Understanding the Internet Merchant Account and How it Works

If you are considering setting up an Internet-based business, and you have been researching on the things you need before you can get started, there is a possibility that you would have come across an ‘Internet merchant account’ as one of the things you may need. Being new to these matters, you could have found yourself wondering what such account is and how it will be of service to you. It is these matters that we will proceed to explore, for your edification.

Now in order to understand what the Internet merchant account is, it is important to understand firstly of the fact that most payments on the Internet are usually done through credit (and debit) cards. The way the arrangement usually works is such that the people looking to purchase various things (both tangible goods as well as services) select what they want to purchase, may be put it onto a virtual ‘shopping cart’ and then go to the ‘checkout section’ of the website from which they are looking to purchase the stuff. At the checkout section, they enter their credit card details (basically their credit card numbers, expiry dates and ‘signature numbers’) and upon deduction of the value of their purchases from their online account, get their products shipped to them. The shipping, of course, can be instant in the case of things like E-books that are immediately available upon payment.

In the meantime, it is upon the website owners where the purchase was made to liaise with the company issuing the credit/debit card in question, so that they can eventually get the actual cash that was deducted from the card-holder’s accounts to finance the purchase.

The way it works is that once a website/business owner (a merchant) signs up with a merchant account provider (processor), it collects the credit card details through an online payment form which is typically hosted on the processor’s secure servers but can also be hosted on a merchant’s website (API integration). This form sends data over to the processor’s payment gateway which is special software for processing card data through the banks and credit card companies delivering either success or decline message back. Money is taken from a cardholder’s bank account usually at the end of the day and deposited to the merchant account and later wired to a merchant’s business bank account depending on the agreed payout schedule, this is normally done weekly but depending on the merchant agreement payouts can be daily or even monthly in some cases.

So ultimately, the Internet merchant account is the ‘place’ where the online payments processing service provider keeps the money they collect from credit card companies before deducting their credit card processing fees and sending the payouts to a merchant. Depending on the structure of the above we can separate between direct merchant accounts where the principal is a merchant and 3rd party merchant accounts where the merchant actually uses a merchant account owned by the merchant account provider company (processor). First is good for companies with processing history and mainstream e-commerce categories where generally tangible goods are sold and 3rd party accounts are perfect for small businesses and startups who cannot get approved for a direct account at the bank.

We have briefly gone through the basics of ecommerce specific merchant accounts, you should now have a better understanding of these terms and how everything works.

Internet Merchant Accounts – Process Payments Like a Pro

Operating a business online is a lot different from operating a retail establishment, where transactions are made in person by the buyer. In an online environment, processing payments requires a specific solution that can make buying simple, convenient, and easy to carry out when cash is not an option. The answer to processing Internet transactions with ease is simple: open a merchant account.

A merchant account will allow your business to accept credit cards – debit cards and even gift cards, too, if you like – for any transaction made through your online store. In addition, a merchant account can offer additional levels of protection against fraud, a risk that is increased in online business, where transactions are performed in a more or less anonymous environment.

Because your merchant account will be so essential to the success of your online business, it’s important that you take the time to consider different merchant account providers, there fees, and the services they offer, before you make a final selection.

Here are a few things to consider when you’re considering establishing a merchant account for your business:

General experience. How long has the merchant account provider been in business? As a business owner, you know it isn’t necessarily true that the newest businesses are the most suspect. But in the world of merchant account providers, especially as more and more businesses have begun accepting credit cards in recent years, the number of less-than-honest account providers has significantly increased. While that doesn’t mean you shouldn’t consider newer account providers, you should be more critical of their claims and offers.
Specific experience. Some merchant account providers may have substantially more experience dealing with specific types of businesses, and less experience with others. Make sure the account provider you select has ample experience dealing with businesses that are similar to yours, as well as with Internet merchant accounts. These accounts can often identify the best rates and deals for your business type. And make sure the account provider has experience dealing successfully with fraud. If your business is growing, consider account providers who are able to meet your current business needs, as well as your future needs.
Costs. Different account providers will have different fees and costs associated with the management and maintenance of the account, as well as specific penalty fees, so be sure to ask for a complete list of fees when comparing accounts. Expect most accounts to charge daily and monthly fees, as well as fees based on individual transactions. Thanks to increased competition among account providers, many fees have been reduced, and some have been entirely eliminated. You should also know that Internet merchant accounts generally have higher fees than other types of accounts, like retail merchant accounts, because they are associated with a higher risk of fraud. Why? Because transactions are conducted anonymously, rather than face to face, as in a retail establishment.
Card acceptance. Some accounts allow you to accept only one card, and some allow you to accept a number of cards. In order to attract the largest customer base, it’s usually best to consider accounts that allow you to accept the major credit cards, including MasterCard, VISA, American Express, and Discover.
Customer service. Check with the Better Business Bureau for any existing complaints against the companies you are considering, and also visit online forums – there are a lot of them – devoted to the businesses who use merchant accounts.
Take individual complaints with a grain of salt, but pay attention to large numbers of complaints, especially in the area of customer service. Also email and call the companies you’re considering to determine how quickly and effectively they answer your questions – and how courteous and friendly the customer representatives are when they respond.
Technical service. Be sure your account provider has the experience and background to perform required and spur-of-the-moment technical maintenance tasks necessary to keep your account up and running. Even a seemingly minor technical issue can prevent you from making sales and damage your reputation as an online retailer. Choose an a/c provider who can respond quickly and effectively to technical problems.
Contract terms. It used to be that merchant account providers required their clients to sign multi-year contracts, and some unscrupulous account providers still have terms that can make it difficult to cancel a contract without incurring substantial cancellation fees. Even at the opening of an account, it’s important to understand the process you’ll need to go through if you decide to eventually terminate your relationship.

