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Important Things to Know Before Choosing a Merchant Account Company

Rebecca Graham
Rebecca Graham | Contributor

Let’s be honest. Cash and checks are falling out of use. People are using their cards, especially their credit cards, more often than not to make their purchases, whether those purchases be a quick trip to the grocery store or large corporate needs. And that isn’t likely to change; if anything, this pattern is likely to continue and expand, which means your business needs to be able to accept credit card payments as a primary form of payment. And this is why you may need a merchant account: a merchant account is a bank account that allows businesses to accept credit cards. Before your company can accept any kind of credit card payment, you must first open a merchant account. While this can be intimidating, we are here to help you choose the best merchant account provider for your needs. Here are some things to consider.           

Point of sale systems

If you are looking into a merchant services provider, you have probably also looked into point of sale options. You may be preparing to choose a point of sale (POS) system or you may already have one. Regardless, you need to understand which POS systems work with which merchant accounts. In choosing which merchant services company you work with, keep this in mind. Whenever buying this technology, make sure you buy it upfront rather than lease it from a merchant account company or a POS company. Leasing can lead you to paying far more than the hardware is worth. 

Remember, too, that you have a variety of software and hardware options. Some recent systems offer touchscreens, which provides a more streamlined experience. Some systems use a cloud-based system. Additionally, consider mobile and wireless technology; even though it is also fairly new, it has its own benefits since it is cost-effective for small to mid-sized businesses with limited needs. No matter what you choose, it is important to have up-to-date hardware when opening your account. Hardware today needs to support EMV (chip technology, e.g. EuroPay MasterCard, Visa). 

Once you narrow your options according to what is compatible and reasonable for your company, consider your business goals: How much inventory information do you need from your POS? How much are you willing to pay?  How much should you pay according to your business’s revenue? How easy is the software and hardware to use? 

Pricing models

There are three different types of pricing models for credit card processing: flat rate, tiered pricing, and interchange plus. Know which model works best for your company so you can find the merchant account service best equipped to service your customers. And make sure you know your company’s pricing model before you choose payment processing services. Also, be aware of your business type and if it is considered to be high risk or not because this will affect the pricing of your merchant account. High-risk factors will often depend on if you have a small or large business, and if you have a lot of possible chargebacks and returns. So, make sure to have your merchant account provider break down the details for you and where you fall in the pricing model options. And here is a breakdown of the three types of pricing models. 

Merchant services providers like PayPal have a flat rate model, which is the sometimes considered best for smaller companies that generate relatively low revenue totals each month. However, If you choose to use a flat rate model, make sure you do your research. Because flat rate is such an appealing option for many small businesses, some merchant accounting companies disguise their rates as flat rate models, causing you to pay more money than you anticipated. 

Tiered payment processing pricing is based on a qualification system that determines which rate tier a merchant's transaction qualifies for. Tier pricing appeals to some merchants because it requires minimal time. However, it generally results in much higher processing costs overall, and you receive few to no details on what exactly the merchant is paying for. 

Finally, an interchange plus pricing model allows merchants to pay only two fees: a flat fee, regardless of the wholesale processing rate, and a small transaction fee. This tends to be geared toward larger companies bringing in a fair amount of revenue, but recently, the market for merchant accounts is more competitive, so small businesses can get accounts on this pricing structure. 


When budgeting for a merchant services account, make sure you understand all of the fees involved. While some merchant account providers do not charge added feeds, many companies do charge fees outside of the typical monthly charge. Carefully researching and asking questions is the key in this industry. Some companies may have their transaction fees and other fees openly stated on their websites, others may not. Some companies may have aspects of the price listed, but not all of the information you need to accurately anticipate the costs you should expect. This is not to say that all companies intentionally withhold pricing information, but you should be aware that some companies — as with all industries — are less transparent than others. Because of this, don’t be afraid to ask a lot of questions and research each company before committing to a  merchant service provider. It is better to over prepare than to risk choosing a sub-par company or one that is ill-equipped to service your customers. Some of the different types of fees you may encounter include the following: 

