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How does a merchant account work?

A merchant account is an account that business owners set up with a bank or other payment processor that allows them to accept credit card payments. Merchant accounts are often set up through your local bank, but business owners can shop around for better rates. Many banks are willing to negotiate their rates to be more competitive with larger payment processors.

When you set up a merchant account, the most important question is whether the majority of your transactions will be "swiped" or "keyed". A "swiped" transaction means that you will have the card present, and it will be manually swiped into a machine; in comparison, a "keyed" transaction is usually taken by telephone or internet, and the numbers will be typed either by the customer (via a "gateway"), or by the merchant.

Obviously, there is a greater chance of fraud for keyed transactions than for swiped, so the transactions fees are considerably higher.

Examples of Merchant Account Rates

When you sign up for a merchant account, you will be presented with both "Retail (swiped)" rates, and "Internet (keyed)" rates. They may also offer "MOTO rates" (mail order / telephone order), which is usually the same as Internet rates.

An example of transaction rates to expect:

Swiped: 1.75% + $.20

Keyed: 2.14% + $.20

This means that, for each swiped transaction, you will pay $0.20 (20 cents), plus 1.75% of the transaction. And for each keyed transaction, you will pay $0.20 plus 2.14% of the transaction.

For example, assume that you sell a product online (a keyed transaction) for $100. The cost of this transaction will be:

$100.00 * 0.0214 ($2.14)
+ $0.20 transaction fee


Most banks will deposit the end sum to you after 2-3 business days. So, in this example, you charged the customer $100.00, so the bank will deposit $97.66 into your account.

There may also be monthly fees and annual fees. These are not uncommon, but can often be negotiated, or even waived, for higher producing merchants. Retail (swiped) accounts will also usually lease the equipment to swipe cards, and Internet (keyed) accounts will pay a "gateway" fee (which is mainly just access to an online terminal).

Most payment processing companies will require a minimum 2-year contract, and a credit check. A poor credit score does not usually disqualify a merchant, but may result in higher transaction rates.

It is important to choose the right type of merchant account and payment processor for your business. While there are many payment service providers out there, it's a good idea to read their terms of service very carefully, as many of them charge exorbitant fees and have strict rules regarding transactions. Even though you can find a processor online with very low rates, there can be a lot of hidden fees, so it is often better to use a local bank with a reputation for good customer service.

Contributed by: GoNC Network

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