Merchant Accounts: What are They, and How and for Who Do They Work

A merchant account is a line of credit issued by a bank that agrees to take payments for goods and services on behalf of the business.   The business then receives payment for the transactions less any refunds and fees.  There are several types of fees that you will need to be aware of before you decide to have a merchant account.  Some of these fees include those set by the merchant account provider, interchange fees, authorization fees, statement fees, minimum monthly fees, batching fees, customer service fees, annual fees, early termination fees, and chargeback fees.

Merchant account provider fees are generally a small percentage that the merchant account provider charges over and above the interchange fees for allowing the account.  The interchange fees are charges determined by the card provider (such as Visa or MasterCard).  The fees are determined according to a set schedule of rates.  The basic pricing plan is a three tiered plan that charges fees based on the method used to "run the card".  For example, if your business swipes the card for purchases and everything goes through as it should, you will be charged the base rate for that transaction.  If the card needs to manually entered, you will be charged by a higher rate.  If the transaction is completed without the required documentation or the batch is not settled in a timely manner, an even higher rate can be charged.

The authorization fee for a merchant account is the fee that is charged for every card ran.  These fees generally run between $.10 and $.35 and can be charged whether the card is accepted or declined.  These fees are itemized in the monthly statement.  The statement also contains a statement fee which is a flat fee (usually $5 to $10).

Merchant accounts usually have a minimum monthly fee.  This is a fee that is guaranteed for the account to cover the costs of maintaining the account.  For example, if the contract is for a minimum monthly fee of $10, but the total of the processing fees is only $5.00 then the account provider can charge the merchant $5.00.

Every night the merchant should "settle" their "batch" which just means that the batch of credit card transactions for the day is transmitted to the bank for payment.  Some merchant account providers charge a fee for the settlements and some providers only charge a fee for accounts that are settled "late" (after 48 hours).

Customer service fees, annual fees, and early termination fees are self explanatory.  The customer service fees are for access to customer service, the annual fee is a fee charged annually for the maintenance of the account, and the early termination fee is the fee that is charged for breaking the contract.

The last fee charged for merchant accounts is for charge backs.  A chargeback is a credit card charge that was disputed by a customer.  The bank that is holding the merchant account charges a fee of $25 - $50 plus the cost of the charge for any charge backs that occur. Be sure to check your contract closely for fees when you open a merchant account.