A Merchant account is an account that allows you to accept and hold credit card transaction monies. If you are going to be operating an e-commerce business, you must have a merchant account. Without a merchant account you cannot accept credit cards.

These accounts can be established through merchant service providers (MSPs) such as banks or via independent service organizations (ISOs). Many people feel more comfortable dealing with their business banker as banks are generally viewed as secure and reliable, but many banks can be clue-impaired when it comes to merchant accounts. Many banks will have no idea what you are talking or will work from a very short list of credit card processing systems. Banks are also much more selective when deciding for whom they will open a merchant account. And lastly, banks generally take a long time to establish a new merchant account, often 2 to 3 weeks. ISOs on the other hand are extremely knowledgeable about merchant accounts as that is their primary business. ISOs tend to be more flexible and are willing to accept more risk, since they are neither monitored nor regulated. They also are able to get new merchant accounts processed in less than half the time a bank takes.

Once you make the decision on where you want to apply for a merchant account, you will need to supply the bank/ISO with the average order size and the average monthly amount that you expect to be running through the account. Estimate conservatively. You may be asked to keep a percentage (or even a full months estimated order total) in an account to cover fraud. If you round-up to impress the banker, you are going to end up paying more in tied-up capital. Tell him what you expect to be processing the first or second month. If by the sixth month you have far exceeded that amount, contact the bank/ISO to discuss increasing your limits.

Once a relationship with a merchant account provider or acquiring financial institution is set up, the institution then deposits daily credit card sales into the merchant`s account after deducting certain fees. Some financial intuitions also conduct merchant services, either in-house or out-sourced to third parties. Such services include customer service, billing, authorization, reporting and settlement services. Third-party companies offering these merchants services include First Data Corp., Global Payment Systems and Nova Information Systems.

Naturally, there are fees associated with anything having to do with a bank. Understanding these fees is important so that you know which fees are merchant account related and which fees are from Right Connection. Depending on where you obtained or are obtaining your merchant account these fees may vary significantly. A merchant account for an online business is similar to a merchant account for mail order business, the risk is associated with the fact that you don`t have the physical credit card to scan.

Discount rates: the percentage of bank card sale amounts that the acquiring financial institution charges merchants for transaction settlements. This depends on the average order size that you quote the bank. A larger order size will usually result in a smaller discount rate. Generally about 2-3 percent.

Interchange fee: amount that merchant`s acquiring financial institution pays consumer`s issuing financial intuition for every credit card transaction settled. Transaction fees can vary from a low of 25 cents to a high of 70 cents per charge.

Equipment and Installation: these costs include hardware/software, set-up and programming. If you`re purchasing an e-commerce solution from Right Connection you will be able to avoid these costs altogether.

Monthly Fees: also includes minimum fees, may cover total charges, statements, and excess usage.

Reserve Costs: some banks hold back a percentage of merchant transactions to cover contested charges. Chargeback fees can also be charged when disputes are settled in favor of the credit card holder. Fraud often takes the form of disputed charges, which, in the U.S., are almost universally settled in favor of the card holder. This means that in addition to losing the amount of the sale -- after the product has been shipped -- the merchant loses the $20-50 that the bank charges in chargeback fees. Also, if the merchant has too many chargebacks, he`s at risk of losing his merchant account. High chargebacks can also result in an increase in your reserve requirement to the loss of your merchant account.

As a merchant, when you signed on to accept Visa, you agreed to adhere to its contractual requirements, including its dispute-resolution procedure. That procedure starts when a consumer disputes a charge on their credit card statement. Once the Issuing bank (bank that issued the credit card) receives a complaint of a disputed charge, the Issuing bank sends a retrieval request to the Acquiring bank (bank that collected the funds). The acquiring bank must respond with support for the transaction. The acquiring bank (your merchant bank) will send you notification by mail. What you will receive is a copy of transaction and a form where you can state the reason why the charge is valid. There will be a respond by date on the form. If you miss this date its too late. Chargebacks are akin to insufficient funds checks. To the banking system a bouncing check causes inconvenience which translates into costing money both to the payee and to the banking system. The banking system has to re-route the bounced check, and perhaps other checks that bounced because of the domino effect of bounced deposits. Bounced checks throw sand into the gears of commerce. Chargebacks throw sand into the gears of e-commerce in a very similar way.

The Terminated Merchant File. What is the number 1 way to get on this list? Exceed Visa & MasterCard`s chargeback threshold of 1% of total transactions per month. When you exceed the chargeback ratio, VISA U.S.A. sends the acquiring bank a warning notification for the first three appearances of a merchant on the report. The VISA Operating Regulations specify assessments of fees for excessive chargebacks over a given time frame. If you meet or exceed the chargeback ratio in this type of timeframe VISA may permanently prohibit you from participating in the VISA program which will result in your name being added to the dreaded TMF. Merchant`s added to the TMF will be barred from ever possessing credit cards with a merchant account again!!

Don`t let this happen to you!!!!

Obviously it goes without saying that the #1 thing to do is keep your chargebacks as low as possible. There are however several things you can do to prevent chargebacks.

• If you have a membership/subscription site, don`t offer trial memberships.
• Have a clear, defined and posted return/cancellation policy posted on your website. Making it easy for your customers to return or cancel will go a long way to reducing chargebacks.
• Get an 800 customer service phone number. If someone gets a charge on their credit card statement that they don`t recognize AND there is a toll-free number to call, you can resolve many disputes BEFORE the customer feels compelled to file for a chargeback. Without a convient way for customers to contact you, your risk of having chargebacks rises.
• If there will be a delay in shipping someone their order let them know about it.