How To Choose An eCommerce Merchant Account
The ability to buy and sell on the internet has only been available for a little over 20 years. In that time, however, the eCommerce industry has expanded dramatically, disrupting traditional retail industries and opening up a new world of opportunity for both merchants and consumers alike. Consumers are no longer limited to buying only things that are available in their local areas. Merchants, on the other hand, can expand their customer base from just the people living nearby to practically the entire planet.
Whether you’re looking to start an eCommerce-only business or add an online presence to your existing retail operation, there are several things you’re going to need before you can ring up your first sale. Obviously, the most important thing you’ll need right away is a means for your customers to pay for their purchases. Unlike retail merchants, who can always accept cash or paper checks, you must be able to accept credit and debit cards (and possibly eCheck (ACH) payments as well). Traditionally, the only way to accept these types of payments was through a merchant account, which is simply an account that processes your customers’ payments and transfers the funds to you, the merchant.
Today, however, you also have the choice of using a payment service provider (PSP), which performs the same basic functions as a merchant account but doesn’t come with a bewildering assortment of fees and complicated processing rates. Square (see our review) and PayPal are popular examples of payment services providers.
In this article, we’ll briefly discuss the services you’ll need to launch an eCommerce business, including online shopping carts, payment gateways, and shipping services (for sellers of physical goods). Then, we’ll discuss merchant accounts in depth, including the features you’ll want to look for and how much you can expect to pay for them. We’ll also recommend several of our highest-rated providers that are ideal for a web-based business.
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Services For eCommerce Businesses
While a merchant account will in many ways be the cornerstone of your online business, you’ll need a few other services as well. Your exact needs will depend primarily on whether your business involves physical goods, digital products, or a combination of the two. Let’s take a brief look at the basic services you’ll need to get your online business up and running:
Online Shopping Carts
An online shopping cart is simply a service that integrates with your website and allows you to display products to your customers. Shopping cart software allows your customers to learn more about your products, select from different options (i.e., color choices, clothing sizes, etc.), and choose the quantity of each product they’d like to buy. Carts also perform a number of other functions to make your customers’ online shopping experience as smooth and seamless as possible.
Of course, you’ll want to select a shopping cart that integrates seamlessly with your chosen payment gateway (see below). Both your shopping cart and your gateway must also, in turn, integrate with your merchant account. While there are literally hundreds of different shopping carts on the market, you should narrow your choices down to just the products that 1) offer the features you need, and 2) integrate with the other tools (i.e., your merchant account and your payment gateway) you’ll be using to run your business.
Fortunately, most payment gateway providers and merchant account providers go out of their way to keep their products compatible with as many of the most popular shopping carts as possible. As long as you stick to a well-known shopping cart, you shouldn’t have any problems. Nonetheless, you should definitely confirm that your chosen cart is compatible with the other elements of your system before you commit to using it.
It’s well beyond the scope of this article to recommend a specific shopping cart for your business, but you can check out our article, Best Shopping Carts For Global eCommerce, to get an idea of the kinds of features you should be looking for, as well as a few recommendations for specific shopping carts that work well for a large number of eCommerce businesses. For beginners looking for a simple, integrated solution that’s easy to use and can be expanded as your business grows, Shopify (see our review) is one of the best all-around shopping carts on the market. You can also check out our Shopping Cart Comparison Chart for a side-by-side lineup of the top shopping carts.
$9 - $299
$29.95 - $249.95
$19 - $229
Free - $99
$25 - $40
Ease Of Use
As an eCommerce merchant, you will also absolutely need a payment gateway to process your online transactions. Payment gateways serve as interfaces between your website and your merchant account provider’s processing network. They send transactions to the processing network so that a purchase can be authorized and transaction processing fees can be assessed. Payment gateways also include a number of very valuable features, from security services that protect your customers’ credit card information to databases that can store your customer’s information (i.e., name, billing address, shipping address, credit card information, etc.) so they don’t have to re-enter it every time they shop on your site. For a more in-depth look at payment gateways and what they can do for your business, check out our article, The Complete Guide to Online Credit Card Processing With a Payment Gateway.
Many companies offer their own payment gateways. Some are generic products that are designed to work with a variety of third-party services, while others are proprietary offerings from merchant account providers that are intended to ensure complete compatibility between their gateway and their payment processing network. Proprietary gateways are usually less expensive, and some (such as the Quantum Gateway from CDGcommerce (see our review)) are included with your account for free. The downside here is that you’ll have to switch to a new payment gateway if you drop your current merchant account provider and switch to a competitor.
