What is merchant services?
Merchant services is the term used for credit card processing. Almost all business owners have to face this issue of having to accept credit cards. While there are always some small shops that still will not take credit cards, most businesses of any type or size need to use merchant services.
Merchant services
A merchant services account is set up with a bank that provides you the ability to accept credit cards. You can say that this form of banking is just like any other, except it’s used in business. This facilitates the ‘credit card interchange’, where your customer pays you by using their credit card and then you are billed for that purchase at the end of the month.
You also have the ability to offer your customers an option to pay by credit card instead of cash, which is great because it gives them incentive to spend more without giving you less profit due to cash discounts (explained below).
What are merchant services fees?
This depends on a few factors, but typically fees come down to whether you are using an account through your bank or through a third party.
There are 2 main types of merchant services fees: flat rates and percentage-based rates . A flat rate is where the fee for processing is fixed regardless of what credit card was used or how much it cost you to swipe that card. This fee is typically around $0.15 plus the percent of the total purchase cost. The percentage-based rate, on the other hand , often falls in the 2 to 4% range but can be higher or lower depending on what card was used.
This second type of merchant service is advantageous for you because there are no flat rates, which means that you are not charged extra for using expensive cards like American Express.
What is a Merchant Account?
A merchant account is the way in which you get your funds from the credit card companies after your customer makes their purchase. This helps you to avoid taking credit cards on faith, because instead of asking your client to just trust you, you receive the funds through an electronic payment.
There are 2 main types of merchant accounts: Branded and Non-Branded .
A non-branded is when your account doesn’t have a name tied to it. This means that the credit card company doesn’t know who is processing the charge; they just know that it’s a business that is processing the sale.
A branded merchant account is when you use your specific company name during the transaction. This means that if your customer decides to dispute their purchase, then they can do so knowing exactly who was selling them the product or service.
Everybody knows that it’s more difficult to get approval while using a non-branded account. So if you want the best shot at approval, then use a branded account.
What is interchange?
Interchange is where your merchant services are processed. The different credit card companies charge different percentages of the purchase price for each type of credit card that has been used in the transaction. This fee can range anywhere from 2 to 5% of the total purchase.
So for example, if you are using a Visa credit card, then your merchant services company will have to pay around 2.05% plus $0.10. If you are instead using an American Express credit card, then the interchange fees will be higher at 3.5%, plus there is also a flat rate of $0.10 that will be added to the transaction cost.
Why do credit card companies charge this fee?
The merchant services fees are a way for credit card companies to make a profit off their customers because they typically don’t have to pay anything when swiping a customer’s card. You can almost think of them as a fee for loading money onto their card, because they are charged by the merchant services company when you accept the credit card as a form of payment.
What are cash discounts?
A cash discount is when a customer receives a certain percentage off their purchase if they choose to pay in cash instead of with a credit or debit card. This helps the merchant services company to entice customers to use their card because it’s often cheaper for the customer when using a credit card.
So if your business normally charges $100 and you charge a 4% cash discount, then your customer would only pay $96 and you would keep the difference. If you were charging with a flat-rate credit card merchant services package, then you would lose the chance to make that extra money.
What is a minimum fee?
A minimum fee is when your merchant service contract has a minimum amount that it charges the business per month, regardless of whether or not they had any transactions during that time. A company can impose a minimum fee on a merchant account as a way to avoid people signing up and never using the account, as well as creating more revenue.
What is a non-qualified rate?
A non-qualified rate is when you receive the second least favorable rates from your merchant service providers. You can think of it as an introductory fee that will apply until you reach a certain volume limit.
Here is an example of how a non-qualified rate works: If your processing volume has been under $500 for the month, then your fee would be 1.99% plus $0.20. Once you have surpassed that amount, then it will raise to 2.19% plus $0.20 . This way it entices customers to increase their volume so they can receive the normal rate.
What is a qualified rate?
A qualified rate is when you receive the most favorable rates from your merchant service providers. It’s kind of like an introductory rate that will apply until you reach a certain volume limit, but it’s considered more qualified or advanced because once you hit the limit, your rate will stay at this level permanently.
Here is an example of how a qualified rate works: If your processing volume has been under $500 for the month, then your fee would be 1.59% plus $0.20. Once you have surpassed that amount, then it will raise to 1.79% plus $0.20 . This way it entices customers to increase their volume so they can receive the normal rate, but this is considered more desirable than a cash discount because you will not have to keep track of fluctuating rates.
What is decoupling?
Decoupling is when your business’s merchant services contract allows you or another business to process cards without being restricted by where the physical business is located.
If your merchant service provider cannot offer decoupling, then you will have to use a different provider that offers this feature if you regularly move or change locations. This can be very difficult for some companies who are forced to jump through hoops in order to get their card processing to follow them around.
However, most merchant services companies will state upfront if they allow for decoupling and it is usually a standard feature with providers. Just make sure you read your contract to see what the specific rules and regulations are, because some companies will give you certain time frames or even force you into signing long-term contracts when choosing decoupling.
