The Complete Guide To Finding An Online Merchant Account

So you’re looking to take advantage of everything that online selling has to offer and enter the world of ecommerce? Good for you! Of course, this will require you to be able to accept online credit card payments. To do this, you’ll need an internet merchant account.

Sounds simple enough, right? If only! Not all merchant accounts are created equal. When choosing an internet merchant account for your ecommerce business, you’ll need to understand how a merchant account interacts with the other elements necessary for selling online, like payment gateways, payment processors, and shopping carts (not the kind you push around). Some services combine one or more of these elements, but it’s still important to distinguish these elements from one another.

Confused yet? Don’t worry — we’ll spell it all out for you!

What Is An Internet Merchant Account?

A merchant account is a specific type of business account into which your customers’ money is deposited after they use their credit or debit card to make a purchase from you. After these payments are verified, the money is transferred to your own business bank account, which is entirely separate from your merchant account. You have no control over the merchant account — it is merely the middleman between your customers’ money and your business bank account.

So, why include this middleman at all? Wouldn’t it be easier to simply accept credit and debit card payments directly and get the funds deposited directly into your business bank account?

Unfortunately, credit card processing doesn’t work that way. When your customer pays you, the transaction ultimately still involves two other major parties: the issuing bank (which grants the customer cards and is responsible for collecting any payments from the customer) and the acquiring bank (which requests and then collects payments from the issuing bank and then releases them to the merchant). Because the payment process is so complicated — the acquiring bank has to ask for the funds from the issuing bank, which has to verify that the customer has those funds available and then transfer them — the merchant account essentially functions as a holding space or even as a sort of line of credit.

Internet Merchant Account VS Traditional Merchant Account

Even though the number of internet merchants has grown and online sales are booming,  many traditional merchant account providers still focus primarily on in-person transactions and the tools those business owners need. But as an online merchant, your needs as very different. An internet merchant account, or online merchant account, is one that focuses on the tools and services needed for ecommerce.

At the very least this includes a payment gateway; some online merchant account providers may offer you an option for a shopping cart or online store. In addition, you should expect that your internet merchant account is compatible with leading software vendors in the ecommerce space, including shopping carts, subscription software, and marketing tools.

Merchant Account VS Third-Party Processor

When selecting a service to process your customers’ card payments, you’ll be choosing from between two different categories of services: direct processors (the providers of merchant accounts like the kind described above) and third-party processors (also called aggregators or payment service providers) like PayPal, Stripe, and Square.

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Setting up an account with a third-party processor is simpler and less time-consuming than setting up a internet merchant account. This is because third party processors don’t set you up with your own unique account. Instead, the third-party processor aggregates all of its merchants into one enormous merchant account.

What do these differences mean for you, the merchant? For starters, the merchant accounts offered by direct processors typically provide you with a higher level of account stability. This is due to the extensive underwriting and risk assessment you have to undergo to get your merchant account. With third party processors, you are subjected to very little underwriting beforehand. Therefore, the processor scrutinizes your activities much more intensely, making it more likely that you’ll experience an account hold or termination.

The flip side of this is the cost advantage of third party processors. These services typically feature flat-rate pricing and pay-as-you-go agreements. There are few (if any) monthly or annual fees to pay, and you don’t need to meet a monthly minimum in card transactions, making it easy to start taking credit card payments with no established business history.

With direct processors, you’ll be paying monthly and potentially annual fees, you’ll need to be processing at least $5,000 to $10,000 per month in card transactions, and the pricing is not normally flat-rate — your rates may vary depending on the nature of your business model and your industry. Many merchant accounts still require you to sign a multi-year contract. (That said, many of the best processors in the industry have done away with these 3-year contracts and early termination fees in favor of month-to-month agreements, and we recommend that you not settle for a multi-year contract until you’ve explored all your options.) Still, above that $10,000/month mark, merchant accounts do offer cost savings and as your volume increases you’ll qualify for even more discounts.

For more on third-party processors and how they stack up against traditional merchant accounts, check out these articles:

• The Best Online Credit Card Processing Companies
• The Truth About Third-Party Payment Processing

What’s A Payment Gateway?

We’ve established what an online merchant account is, so let’s move on to payment gateways.

While a merchant account is the account into which your payment processor sends your customers’ payments before they are transferred to your business bank account, a payment gateway connects your online store to your payment processor, facilitating your customers’ online transactions.

