Merchant account guide for small ecommerce sellers

Merchant account guide for small ecommerce sellers

Whether you're selling handmade crafts, auctioning off antiques on eBay or hawking your skills as a website designer, your needs as a small online business are different from those of brick-and-mortar ones. Although you don't have to worry about purchasing registers and card swiping equipment, you will need to figure out a way to accept payments from your customers.

The right choice will involve balancing how much risk you'd like to take on, how much you can spend and how much customization you need. Here are some things to consider.

Your liability
Accepting online credit and debit payments from your customers entails being responsible for protecting their personal data. Ecommerce merchants are what's known as "card-not-present" merchants -- merchants who don't handle customers' physical credit cards, but use the card data customers enter to process transactions. That leaves online businesses with unique challenges, according to Practical eCommerce, a site that provides advice to online merchants. A brick-and-mortar merchant would be able to ask for a second form of ID to verify that the card belongs to the shopper. Ecommerce merchants don't have that ability.

Like all merchants, online sellers must comply with the stringent and rather complicated requirements of the Payment Card Industry Data Security Standards (PCI DSS) Council. PCI DSS is a set of rules merchants must follow to protect cardholder data. Failure to comply can result in stiff penalties.

The manner in which you accept payments will determine how much liability you take on when it comes to PCI DSS. With online third-party payment services, such as PayPal or Google Checkout, you don't have a direct relationship with the company that actually does the credit card processing. You're going through a middleman, piggybacking on a third party's access to the credit card processor. One of the advantages to this approach is that it becomes that third party's responsibility to comply with PCI DSS -- not yours.

With a merchant account, on the other hand, you have a direct relationship with the credit card processor. That means you have to learn and comply with all the PCI DSS requirements for storing and protecting customer data. It's important to remember that it's you, and not the credit card processing company, that will ultimately be responsible for any data breaches (or even any unsafe practices) that occur at your level of the transaction.

The customer experience
How you accept payments will determine customers' experience on your site, which could determine how likely they are to return.

With a merchant account, the customer stays on your website for the entire transaction process. If you use a third-party processor, however, your customer will be required to leave your site to complete the purchase. If that customer doesn't have an existing account with the third-party processor you're using, he or she will be encouraged by that processor to sign up for one throughout the check-out process -- an extra step that might be a turn-off.

Another thing to consider -- if you want to offer customers discounts via coupon codes or keep track of their purchases for loyalty programs, a merchant account will likely be necessary, as third-party processors generally don't allow for that level of customization.

Processing costs
No matter how you accept payments, you'll have to turn over a portion of your income to the companies that help you process transactions.

Comparing the cost of various payment processing options is complicated. You'll have to factor in not only the transaction costs you'll pay for each sale (generally a percentage of the sale plus a flat fee), but other charges such as monthly fees, setup fees and monthly statement fees.

For example, PayPal's basic free service currently charges rates of between 2.2 and 2.9 percent of the purchase, plus a flat $0.30 transaction fee. Merchant accounts meanwhile, may sport rates of as low as 1.7 percent and flat transaction fees of as low as $0.14. Yet the basic versions of PayPal and other third-party processors often omit the fees that are the bane of merchant accounts -- set-up fees, statement fees and monthly fees.

So take into consideration your monthly income as well as the average price of what you sell. If you are selling hundreds of $10 necklaces each month, your income would get eaten up if your flat per-transaction fees are too high. On the other hand, if you are selling only a few pieces of very expensive furniture per year, you'll want to minimize the monthly maintenance fees that could be more than your sales during a slow month.

Given the complexities of merchant account pricing and the diversity of online merchants, there are no hard and fast rules that will help you pick the best payment processing solution. Yet here are some questions to ask any third-party processor or merchant account provider you're considering.

• Do you require a contract for a certain length of service? What's the fee if I terminate the contract early?
• What other fees do you charge, in addition to transaction-related costs?
• What discounts do you offer for larger sales volumes? Do you have any programs designed especially for merchants whose average sales are small? (PayPal, for example, has a micropayment discount designed for merchants whose average sale is under $10).

Access to funds
When you have a merchant account, the payments that customers make (minus the transaction fees) go directly into your bank account. That process is regulated through the FDIC and usually takes only a day or two.

With third-party processors, on the other hand, customers' payments go into your account with that company and stay there until you transfer them into your bank account. This can become a problem if your processor locks down your account due to suspected fraud. Even if you're innocent of wrongdoing, you won't have access to your own money while they are investigating -- and that can prevent you from buying supplies for completing and shipping out future orders.

Use both?
Some online merchants decide to keep third-party accounts and simply add a merchant account as another payment option on their websites. That way, customers who like using a particular third-party payment processor can do so, and those who don't can check out via the merchant account.

One problem with this approach is that merchants will incur duplicate charges from both the third-party processor (PayPal or Google Checkout) and from the credit card processor -- monthly fees, for example. Splitting the credit card checkouts between two different sources might also disqualify a merchant for discounts that they earn on higher sales volumes.

Published: July 20,2023