How Merchant Accounts Can Save You Money

We all know that accepting credit cards is the key to online sales. Unfortunately, most merchants are unaware that acquiring a merchant account can actually save them money. And in many cases, big money!

For this experiment, we will use a fictional character named Bill. Bill owns and operates a great online resources for marketing tools and resources. Bills website is a membership based website, and therefore could potentially be approved for both third party processing and an internet merchant account. Bill starts off processing his business with a popular third party processor who offers him the following plan:

Start Up Fee – None

Monthly Fee – None

Transaction Fees – 13.5% (Initial or One Time), 15.0% (Recurring)

Bills sets up his business with this popular third party processor and charges $30 per month. He has built an extensive reciprocal link exchange directory, has purchased some PPC advertising on a few of the best search engines, and has reached a excellent spot in the content based search listings for the top 5 search engines. His customer base has grown from zero before accepting credit cards, to 150 members, is just one month. Bill can’t believe his success at internet marketing, and is planning on building even more web based resources and tools for his website, thus increasing the value and content. He is ecstatic at the initial results, so let’s take a look at Bills numbers:

$30 (Per Membership Sold) x 150 (Memberships Sold) = $4,500.00

$4,500 x 13.5% (Initial or One Time Transactions) – $ 607.50

$4,500.00 (In total sales)

– 607.50 (Total fees)

= $3,892.50 (Net profit after all processing fees have been deducted)

Ok. Well Bill certainly had an excellent first month accepting credit cards with his new business venture. But let’s see how Bill would have made out if he would have secured an internet merchant account for his new business:

Start Up Fee None

Monthly Fee $15.00

Discount Rate 2.35% (Initial, One Time or Recurring)

Per Trans Fee .30 cents

Gateway Mo. Fee $15.00

AVS Fees .10 cents

Now the first thing we see is that the merchant account company is showing us more fees. This may be disheartening at first sight, but we should really explore what these fees are, and how they affect our bottom line.

Start Up Fee: This remains the same. Bill paid zero to get setup with his new merchant account, just as he paid zero to get setup with the third party processing account.

Monthly Fee: The third party processor offered us no monthly fees, yet we must pay $15.00 with the merchant account company.

Discount Rate: The merchant account has labeled one of their fees as “discount rate.” These fees are the fees Bill will pay as a percentage of each transaction. They are similar to the main fee charged by the third party processor. This fee when charged by the merchant account company is substantially smaller than the high percentage charged by the third party processor. But we will wait till the end of this experiment to see who offers the better comprehensive deal.

Per Trans Fee: The merchant account company charges Bill .30 per transaction he processes through his merchant account. Of course, we have already established that Bill will pay no per transaction fees with the package he received from the third party processor.

Gateway Monthly Fee: Because Bill will also need an internet payment gateway for his merchant account to work online with his website, he will also be paying $15.00 a month for his Gateway Monthly Fee.

AVS Fees: The AVS fee stands for Address Verification Service. Bill will want to use this service, to help reduce potential fraud, and customer chargebacks to his merchant account. He will now pay an additional per transaction fee of .10 per transaction.

Let’s see the numbers behind processing with a merchant account as opposed to a third party processor:

$30 (Per Membership Sold) x 150 (Memberships Sold) = $4,500.00

$15.00 (Merchant Account Monthly Fee) – $15.00

$15.00 Gateway Monthly Fee) – $15.00

2.35% (Discount Rate) x $4,500.00 – $105.75

30 cents (Per Trans Fee) x 150 (Memberships Sold) – $45.00

10 cents (AVS Fees) x 150 (Memberships Sold) – $15.00

Total Fees (With Merchant Account) = $195.75

$4,500.00 (In total sales)

– 195.75 (Total fees)

= $4,304.25 (Net profit after all processing fees have been deducted)

With the merchant account, Bill was able to keep substantially more of his sales for himself, as profit. Bill could use these extra resources to advertise more, expand his operation, and even hire someone to work for him, even if only on a part time basis. The point is that that the better deal in credit card processing is always with a merchant account as opposed to using a third party processor.

Most third party processors leverage the high levels of risk and chargebacks they must face everyday, by charging enormous fees and rates to their entire customer base. Third party processors are synonymous with Adult related websites. This is the reason for their increased exposure to risk. They must charge high rates to overcome the losses they are subject to by processing for a category of merchants that, unfortunate as it may be for them, falls into a certain level of risk and fraud that most other merchants do not. Because the merchant account company restricts its clientele to only companies with non adult related content, they are able to offer an entrepreneur like Bill, selling online content through his membership based marketing website, a much better deal in credit card processing.

$4,304.25 (Net Profit with Merchant Account)

– 3,892.50 (Net Profit with Third Party Processing)

= $411.75 (Total Savings with Merchant Account)

This experiment has shown that the average website owner can save substantially by choosing wisely when it comes to their credit card processing solution. We have proved that most any entrepreneur can and will save substantial amounts of money by using a merchant account for their online credit card processing, as opposed to processing with a third party processor. In our little test, Bill saved $411.75, and that was just in the first month alone.