Payment gateways enable online transactions like so: the gateway integrates with your ecommerce store to securely capture the payment details for customer transactions. The gateway then routes that information to your payment processor or acquiring bank, which assumes control of the payment process. The gateway will then send an approval or decline message back to the merchant based on whether or not the processor/acquiring bank accepts the payment.

PCI Compliance With Online Merchant Accounts

What is PCI compliance, and how do you achieve it?

PCI compliance refers to a set of safety practices established by a council (the Payment Card Industry, or PCI) sponsored by the major credit card companies to ensure that a consumer’s payment information is secure when making a purchase using a credit or debit card. These standards, which apply to all businesses that accept credit and/or debit cards, are meant to standardize the securing, processing, and transmission of cardholder data.

If your online merchant account provider deems you to be PCI non-compliant, you’ll be subject to a PCI non-compliance fee of around $30 per month until your account is compliant. What’s more, if your non-compliance results in a data breach, you can be fined anywhere from $5,000 to $500,000!

In short, PCI compliance isn’t optional; it’s mandatory for any internet merchant. For most small businesses, that means being Level 4 PCI compliant. Level 4 is the PCI standard that applies to businesses up to a certain size — it’s essentially the lowest bar to clear. Larger businesses must comply with higher PCI standards, with Level 1 standards applying to both the largest businesses and businesses that have suffered a data breach.

Most third-party processors handle the entire process of PCI compliance for you, but with an internet merchant account, you will be required to handle at least some paperwork. You’ll want to make sure your provider offers PCI compliant software. Ideally your provider should also offer assistance with, or at least guidance for completing, quarterly network vulnerability scans and Self-Assessment Questionnaires (SAQs). Very capable online merchant accounts will offer features that can reduce your PCI scope — that is, reduce the workload for maintaining PCI compliance.

Some PCI best practices are no-brainers. For instance, you don’t want to store your customers’ card data on your own hard drive or server, you should never use default passwords, and you’ll need to use a firewall on your network and computers. There’s more to PCI compliance than these obvious measures, however. For a detailed explanation of what PCI compliance means for your business, I highly recommend reading our comprehensive article on the subject, The Quick Guide To PCI Compliance For Small Businesses.

How Much Does It Cost To Open An Online Merchant Account?

When choosing a merchant account, it’s important to know the different pricing models offered by payment processors:

• Flat-Rate Pricing: This pricing model has the advantage of being predictable. You’ll pay a fixed rate for each transaction, making it easier to predict your processing costs. While you’ll usually pay more on a per-transaction basis than with other pricing models, you typically probably won’t have to pay monthly fees unless you opt into software services. You’ll find third-party processors like PayPal, Square, and Stripe use this pricing model, but occasionally some internet merchant accounts do as well. To learn more about flat-rate pricing, check out our flat-rate credit card processing explainer.
• Interchange-Plus Pricing: Also known as cost-plus pricing, interchange-plus pricing is the pricing model preferred by Merchant Maverick. Why? Because it’s the most transparent model and it makes rate comparisons between processors easy. With interchange pricing, the processor passes on the interchange fees (fees charged to the merchant’s bank account and paid to the bank that issued the card) and assessments (fees paid directly to Visa or Mastercard etc.) while charging a small markup above that (often a percentage and a flat fee). Check out this article for more on how interchange-plus pricing works and why we prefer it.
• Membership Pricing: This is the pricing model used by subscription-based payment processors like Fattmerchant and Payment Depot. Under this pricing model, you’re charged a single monthly subscription fee instead of the assortment of fees other pricing models feature. You’ll also likely pay a flat fee of between $0.08 and $0.15 per transaction as well as interchange fees. Higher-volume online merchants can find themselves saving money under this pricing scheme.

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• Tiered Pricing: Tiered pricing is an older pricing model favored by very large online merchant account providers and sub-par companies. We don’t recommend it. All transactions are grouped into two or three tiers of transactions, ranging from the lowest-priced transactions to the highest-priced transactions. Essentially, the problem with tiered pricing is that processors can categorize transactions assumed to be in a lower-priced tier as higher-priced transactions, thus charging you more and leaving you little recourse. You should avoid tiered pricing arrangements.

For most small businesses, using a third-party processor with flat-rate pricing like Square or PayPal may be more affordable than using a full-service online merchant account. Of course, this entails a much greater risk of having your account frozen or terminated, which is, in itself, a very costly thing to happen to any business.

