Glossary of Merchant Account Terminology

Merchant Accounts

A merchant account is a system where-by banks process credit cards and deposit the proceeds into a store merchant's bank account. There are fees associated with receiving payments through merchant accounts which are covered in more detail below.

Application/Setup Fees: $0 – $100+ (one time fee)

Most Merchant Account providers have an application fee. Some charge it right at the beginning, while others add it into the transaction fees as well as equipment purchase/lease costs. Some providers do not have an application fee at all.

Hardware/Software Fees: $99 and up or Lease: $20/month and up.

One important note worth mentioning here, though leases are sometimes beneficial to you because they keep you from paying up front for a terminal, it's usually much better to purchase from the beginning than pay a lease for the next 12, 24, 36 or 48 months. Why? With a lease you'll end up paying sometimes 3 times or more the actual cost of the equipment than if you would have just purchased the equipment outright from the beginning. While a $29.95 monthly lease for 48 months sounds good in reality it isn't.

Leases are very hard to get out of once started. If your business goes under before the 48 months are up, you still have to pay on the hardware/software costs until the last penny has been received by the leasing company. Also, the lease fee you see does not include your state sales tax or the amount charged for the damage/loss waiver. If you do go for the lease, always determine the lease's buyout clause, end of lease terms, and especially beware of clauses that allow the lease company to continue charging you even after the 48 months have passed (they say that you should contact them in writing one month prior to the end of the lease, or you can just let them keep charging you). Oh, and if you are looking for a wireless terminal to process credit cards remotely, be prepared to have those costs jacked up 3 to 4 times the regular costs.

Programming Fees: $0 – $100+ (one time fee)

This usually only applies to retail merchants who have changed from one provider to another. The programming process isn't difficult but watch out for the cost. Some merchant account providers may nickel and dime you on programming fees. Why do they charge this fee if you use your own equipment? It's used to somewhat make up for the loss of not selling or leasing you their equipment.

Discount Rates: 1.49% or more

Discount rates are the fees that are charged to you as a merchant for processing credit card transactions. The discount rate is typically the mark-up that a merchant provider will charge on top of the actual Interchange rate that Visa/MC/Discover/Amex will charge.

For more detailed information on this topic you may want to check Wikipedia's database.

Transaction Fees: $0.20 – $0.50 per transaction

In addition to the discount rate a transaction fee is also deducted from the purchase cost. Also, just as with discount rates, transaction fees are lower for retail businesses while slightly higher amounts are charged for MOTO and Internet establishments. Address Verification (AVS) may either cost an additional fee, or may be included in the base transaction fee. The typical merchant account transaction fee for US businesses is right around $0.30 while the higher end of this fee is sometimes the case for Non-US businesses.

Monthly Minimum Fees: $0 – $25 per month

Merchant accounts expect to make a minimum amount of money from each business they sign up. They typically set a minimum fee you must hit each month and this fee is based on your transaction and discount rate fees from your credit card sales each month. For instance, say your bank charged $25 as a monthly minimum, the transaction and discount rate fees collected by the bank must equal or go over $25 each month. If this is the case no monthly minimum will be charged. However, if the fees collected for that month do not meet the $25 minimum, you will then be charged the difference. Not all processors have a monthly minimum fee, however most do.

Gateway Access Fees: $0 – $25+ per month

Since in most cases, the Secure Payment Gateway provider (e.g. Authorize.Net, VeriSign, PayPal, etc.) is a separate company from the Merchant Account Processor, they charge extra fees. For every month that you are on their system, you usually pay an access fee. The usual fee to pay for gateway access is around $10 - $50.

Statement Fees: $0 – $15 per month

Merchant Accounts typically charge you a monthly statement fee because at the end of each month you will receive a statement from your processing bank that will list all the transactions that went through for that particular month. It's very much like your credit card or telephone bills and is just another way for them to make money.

Daily Close-Out Fees (Batch Fees): $0 – $0.15 each day

Associated with software and terminal processing solutions where at the end of every business day you close-out all your transactions. Many merchant account providers do charge this daily closeout fee.

Address Verification System (AVS): $0 – $0.05 per transaction

The AVS service checks to see that the billing address given by the customer matches the credit card. If you opt not to use AVS, VISA and MasterCard will not support your transactions and will charge you an additional 0.17% to 1.25% on those sales. Most merchant accounts do have an AVS charge, even if it's bundled with your transaction fee. The AVS service works only with US credit card holders. Currently, there is no AVS service in place for non-US credit card holders.

Chargeback: $5 – $35 per instance

A chargeback occurs when the cardholder disputes a charge that they found on their monthly credit card statement. A large number of chargebacks can cause your merchant account to be dropped totally and leave you in a bind when trying to get another merchant account for your business. If this is the case you may not be able to get another merchant account for several years. As a merchant it is important that you take the necessary steps to reduce and potentially eliminate the instances of chargebacks.

Reserve: Varies, ask the provider for details

Some providers will require you to have a reserve account where the amount is determined by your businesses estimated sales receipts. Usually a reserve is almost always charged to a Non-US based merchant who is trying to obtain a merchant account. Also, businesses that do a high volume of sales each month may be charged a reserve fee. Otherwise, there usually isn't a charge. In most cases, the reserve fee is used to cover for any chargebacks on the merchants account. A reserve should be avoided if all possible.

Annual Fee: $0 to $100 per year

Some credit card processors will charge this fee just as additional way to pay for maintenance and system upgrades. This fee usually isn't disclosed upfront. Ask your merchant account sales representative for information.