Traditionally, to be afforded the opportunity to accept credit and debit cards from their customers any organisation (typically called a “merchant” by the financial services industry) must be granted so-called “proper” status as a bank. This proper status is given to a merchant through the vehicle of a unique Merchant ID (or MID) from the bank and allows them to participate in the payments chain. Pretty much all large businesses have a merchant account like this. However, the smaller the organisation gets the less likely that they will have one and may be missing out on the benefits.
The banks which provide a merchant account are not quite the same as the ones with which we are most familiar as personal current account holders. All major high street banks have what is known as an “acquiring” bank arm or division. For example, in the UK NatWest has ‘Streamline’, Lloyds-TSB has ‘Cardnet’, Barclays has ‘Barclays Merchant Services’, HSBC has ‘HSBC Merchant Services’ and so on. In addition, some organisations outside the high streets banks (like American Express and PayPal for instance) have a license and do their own acquiring. Subject to a range of pre-conditions, all these “acquiring banks” are able to issue a Merchant ID and allow an organisation of any sort to start taking credit and debit cards. They will authorise or decline each customer transaction, collect any payments on the merchant’s behalf and pay the money into a merchant’s nominated bank account.
There are obviously costs involved in setting up this merchant account – typically the acquiring bank will include setup charges, monthly or annual fees, monthly rental of a physical terminal (or PDQ machine) for the merchant to process card details, and they may insist on a dedicated telephone line for the terminal. A merchant will also be charged a percentage of each transaction which they process, may have a minimum monthly volume of business imposed, and in some cases, have to provide a substantial “bond” or deposit as extra security (to cover any potential card “charge-backs” that may occur).
Unfortunately that’s the relatively easy part of the process! – before a merchant can even start the process, they will have to satisfy the acquiring bank that they are worthy of their trust in the first place, and a merchant will usually have to provide two years audited accounts and demonstrate a sound business track record in order for the application to proceed (which is why some banks also require a cash bond and an extensive business plan if a merchant cannot satisfy all that, for whatever reason).
Even if a merchant meets these requirements, they will usually only be able to accept card payments in the “traditional” part of the business only. If a merchant wants to set up a web site to accept card payments they will find that the acquiring banks will not accept any information coming from the merchant directly via the Internet. The banks will only accept information from a web site which has been processed by an approved Payment Service Provider or PSP (who will do this on a bulk basis and in a safe and secure way -and according to PCI or Payment Card Industry compliance rules).
A Payment Service Provider’s function is to integrate a merchant’s e-commerce enabled web site with the major credit card networks so that orders generated by a merchant’s own or chosen ‘shopping cart’ software can be authorised and payment collected. This payment is then transferred to a merchant’s account for onward remittance to another receiving bank account as necessary.
As you might expect every merchant has to go through quite a formal application process in order to get an agreement in place with a PSP. Their terms and conditions and charges vary enormously from one PSP to another and it is very difficult to make exact comparisons. Merchants also need to be aware that whatever charges any PSP makes will always be added to those charges which are levied by the acquiring bank providing the Merchant Account. This means any merchant may well end up paying two lots of set-up charges, monthly/annual fees, and, worst of all, two lots of percentages (plus fixed fees in some cases) on every transaction.
So, you might be thinking, with all of these hurdles:
- why would a small organisation in particular bother with all of this? and
- are there better ways to go about the necessary merchant account sign up steps if the journey to doing so is deemed to be worthwhile?
The answer to the first question is relatively straightforward. For most businesses turning over say more than £100,000 a year, the ability to offer credit and debit cards payments will bring not only extra revenue but will also accelerate cash-flow (to some extent at least). This will usually easily recover the outlay made on setting up a merchant account and make incremental profit into the bargain. Fixed fee payback would be expected to be within the first 6-9 months and thereafter the benefits would typically be significant for most businesses.
The answer to the second question is also a positive one. As the Internet (and web 2.0 technology in particular) has evolved in recent years, there are now several businesses that a merchant can approach to be a “one-stop-shop” when it comes to taking payments (credit, debit and even other types). In other words, these businesses will handle all of your merchant needs, including setting up the necessary relationship with both the bank (the acquirer) and the processor (the PSP) and may offer other services also. At a simple level this is likely to be more flexible customer service (a single point of contact with a real person for example) but may include other services (such as e-wallet capability-such as PayPal offers for instance or electronic billing capability-such as PaySwyft offers for instance). In addition these “one-stop-shop” businesses can often lower overall costs and reduce administrative hassle as well as operate on a “pay-as-you-go” basis. This means that even small merchants can accept credit and debit cards quickly and cost effectively and start to reap the benefits that have mainly only been available to the larger organisations in the past.