One thing that affects what your internet merchant account will charge you is the fact that CNP (card not present) transactions, including online purchases, cost more to process than do in-person transactions. This is due to the fact that the chance of chargebacks and fraud is higher with transactions where the card is not present, and this is factored into the cost of processing the payment.

Other fees you may (or may not) have to pay include PCI compliance fees, payment gateway fees, and fees for ACH acceptance if you want to offer customers the ability to pay with their bank accounts in addition to cards. To learn more about the complex and relatively opaque world of internet merchant account pricing, read through our Complete Guide To Credit Card Processing Rates & Fees.

Features To Look For In An Internet Merchant Account

Let’s go through some of the features that may be included in your internet merchant account package.

Included Gateway

When you use a third-party processor, a payment gateway is typically included in the service. With direct internet merchant accounts, you may have a choice of several gateway options depending on exactly what features you need. Authorize.net is one of the most widely available (and widely compatible) payment gateways, but it’s not the only option by any means. In fact, some internet merchant accounts offer their own proprietary gateway to ensure an absolutely seamless experience.

Some providers will include the gateway as part of your standard online merchant account fees; others will tack it on as a separate charge. And some internet merchant accounts might charge a fee for a gateway only if you opt to use something other than their proprietary product.

This variance can be frustrating, but a gateway is simply not optional for online merchants. You should look for a internet merchant account that offers a payment gateway with all of the features you need for the best price.

Multiple Payment Methods

We’ve established that you’ll want to be able to accept credit and debit cards. However, there are other payment methods your customers may want to use, and you want to be able to accommodate them. From mobile wallets like Apple Pay on the web to ACH payments, the more payment methods your payment gateway (and payment processor) supports, the better.

Global Payment Support

With some merchant accounts, you can only accept payments in USD. If you expect to be able to attract any international business, that’s obviously not going to be good enough. Thankfully, many merchant account providers can set you up with a multi-currency ecommerce merchant account so you can expand your global reach. Just be aware that you’ll likely pay currency conversion fees (if they aren’t passed to your customers). PayPal and Stripe do very well in this regard, and Stripe actually supports many localized payment methods across Europe and Asia.

As an added note — some processors offer a feature usually referred to as dynamic currency conversion or localized currency displays. This means that your website will automatically convert the price from USD (or your default currency) to whatever currency is most common in the customer’s region. This can improve the shopping experience for international customers and potentially increase your sales.

Included Shopping Cart (Or Other Software)

An online shopping cart integrates with your website to facilitate ecommerce. The shopping cart enables your customers to look through your available products, select different options for each product (size, color, etc.), select the quantity of the products they want to order, and more.

Most merchant accounts can be integrated with major shopping carts, but if you can find one that includes a good shopping cart already, that’s even better, as you’ll be saving money.

Other handy features to look for include a customer credit card vault that allows you to securely store your customers’ card information while keeping it off your own equipment and subscription tools that let you create and manage customer subscriptions. Stripe is an example of a processor with built-in subscription tools and a card vault. However, you can also opt for a third-party provider to get recurring billing functions.

Developer Tools

Processors with integrated developer tools, like Stripe, allow developers to use APIs (application programming interfaces) to integrate the payment platform using a variety of different programming languages. For the business with developer talent, integrated developer tools can help you build custom solutions for your ecommerce outfit. Third-party processors typically excel in this area, but online merchant account providers can hold their own, and many gateways offer tools to help with custuomization as well.

Customer Service

Good customer service and availability is critical in an internet merchant account. Your ability to do business is reliant on all your systems working correctly 24/7, so reliability and quick response times are crucial. Do some research on  providers to weigh the experiences of other online merchants when dealing with any issues that pop up, and make sure that the available support channels jibe with your preferences.

How To Choose The Right Online Merchant Account Provider For You

That was a lot to take in, wasn’t it? If you’re feeling overwhelmed, don’t worry! Merchant accounts are Merchant Maverick’s original specialty, and we’re here to help you delve into the nitty-gritty of merchant account pricing, features, and provider options.

Here are some links to help you learn more about merchant account options, features, and more:

• The Best Online Credit Card Payment Processing Companies
• How To Choose An eCommerce Merchant Account
• The Complete Guide To Online Credit Card Processing With A Payment Gateway
• How To Accept Credit Cards Online