As with any business decision, be smart. Compare rates and plans, and make sure the “simple” setup is really worth the cost. In most cases, your Merchant Service Provider can setup your merchant account in as little as 24 hours. This is faster than your third party processor, and adds even more value to the otherwise already vastly superior deal you are receiving with your very own merchant account.

Make the decision that is best for your business, and best of luck! Please visit Josh Greth at

Copyright 2003 Josh Greth. All rights reserved.

Josh Greth draws upon his 20+ years of Credit Card Processing/Executive experience in the field of Merchant Services. He developed, owns, and is the reigning CEO of CardStreet Cardservice Corp., a company that has been processing credit card transactions for over two decades. To date, they have established over 100,000 successful merchants and helped make their dreams a reality, by creating a simple, yet cost effective, means of credit card processing. For more information on credit card processing, or to obtain your own merchant account for a retail, internet, wireless or phone/mail order business, please visit

Choosing An Internet Merchant Account

Surf to Google and perform a search on “Internet Merchant Account”. The results are staggering (472,000 results!) If you have created a web based business and need to accept credit card payments, your choices are limitless. Before you partner with a provider, take time to understand the different components of internet credit card processing, and know what to look for in a merchant provider.

How It Works

Accepting credit card payments through your web site actually requires multiple components. Between a paying customer and your bank account, three layers exist:

Payment Gateway – This is the code that will transmit a customer’s order to and from an internet merchant account provider. The payment gateway provides you the ability to accept customer billing information (credit card number, credit card type, expiration date, and payment amount) and the necessary validation steps that must be followed before the credit card is actually billed.

Internet Merchant Account – A Merchant Account is an account with a financial institution or bank, which enables you to accept credit card payments from your clients. The payment gateway actually transmits the billing information to the internet merchant account provider. Unfortunately, most local banks do not provide internet merchant account capability.

The main reason why most local financial institutions or banks do not want to provide online merchant accounts is because transactions conducted over the Internet are totally different from face to face transactions where a signature is required to authorize the purchase. This makes online transactions prone to credit card fraud. Fraud protection should be one of your primary considerations when choosing an internet merchant account provider.

Web Site – Regardless of which merchant provider and gateway service you choose, your web site will need to integrate with your service providers. Most providers include detailed web integration instructions.

How Much Does It Cost

Understanding the total costs of your merchant provider can be tricky. Remember my Google example – there are more merchant account providers than there are people looking for internet merchant accounts so ask questions and be picky! Typically, an internet merchant account will have three types of costs:

Up Front Application Fees
On Going Fixed Fee
Discount Rate
Fixed Transaction Fee
Termination Fees
Miscellaneous Fees

Let us discuss each type of cost:

Up Front Application Fees

Many internet merchant accounts will require an up front application fee. This fee, supposedly, is to cover their costs for processing your application. In case you choose not to open an internet merchant account, they still cover their initial costs. Although common, many providers waive these fees and I recommend that you choose a provider that does not require an up front fee.

On Going Fixed Fee

Most all internet merchant providers require a monthly fixed fee or “statement fee” as it is commonly named, which is simply another way to cover their costs and make money. You will be hard pressed to find a provider that does not require this type of fee on a monthly basis. However, do not choose an internet merchant account that requires more than $10 per month. Additionally, most internet merchant providers require a monthly minimum (usually $25). The bottom line is that you will be paying at least $25 per month (on top of the monthly statement fee) for your account.

Discount Rate

Usually, the discount rate will be between 2 and 4 percent. The discount rate is the sales commission the provider earns on each sale. For example, if the discount rate offered is 3%, and you receive a sale over your web site for $20, you will owe 60 cents to your internet merchant provider.

Fixed Transaction Fee

Usually between $0.20 and $0.30, the fixed transaction fee is the fixed fee portion of each sale. Unlike the discount rate, the fixed transaction fee is the same for every transaction. Whether you get a $1 sale or a $100 sale, the transaction fee will be the same.

Termination Fee

A bit more hidden in the small print, a termination fee can apply if you cancel your merchant account within a specified period of time (usually within one year). But beware, some merchant providers require a three year commitment!

Miscellaneous Fees

If a customer requests a refund and they want their credit card credited, an internet merchant provider will charge you a separate fee (usually between $10 – $20). Read the contract carefully, as other special fees may apply.

Putting It All Together

Now that the different fees have been explained, let us look at an example set of transactions to help understand what an internet merchant account may cost your business on a monthly basis.

I have created a simple formula to help you calculate your monthly charges:

Total Charges = Statement Fee + Number of Transactions x (Average Sale x Discount Rate + Fixed Transaction Fee) + (Number of Chargebacks x Chargeback Fee)

For example, let us see you sell widgets over the internet. The sales price for each widget is $10. You typically have 100 sales per month and about 5 people request refunds (chargebacks). For this example, let us assume you have signed up with Jones&Jones internet merchant account services and have the following terms:

Discount Rate – %2.5

Statement Fee – $10

Fixed Transaction Fee – $0.30

Chargeback Fee – $15

Using my formula above, your monthly Jones&Jones charges will be:

Total Charges = 10 + 100 x (10 x .025 + 0.3) + (5 x 15) = $140

You can calculate your monthly sales revenue by multiplying your sales volume by your price:

Monthly Sales Revenue = 100 x $10 = $1000

Your internet merchant provider is costing you %14 or your total sales.

