Put simply, a merchant account is a line-of-credit account that allows you to accept card payments from your customers. Banks consider a merchant account a line-of-credit account because you get paid before any actual money is collected from the customer. This means that you may be required to undergo a personal credit check, sign a personal guaranty, and supply financial data to get approved for a merchant account.
Just like a checking account allows you to deposit another person’s check into your checking account, a merchant account allows you to accept a card payment from a customer. However, unlike a checking account, a merchant account doesn’t hold money. Instead, a customer’s card payment passes through your merchant account and is deposited into your checking account after the funds have been cleared through your merchant account. All card payments from a single business day are grouped together into single deposit called a “batch.”
An interesting fact about the credit card processing industry is that VISA, MasterCard and Discover do not directly provide merchant accounts. Instead, they rely on banks, Independent Sales Organizations (ISOs), financial service providers and independent agents to market the accounts for them. American Express is different from the other three because it markets its own merchant accounts and does not use third party sales organizations or independent agents. If you wish to accept American Express Cards, you must set up a separate American Express merchant account which will have its own account number. However, American Express has recently launched a new program called “OptBlue” which allows VISA and MasterCard resellers to set up AMEX merchant accounts along with their own. Discover Card acceptance can be set up with a VISA and MasterCard provider. Despite all the different card brands and merchant accounts, all cards can be transacted through the same payment equipment and payment gateways.
In order for a third party sales organization to officially supply VISA and Discover credit card processing services to businesses, it must be registered as an “Independent Sales Organization” (ISO) and backed by an FDIC insured bank (AKA: Acquiring Bank), or be a sub-ISO of a registered ISO. The same holds true with MasterCard except the certification is called a “MasterCard Service Provider” (MSP). American Express does not use third party resellers so it has no such certification.
“Pitfall” Isn’t Just an Atari Game
The credit card processing industry is complicated, confusing, and attractive to organizations and agents that practice deceptive sales tactics in the name of big profits. There is no formal regulation on how providers must quote rates and fees (other than preexisting advertising and contract law), which is the reason this industry is notorious for having “hidden” fees. It is nearly impossible to accurately compare the costs between providers because typical rate quotes are almost never uniform from one provider to the next, even though they appear to be on the surface (we’ll cover how to get uniform quotes later in the book).
During the signup process, nearly all providers intentionally fail to disclose each and every fee that you will experience. Instead, most of the fees are buried in the fine print of a long and seemingly incomprehensible contract. Because of this, most business owners end up experiencing processing rates that are nearly two times what the agent verbally quoted. Many find that their agent also failed to mention a term length service agreement with an expensive early cancellation penalty, only to learn about it when they try to cancel service. Very often this fee is only mentioned in a single sentence of a 30,000+ word document that the merchant was ushered into signing as quickly as possible. In a world where everything seems to come with a lengthy agreement, it is not surprising that most business owners do not suspect that their merchant account agreement may contain insidious clauses that will come back to haunt them later.
Unfortunately, there are many unethical sales organizations and agents that take advantage of people’s naiveté and base their sales tactics on duping business owners into predatory contracts. It’s even more common for a rookie agent to inadvertently market outrageously expensive accounts because they have no more knowledge about what is in the contract than the business owners they approach. Most independent agents that you will encounter are poorly trained and intentionally focused on selling expensive accounts in exchange for high commissions, which means high pricing for you if you are not careful.
The information provided in the next sections will arm you with the knowledge you will need in your merchant account search and put the power on your side of the negotiating table. To make it an easy read, I have included only the details that will matter most to you as a business owner. This is meant to be a simple how-to guide, not a textbook on the credit card processing industry.