  • Discount rate—the percentage charged on each transaction, which depends on the type of credit card and the type of transaction.
  • Transaction fee—a charge for processing each individual transaction, which depends on the type of transaction.
  • PIN debit transaction fee—a fee when someone using a debit card must enter their personal identification number (PIN).
  • Monthly minimum fee—when creating an account, you usually agree with the merchant service provider on the number of transactions you will generate each month, and if your monthly fees do not meet that minimum, you must pay the monthly minimum fee. 
  • Application/setup fee—a one-time, upfront charge for setting up your merchant account.
  • Annual fee—the amount charged by a processor for your merchant account on an annual basis.
  • Cancellation or termination fee—if you cancel or terminate your merchant account before the date agreed upon with your services provider, he or she will most likely charge this fee. Some companies allow room for negotiation, especially if the cancellation deals with unresolved problems or issues that the provider cannot resolve. 
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Merchant Account Services Frequently Asked Questions

Should I use a flat rate, tiered pricing, or interchange plus pricing model?

Flat-rate pricing is the easiest of the billing platforms.You are charged one rate, regardless of transaction size or type, for all type of card transactions. In honest flat-rate systems, you should only be charged a small fee per transaction. Whether or not flat-rate pricing is most beneficial to you depends on what that flat rate covers. To make that decision, you would need a breakdown and analysis of your sales.

Tiered pricing was introduced to help merchants process their credit cards in simple ways, but many credit card experts criticize it because it doesn’t provide details or flexibility on credit card processing fees. Also, it is common to have what is called mismatching. For example, an inexpensive debit card could be billed to the merchant using an expensive rewards card rate transaction. This mismatching is legal and happens often.

Traditionally, only businesses with lots of credit card sales — usually $25,000 or more — could use interchange plus, but recently it has become more accessible to companies of every size. In interchange plus, you only consider two rates: a consistent, flat fee, regardless of the wholesale processing rate, and a small fee per transaction. While this system sets you up for competitive pricing, you must still have a competitive quote.

What factors will companies consider when I apply for a merchant account?

Anytime you try to open a merchant services account, the company providing the service will consider your company in terms of the following:

  • Your average purchase transaction amount
  • The types of credit/debit cards that you accept
  • The types of products or services that you are offering the consumer
  • Your projected monthly sales volume
  • Your business reputation, including things like the age of your business and your business credit rating
  • The percentage of your online transactions

What questions should I ask merchant account companies before agreeing to work with them?

Always look for transparency in the companies you consider working with. Companies who avoid giving you information concerning pricing, fees, or general services are more likely to deal dishonestly with you. Here are some questions you should ask:

  • Do you offer 24/7 customer support?
  • Is your payment processing compatible with our system?
  • Could I process online and offline transactions?
  • Do you offer fraud protection services and what are they?
  • What contracts are there and for how long are those contracts?
  • Are there cancellation fees and what are they?
  • Are there different rates or fees associated with different types of cards? Different types of transactions? Online vs. offline transactions?
  • When I refund a transaction, do I receive any of the original fees refunded?
  • What fees do you charge each month?
  • Is there a monthly minimum processing requirement or fee?

What is the difference between payment gateway and merchant account?

Many people feel confused about payment gateway and merchant accounts and what they are, or are not. Here is the simple answer for what they are, how they work, and how they apply to your business:

  • Merchant accounts are contracts between a retailer and a credit card processing company that allow your business to accept multiple forms of payment, including credit card and debit card payments.
  • Payment gateway is used to facilitate online transactions and get them approved, and it is the first place the transaction goes when a customer submits an order online. The online transaction happens via a payment form on your website or through an integrated shopping cart. Once the customer submits an order, the encrypted payment travels from the payment gateway to the payment processor and eventually reaches the customer’s credit card issuer so that it can be authorized.
  • Merchant accounts help to reconcile the funds you receive from successful sales. All approved payments are paid out to you through your merchant account. This is the last stop before you receive the funds in your normal business bank account.

What are the best merchant account service companies?

When choosing a company to work with, there are many things to consider, but don’t stress out. More than anything, you should consider the needs of your company in choosing the best merchant accounting service. Of course, there will be constants in what to consider, such as company transparency, pricing, quality of service, customer care, and other similar considerations. Consult merchant account company ratings and compare their qualifications before making a final decision. 

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