Thursday, May 21, 2009

Merchant Account

There is a lot of controversial issues on credit card processing and merchant accounts. Some of the most common areas of confusion are the various types of organizations that sell this services, what entities actually process the transactions and the fees and pricing structures that progressively form an unsolvable mystery for most merchants. This article will expose you to merchant account basics. Today, I'm going to expatiate on Independent Sales Organizations (ISO's) .

An ISO resells the products or services of one or multiple payment processing vendors. They can also improve their own or aggregate other value added products and services. ISO's range from a little sketchy to best in class providers.

There are basically 2 types of ISOs:

1. Banks - Banks of all shapes and sizes are ISOs. Wells Fargo, for example, is an ISO of First Data. Your local community and extended regional banks are most likely ISOs. Banks entered into the merchant services business because it was a natural fit with their product and service offerings. It's a way to increase revenue per customer. Most, but not all banks, will private label the services so that it's difficult to distinguish whether they are a processor or ISO. The benefit of working with a bank is that you can consolidate your financial services. The drawback is the you usually get out of the box solutions and service.

2. Non-banks - These types of ISOs range from some of the most dynamic and competent providers to firms who don't represent the industry very well.

Industry Dynamics There are a few dynamics that make the industry landscape quite interesting. First, there are few barriers to entry due to the lack of certifications, licenses, and capital requirements. Secondly, there really is no active regulatory body that oversees and enforces acceptable practices. So naturally, with these two market conditions, merchants need to be mindful and thorough in selecting a provider.

Processors versus ISOs In comparing the two, ISOs offer all of the products and services that processors do (because they are reselling) but processors can't always offer the same products and services as ISOs. This is because ISOs can resell for multiple processors and can either develop their own technologies or aggregate solutions from other providers. ISOs have largely been the most successful creators of value-added services while attempts by processors have usually been pretty clunky. ISO's also tend to be smaller, which usually (but not always) leads to choiceable customer service.

Processors are usually a safer bet for newer merchants that are still learning about the industry. Most still maintain what I consider less-than-upfront pricing practices, but with their services it is less common to hear about some of the more serious challenges that merchants come across when they deal with the wrong ISO. As for price, in most cases, there really is very little to no difference. I argue, and fully disclose my vested interest, that in nearly any situation a best in class, non-bank ISO can provide more value than a processor.

Business specific merchant accounts The rates, terms, and conditions of your merchant account will widely depend on your kind of business and the provider you choose. Business types are first divided into two buckets: card present (swiped) and card-not-present (non-swiped). Card present merchants, such as restaurants and brick and mortar retailers are low risk and have fairly simple needs. Card-not-present merchants are much more complex because the risk level of secure credit card storage is substantially higher when individuals are transacting business through the internet, telephone, and so on. Other risk factors that will have effect on your merchant account are the types of goods that you're selling, delivery times, whether or not a deposit is needed, and about 18 other variables. Most underwriting groups use some kind of actuarial model to determine their guidelines.

To give you an idea of one risk merchant service provider face, here is an example. Let's say that you sell $150,000 in books online. Within two days of selling those items, the customer's money is deposited into your bank account. If you take that $150k and skip town without shipping the books to the people who bought them, the merchant service provider is stuck with the $150k bill because customers are going to contest and win the charge with their banks. So for a few hundred dollars a month in revenue, the risk better be pretty manageable for the provider.

Paperwork and underwriting most companies have a two-page application that will require you to fill out both personal and business information. Many people are justifiably concerned about giving out personal information including their social security number. However, unless you are a publicly traded or non-profit, I don't know of a merchant provider that will underwrite a business without it. When asked why all of the personal information is needed, most companies will point to the Patriot Act that was passed in Congress shortly after 9/11. It basically requires all financial institutions, which comprises credit card processors, to collect specific identifying information about their customers.

Most business owners will respond that they incorporated so that they wouldn't be needed to sign a personally guarantee. The underwriter will respond by asking why they should have more hope in your business than you do. Both sides have valid points. I think that the issue melts down to whether or not the business will deliver the goods or services that were bought under the accepted terms and conditions. The personal guarantee is not so much useful in receiving money, but instead used as a deterrent against scamming

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