Making Your Decision

Before you choose and internet merchant provider, understand all of the cost components. Use your current or projected sales data to forecast what your internet merchant account costs will be. Planning ahead can save you time and money.

Avoiding Merchant Account Disasters

Merchant accounts are an integral part of accepting and processing credit card payments through your web site, but failing to properly research your chosen merchant account provider can cost you – in a big way. By knowing how to spot merchant account problems before they happen, you can save yourself significant frustration as well as money.

“Too many Internet marketers don’t understand how merchant accounts work,” says Matt Bacak, a successful online marketer who trains speakers and authors. “When I first started out, I definitely didn’t understand them. First of all, I had no idea that your merchant account provider would freeze your account if you made what they considered to be too much money. I mean, I didn’t even know you could make too much money!”

But when it comes to many merchant accounts, it is possible to make too much money. Bacak had given his merchant account provider an estimate of what he expected to make each month. The holiday season brought in far more; in fact, within a few days Bacak had made more money than he’d expected to make in a year! Instead of reveling in his success, he soon found himself battling his merchant account provider for his earnings. “Apparently the amount was more than my merchant account could handle,” he says. “They froze my account and held my money until they could be sure that all of my customers had received their credit card statements in the mail. It ended up being six months before I got paid.”

With his merchant account frozen, Bacak was unable to continue selling his product online. With no way to process credit card payments, his business was quickly put on hold. “I went out and got another merchant account,” he says. “I now had two; I was under contract with the first one so I couldn’t just leave them. The new provider was happy to take me on, but not before charging me nearly 10% in fees on every sale I made. In the end they ended up just picking up and leaving, with $30,000 of my profits that I still have yet to recover.”

Armin Morin, an online marketer and entrepreneur who has made more than $15 million promoting and selling products online, is no stranger to merchant account problems. “My product brought in over $4 million over a very short period of time. My merchant account provider not only shut me down, but they went into my bank account and took more than $2 million from me! This was half my profits; money that was allocated to pay my affiliates. How can you run a business when half your profits are frozen? I hadn’t done anything wrong, and yet my money was gone.”

If your merchant account is frozen, your business will basically be dead in the water. You won’t be able to process credit card payments online any longer, putting your sales indefinitely on hold. Even worse, you may find that if you’ve had an account frozen in the past, other merchant account providers will be reluctant to take you on as a customer.

“Once they took my merchant account away no one else would take me on as a merchant,” says Morin. “After they took my money, my bank discontinued doing business with me as well. I had a check for over two million dollars in my pocket and no major bank would take me on because they didn’t want the hassle caused by my merchant account troubles.”

Aside from the potential for frozen accounts, online marketers need to be aware that merchant accounts often come with a host of fees. “One merchant account required that I pay $500 up front just to get started,” says Bacak. “That didn’t even include my Internet gateway.” Others will ask that you pay to lease their equipment in addition. If you buy the equipment on your own, it will only cost you a few hundred dollars; if you lease the equipment from your merchant provider monthly over the course of a three- or five-year contract, you’ll pay thousands.

Making Merchant Accounts Work For You

There are millions of online marketers successfully processing credit card payments through merchant accounts. Despite the worst-case scenarios described here, there are ways to avoid merchant account problems and maximize your online sales.

To avoid a frozen merchant account, seek out a provider that does not limit the amount of money you can accept over the course of each month. It will be difficult to anticipate the amount of money your web site will bring in, and if your provider asks you to estimate an amount, you could be setting yourself up for a problem down the line. Additionally, you need to be aware that many merchant accounts end up frozen not because of the amount of money coming in, but because the business in question veered from its original business plan.

“When you apply for a merchant account, you’re typically asked to present a business plan,” explains Morin. “If your original premise is too narrow, as in teddy bears, and then you decide to start selling Barbie dolls, your provider could shut you down because you’ve changed gears without their approval.”

Allowing yourself more flexibility in your business plan will give you the freedom to change your product line to better suit your customers. Instead of listening your premise as “jam,” list it as “food.” If you want to offer two products that are entirely different, you should have two merchant accounts, one for each product.

Additional merchant account problems crop up when your provider decides that you have reported too many charge backs. Charge backs occur when one of your customers refutes the credit card charge from your company and refuses to pay his or her bill. Morin says that this can be avoided entirely by offering outstanding customer service that includes quick and no-questions-asked refunds. “We refund people even if they don’t want to be refunded,” he says. “We contact every customer by phone or email to verify the sale. If we can’t contact them then we refund them. We don’t want to risk fraud, and we want our customers to know that we care about risk. I think it helps to build our credibility.”

You’re selling products online because you want to be successful. But when your merchant account is causing you frustration, your success can quickly translate into a very serious problem. By preparing in advance you will be able to quickly and easily process your customers’ payments while enjoying the financial success you so richly deserve.