Your merchant account provider will be an important partner in your business’ operation. Take your time to carefully consider all your options, and make sure you read all the fine print before signing the account provider’s contract, and reach for the next level of your business’ growth and development.

Merchant Account Cancellation Fees and Solutions

Merchant account cancellation fees, also known as early termination fees, are fees charged to a merchant who is ending their merchant account agreement early. Setting up a new merchant account costs merchant account providers money, called boarding charges. Cancellation fees help to recoup these new boarding costs, when an account is closed before its term. They also increase customer retention, and give providers a chance to rectify any problems. Fees vary, and are set by merchant account providers. They typically range anywhere from $0 to $500 fixed. Be aware of cancellation fees that are not fixed. This variable termination fee is based on how much a merchant processes (times remaining months left), and can end up costing thousands of dollars.

Here are a few ways to avoid (or lessen) merchant account cancellation fees.

Communicate with your Current Processor

The top reason merchants want to switch processors is because they found a better rate with a competitor. Comparing rates and fees can be an exhausting, timely task. Save yourself the time and energy, and speak with your current merchant account provider about pricing. Let them know that you are “shopping” around for better rates, and have them reevaluate your merchant account. Most processors do not want to lose their clients, and will lower pricing if they can. Remember, that pricing can never go below interchange. Current interchange rates are always posted on card association websites.

Be concerned when a merchant provider is advertising super low rates, much lower than other providers. They are probably displaying the rate for PIN-based debit transactions. These rates only apply to transactions where a PIN number is entered at the point-of-sale. Credit cards are charged at a higher rate. Another tricky pricing scheme to watch out for is a rock bottom qualified rate, with ridiculously high mid-qualified and non-qualified rates to make up for it. Talk with your current processor and let them know what pricing you are seeing out there.

Look at your Contract

If communicating with your current processor is not going to work, look at your merchant account agreement closely. Read every single line. Some contracts will have clauses waiving cancellation fees. For example, if fees increase during the contract term, termination fees are waived. Other contracts may excuse cancellation fees for businesses that go out of business. Credit card processors have varying cancellation fees, clauses, and terms. Read your contract carefully.


Sometimes you can have your merchant account cancellation fees waived, or reduced by negotiating with the processor. Especially when there is a working relationship with the provider, and the account is in good standing. For example, a business owner decides to sell her clothing store to a neighbor. If the new owner open up a merchant account with the current processor, most likely, early termination fees would be waived

Leave Account Stagnant

A merchant can simply choose not to use their existing merchant account to process, and open a new account for future credit or debit transactions. The “old” account stays open, but the merchant is not processing anything through it. This solution may prove to be less expensive than paying a hefty cancellation fee. For example, the cancellation fee on your existing account is $300. You have 3 months left on your contract, and your monthly minimum fee is $25, plus a $10 monthly statement fee. You would end up paying $105 (vs. $300) to leave it open.

Before opening a second account, ensure that you have contacted your current processor. Communicate your concerns. Most reputable processors will do everything in their power to keep your account.

Cancellation fees exist to improve customer retention and recoup any initial boarding costs incurred by the merchant account provider. Merchants who want to switch processors, but are facing an early termination fee, are encouraged to contact their current processor with any problems or concerns. Competitive pricing continues to be the main reason merchants want to close their account. Be aware of pricing schemes designed to lure customers. Before switching, ask your provider to reevaluate your account and let them know about comparable rates you have seen. Chances are, they will lower your rate and retain your business.