One of the oldest and best-known payment gateways in the eCommerce world is Authorize.Net (see our review). Because it has such a large share of the payment gateway market, Authorize.Net can be rather pricey in comparison to some of its rivals, at least if you sign up with the company directly. Fortunately, many merchant account providers offer the Authorize.Net gateway with their merchant accounts, and in many cases, they can get it for you at a significant discount.
If you’re going to get your payment gateway separately from your merchant account, you’ll want to ensure that they’re compatible before you commit to a long-term contract. This usually isn’t a problem anymore, but some proprietary gateways only work with certain merchant account providers. Nowadays, many proprietary gateways include an Authorize.Net emulation mode that will allow them to work with virtually any merchant account or shopping cart.
Although Authorize.Net is very popular among eCommerce merchants, it’s far from being the only choice out there. Check out our article, The Top 5 Payment Gateways For Online Credit Card Processing, for an overview of our top picks for a payment gateway for your online business.
If your business sells physical goods of any type, you’re going to have to get your products to your customers somehow. If you’re just getting started and your business is still very small, you might be able to get away with packing and shipping your customers’ orders yourself. However, once you reach a certain sales volume, this approach just won’t work anymore. You’ll need to sign up with a shipping service to help fulfill your customers’ orders.
Although it’s far from the only choice, the best all-around shipping service we’ve found so far is ShippingEasy (see our review). It’s ideal for eCommerce merchants who want to automate their order deliveries and avoid countless trips to the local Post Office. For an overview of the top shipping services we’ve reviewed, check out our article, Best Shipping Software For 2019. You can also check out our complete list of shipping software reviews for even more choices.
We've done in-depth research on each and confidently recommend them.
Integrated VS Non-Integrated Solutions
Before we dive into the specific features you’ll want to look for in selecting a merchant account provider for your eCommerce business, let’s talk about the two different ways you can bring all these services together. We refer to the practice of selecting your services independently and tying them together yourself as a non-integrated approach to setting up your processing system. Maybe your merchant account provider’s preferred gateway doesn’t include a feature that you need. Or, perhaps you really like a particular online shopping cart and don’t want to go with a more generic alternative. If you’re going to go this route, you’ll need to be very confident that all the components you select are compatible.
The sales department for each company should be able to give you a firm answer on this issue. However, some sales agents have been known to blithely assure merchants that their products are compatible when, in fact, they either aren’t compatible or require some additional coding to get them to work together. This problem usually occurs when a merchant account provider employs independent sales agents to sell their accounts. We recommend that you check with the company’s customer service division rather than relying on the assurances of a sales agent.
Because the non-integrated approach can often lead to headaches for new eCommerce merchants, there has been a demand for a simpler approach. Under an integrated approach, your merchant account provider (or payment services provider (PSP)) provides you with a single product that integrates as many of these separate services as possible. These solutions are an excellent choice for a new eCommerce merchant, as you can be assured that everything will work together right out of the box. Providers offering an integrated suite of services may use their own proprietary services, pre-installed third-party products, or a combination of the two.
For beginning eCommerce merchants, Square (see our review) offers perhaps the most comprehensive integrated suite of services available today. Although Square is very popular with retail merchants, they provide everything you’ll need to run an online business as well. Other popular choices that are more specifically designed for eCommerce are Stripe and PayPal.
Choosing An eCommerce Merchant Account Provider
Of all the services you’ll need to run your online business, merchant accounts are, unfortunately, the most complicated to understand. There’s a lot of terms and jargon that you may not be familiar with, as well as a host of confusing options to choose from when selecting the provider that’s best (and most affordable) for your business. We’re here to help.
Read on, and we’ll walk you through the concepts you’ll need to understand. We’ll also explain the most common options regarding pricing and contract terms, and tell you which ones are best for which types of businesses.
Direct VS Third-Party Processors
Processing credit card transactions requires a tremendous investment in capital and resources, and only the largest credit card processors handle this task themselves. Most merchant account providers (and payment services providers) contract their processing out to one or more of the larger direct processors.
You might think that working with a large direct processor would be preferable to having to go through a third party. In truth, there are advantages and disadvantages to both approaches. A large direct processor (such as First Data) can offer a more comprehensive lineup of products and services designed to help you run your business, but you’ll often pay higher prices and be saddled with onerous contract terms if you sign up with them directly. On the other hand, third-party processors (such as Dharma Merchant Services, which uses First Data as its backend processor) can get you much lower rates and more favorable contract terms than you’ll get from a larger company if you sign up with them directly.
