee may be based on the length of time you have remaining on your minimum account period or your monthly average fee. Before choosing a merchant account provider, know the specific details pertaining to cancellation/termination fee (if any) as this could potentially cost you.

Setup a Credit Card Merchant Account Here

Buyer Beware: Hidden/Junk Fees

Lastly, take note of Hidden/Junk Fees. These can catch you off guard so it is critical to know what to look out for. One prime example is being offered an excellent introductory rate. It seems almost too good to be true, but after several months you notice that your rate has doubled!

Another example of the old “bait and switch” would be providers who offer outstanding rates on certain cards, but turn around and attach exorbitant fees to others. It is also not uncommon for some merchant account providers to remain “hush hush” about their AVS, batch and gateway transaction fees for example. Begin by knowing what certain unscrupulous merchant account providers are up to so that you will not become their next unwitting victim.

In closing, I should state that there are numerous merchant account providers who run their business with honor and integrity. They have nothing to hide and their commitment to “customer satisfaction” is the real deal – not just words carelessly tossed about to draw potential customers. With virtually hundreds – possibly thousands – of merchant account providers to choose from, it would pay – literally in greenbacks – to locate those whose business is conducted under these principals.

Setup a Credit Card Merchant Account Here

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