There is a lot of confusion surrounding credit card processing and merchant accounts. Some of the most common areas of confusion are who sells the payment services, what companies process the transactions, and how the fees and pricing structures work.
It is not critical for businesses to accept credit cards, but some merchants prefer accepting credit cards because they are a convenient and cost effective way of collecting payments from customers. Other merchants, while it is convenient, do not want to pay the fees associated with accepting credit cards. For any merchant that wants to offer remote payments like online shopping, curbside pickup, and telephone ordering, credit cards are a must.
What Companies Help You Accept Credit Cards?
If you want to get a new merchant account or switch from your existing payments provider, one thing is for sure is that there is no shortage of payment companies willing to offer you ways to accept credit cards. There are hundreds of options which you can find from a simple Google search.
Today, you’ll find two main categories of companies that help you accept credit cards. The first are processors (i.e. Clearly Payments, Moneris, etc) which offer you a merchant account and the second are aggregators (PayPal, Square, etc) that don’t give you a merchant account, but are super easy to sign up for.
Processors Versus Aggregators to Accept Credit Cards
Processors, also known as Acquirers, is a company that offers the capability to receive transaction data from a merchant and then communicate with the appropriate financial institutions to approve or decline transactions. Processors must also be able to settle completed transactions through financial institutions in order to deposit funds into the merchant’s bank account.
The credit card processing industry is highly concentrated with the top five processors maintaining over 70% of all transaction volume. While processors do maintain a direct sales force of their own, they primarily work through other organizations called ISOs to acquire and maintain their merchant customers. Roughly 80% of the selling of merchant account done through ISOs.
Aggregators are payment companies that have a single merchant account and run software so merchants share the merchant account. Aggregators main benefit are that they are super easy to sign up for. You can get up and running within 10 minutes if you do not need any hardware. The aggregator business model is largely a self-serve model for merchants. Therefore, if you like to move quickly and troubleshoot problems yourself and you are a small business, aggregators are a great option.
|Benefits||Processor (Clearly Payments)||Aggregator (PayPal/Square)|
• Fees are based on your business type and processing amount, generally 2% to 2.5% and $0.10 per transaction
• You'll pay lower fees than aggregated accounts when you process more than $100k/year
• Fees are typically between 2.75% and 3.5% plus $0.30 per transaction
• You'll generally pay less fees with an aggregator account if you process less than $100k/year
• Money is deposited directly into your business bank account. This can be anywhere from same-day to 3 days, depending on your processor
• Money is sent to your bank account based on the aggregator's rules
• No credit check up front means the aggregator may review at anytime and freeze funds without notification
• Deposits are regulated by the Bank Act
• Deposits are insured through FDIC
• Aggregators set up their own policies so your funds are at more risk than with processors
Credit Card Statements
• Merchants actual business name is stated on your customers' credit card statements
• In aggregator accounts, the name of your aggregator also appears on your customers' credit card statements. For example, PayPal-MyBusiness
Sign Up Process
• You will work with a processor sales person to fill out an application
• Your products and pricing will be customized for your business
• It may take one to two business days to do credit checks and have your application approved
• You can sign up online and have your account ready in as little as 10 minutes
• Aggregators may conduct a check on your business after you start processing
How Does My Business Type Impact Pricing?
Pricing is one of the most important considerations in accepting credit cards. With an aggregator, the rates are not customized for your business. Regardless of how long you’ve been in business or the size of your business, you’ll have the same rates as all the other customers of the aggregator. This is one reason why larger or more established businesses get a merchant account from a processor.
With a processor, the rates, terms, and conditions of your merchant account will largely depend on your type of business and the way you want to accept credit cards.
The way you want to accept credit cards 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 categorized as low risk and have fairly simple needs. Card-not-present merchants are much more difficult because the risk level is higher when people are transacting business via the internet, telephone, etc.
Other risk factors that will affect your merchant account are the types of goods that you’re selling, delivery times, and about 10 other variables. Most underwriting groups use some sort of model to determine the guidelines.