Another advantage of smaller, third-party providers is that they usually offer better, more personalized customer service. Many providers will now assign you a dedicated account manager who will be your first point of contact if you need help. This is a much better arrangement than relying on the impersonal service you’ll receive with a direct processor, where you’ll often find yourself talking to a different representative every time you contact the company.
Another important thing to consider is that account freezes, holds, and terminations are almost always the result of a decision by the backend processor, not your merchant account provider. Unless your provider is a direct processor, there’s little they can do in this situation except to contact the backend processor on your behalf and try to resolve the situation. See our article, How to Avoid Merchant Account Holds, Freezes, and Terminations, for more information on how to prevent this situation from happening to you.
Like it or not, the industry standard for contract terms is a fixed-length contract with an initial term of three years, an automatic renewal clause that extends the contract for one-year periods after that, and an early termination fee (ETF) that the processor will charge you if you break your contract by closing your account early.
We don’t like it.
This type of contract essentially forces you to continue doing business with your provider indefinitely unless you take very specific steps to close your account at the end of a contract term (and before it automatically renews). Early termination fees typically run between $200 and $600 and serve as a penalty to discourage you from moving to a different provider. Some merchant account providers go even further, including a liquidated damages clause in their contracts that can potentially cost you thousands of dollars if you close your account early. Although early termination fees and liquidated damages clauses are based on a flimsy legal argument regarding the anticipated amount of money the provider would have made if you had stuck to your contract, they’re essentially free money that your provider can collect without having to perform any services for you. Providers know this, and the most unscrupulous ones in the industry probably make more money from closing accounts than they do from the processing fees merchants would have paid if they had stayed with them.
As you might expect, these types of long-term contracts are extremely unpopular with merchants. Fortunately, the industry is starting to respond positively, and month-to-month billing with no early termination fees is becoming more and more common. Under this arrangement, you’ll be billed every month until you decide to close your account. You can do so at any time, although it usually requires 30 days’ notice to coincide with your billing cycle. You also won’t be charged a penalty of any sort for closing your account. Simply provide the required notice and return any equipment that you don’t already own outright, and you’re free.
You should also be aware that some providers will sign you up for a three-year contract, but waive the early termination fee. Don’t be fooled into thinking this is the same as month-to-month billing – it’s not. Although you won’t have to pay a penalty for closing your account, you’re still under a long-term contract. Your provider might continue to deduct monthly account fees after you close your account if you don’t follow the procedure specified in your contract to the letter. Although you’ll usually receive a refund in most cases, it’s a real headache to get this cleared up with your provider, and the best way to avoid this situation is simply to follow the proper procedure when closing your account.
Also, don’t be fooled by providers that advertise “no contracts” on their website. Your merchant account will always be covered by a legal contract of some sort or another. What they really mean is that you won’t have to pay a penalty for closing your account. You might also have true month-to-month billing, but the only way to be sure is to refer to your contract.
Lastly, you should be aware that some providers will require a rolling reserve when signing you up. This contract provision holds a certain percentage of your monthly funds as a hedge against you suddenly going out of business or closing your account. Rolling reserves are temporary, and you should eventually receive all your money. However, they can cause serious cash flow problems for a new business that’s just getting started. You’re most likely to have to deal with a rolling reserve if you’re a high-risk merchant. Unfortunately, many eCommerce businesses fall into this category for one reason or another.
Figuring out how much you’re going to pay to process a credit card transaction is one of the most complex aspects of understanding merchant accounts. In all cases, your provider has to deduct interchange fees, which have to be paid to the credit card associations (i.e., Visa, Mastercard, etc.). They’ll also charge their own fees that go to the processor and the merchant account provider, although this is usually only a small portion of your overall processing cost. How they determine your total processing cost will vary from one provider to the next. However, there are four common pricing schemes that are used by almost all providers:
This is the simplest method of charging for credit card processing. Every transaction is charged a fixed percentage, and there is usually a fixed per-transaction charge as well. The main advantage of flat-rate pricing is its predictability – you’ll always know in advance how much you’ll pay to process a given transaction. At the same time, flat-rate pricing can be very expensive in comparison to other pricing methods once your monthly processing volume reaches a certain amount (typically around $5,000 per month). Flat-rate pricing is frequently offered by payment service providers such as Square (see our review).
Interchange fees are confusing and complex, and vary from one credit card association to the next. Tiered pricing aims to eliminate some of this confusion by reducing the number of rates you pay down to just two (or three) rates: qualified, non-qualified, and possibly mid-qualified. Your rate quote will appear similar to a flat-rate quote, such as 2.60% + $0.25 per transaction. However, companies that use tiered pricing often quote only their lowest qualified rate, without mentioning that many (if not most) of your transactions will not be qualified and that this rate is only available to businesses that have a very high monthly transaction processing volume. Because rewards credit cards are almost always placed in the non-qualified tier, and most consumers today use these types of cards, your actual rate will be much higher than what you might have been led to expect.
Tiered pricing also makes it all but impossible to determine how much your provider is charging you over and above the interchange that they have to pass on to the credit card associations. In almost all cases, we recommend that you avoid tiered pricing, if at all possible.
eCommerce merchants, in particular, should steer clear of tiered pricing, as all their transactions will be card-not-present, and these types of transactions usually have the highest processing rates assigned to them.
If you’re looking for a transparent and affordable pricing plan, interchange-plus pricing is what you want. A typical interchange-plus rate quote will be in this format: interchange + 0.30% + $0.20 per transaction. While the interchange will vary considerably from one transaction to the next, you’ll always know exactly how much of a cut your provider is taking from your processing fees.
Interchange-plus pricing is almost always less expensive overall than tiered pricing, and all our top-rated merchant account providers offer it as a standard feature. Be aware, however, that interchange-plus pricing works best for merchants processing over $5,000 per month. Below that amount, monthly account fees can eat into your profits to the point where a simple flat-rate plan without any monthly fees will be more affordable.
Also called membership pricing, subscription pricing is a new variation of interchange-plus. In exchange for a (sometimes hefty) monthly subscription fee, you’ll pay only a flat per-transaction charge in addition to the applicable interchange rate for any transaction. For example, your rate might be interchange + 0% + $0.20 per transaction. This type of pricing plan can save you a significant amount of money in processing charges – in some circumstances. Remember that you’ll still have to pay that monthly subscription fee in addition to your processing charges. As a general rule, we’ve found that subscription-based pricing works best for relatively high-volume merchants who have a predictable, steady monthly processing volume.
Conversely, it’s not a good choice for low-volume merchants or new businesses that are just starting out. While only a few providers are offering subscription-based pricing at this time, it’s growing in popularity due to its potential to save you a significant amount of money. One of our overall favorite providers, Fattmerchant (see our review), offers subscription-based pricing exclusively.
In addition to charging you for processing your transactions, most merchant account providers also charge a variety of monthly, annual, and incidental fees. These fees will vary from one provider to the next, and often your fee schedule will be customized for your particular business. The most common fee you can expect to pay is a monthly account fee, which is designed to recoup the cost to your provider of maintaining your account. Monthly account fees cover things like account statements, access to customer service, and other behind-the-scenes costs that they are passing onto you. These fees are highly variable, but typically range from $10.00 to $25.00 per month.
eCommerce merchants can also expect to pay a gateway fee for the use of their provider’s payment gateway. This fee is usually around $25.00 per month, although some providers will let you use their proprietary gateway for free. You might also encounter an additional processing charge for each transaction processed over a payment gateway, typically an extra $0.05 per transaction. This charge is usually imposed if you use a different gateway than the one offered by your provider.
There are a number of other fees that providers commonly charge, including annual fees, PCI compliance fees, chargeback fees, and many others. Your account might also be subject to a monthly minimum, which might result in an additional expense for low-volume merchants. We recommend that you review your contract documents thoroughly before signing up with any provider, as these fees are disclosed in the fine print there. For a much more in-depth look at processing rates and fees, see our article, The Complete Guide To Credit Card Processing Rates & Fees.
Note that payment service providers (PSPs) typically do not charge any of the above fees. Instead, they operate on a pay-as-you-go basis, and the costs of maintaining your account are included in your processing fees. This type of arrangement is typically more cost-effective for small merchants processing less than $5,000 per month.
Starting an eCommerce business is never easy, but it’s far less challenging today than it was just a few years ago. Whether you opt for a payment service provider or sign up for a full-service merchant account, choosing the right provider is a critically important step in getting your business off the ground.
As we’ve noted above, merchants processing over $5,000 per month in credit/debit transactions will typically save money (and receive better service) with a true, full-service merchant account. Payment service providers such as Square (see our review) are a better choice for those processing less than $5,000 per month. Because payment service providers typically don’t charge monthly fees or impose long-term contracts, it’s easy to switch to a genuine merchant account once your business reaches this threshold.
For a more in-depth look at specific providers, check out our article, The Best Online Credit Card Payment Processing Companies, for an overview of our top choices for credit card processors for your online business.