What are chargebacks?
A chargeback is the process in which a customer contacts their credit card issuing bank to dispute a charge on their credit card bill. All credit card holding patrons have the right to initiate a chargeback as it is part of the contract between the issuer and card holder. The chargeback process was established to protect card holders from the liability associated with stolen credit cards.
The chargeback process begins with the customer contacting their bank to dispute a charge. A dispute may arise from any number for reasons, as few are - an unknown or unauthorized charge, product delivered did not match what was advertised, the list goes on and on. Once a chargeback has been opened with the card issuing bank an investigation take place. The bank will call the merchant involved with the charge to determine the nature of the issue. In the case where the charge is disputed due to an unauthorized charge the merchant will be given the opportunity to prove that the charge was authorized. Typically the merchant’s best defense is a signed sales receipt or credit card authorization for the transaction. If the signature on the sale receipt or authorization matches the signature on file with the bank the merchant will usually win the dispute.
Card holders or customers have up to 18 months from the time the charge shows up on their statement to chargeback the transaction. So, it is VERY important for merchants to hold on to their sales receipts and authorizations for 18 month from the time of the sale.
Shopping cart compatibility, will any Internet merchant account work?
The short answer is no. For an Internet merchant account to be compatible with a specific shopping cart, the merchant account must utilize a compatible payment gateway. So, to simplify this, the shopping cart must be compatible with the payment gateway and the payment gateway must be compatible with the merchant account.
The job of the payment gateway is to form a bridge between the website’s shopping cart and the merchant account. The payment gateway will encrypt and transmit the customer’s credit card information securely to and from the merchant account.
Shopping Cart Compatibility Worksheet – Tips for getting a shopping cart set up.
My business already has a merchant account. You already have a merchant account and are looking to enable a web based shopping experience.
- First, you will need to determine if your merchant account supports internet based transactions. If you have a retail store and have a merchant account set up, you will need to apply for another account that will allow internet transactions. If your current account is a MOTO (mail order, telephone order) account, you can typically turn on internet transactions without setting up a new account.
- Next you will need to ask your processor “What payment gateways are compatible with my account?”
- There are fees associated with the payment gateway so if you have multiple options you will want to investigate the cost and functionality associated with each one. Payment gateway functionality.
- Once you have selected the appropriate payment gateway, you will want to determine the shopping carts that are compatible with that gateway.
- Last, you will want to select the shopping cart that has the features you are looking for.
My business has a website and shopping cart and we’re looking for an Internet merchant account. You have already built your website and have selected a shopping cart or have built a custom shopping cart.
- The first question is, what kind on shopping cart do you have? A commercially available pre-built shopping cart or a custom shopping cart?
- If you have a commercially available pre-built cart you will need to investigate merchant service providers (processors) that offer a payment gateway that is compatible with the shopping cart. If the processor has a compatible payment gateway available it will also be compatible with the merchant account.
- If your shopping cart is custom built you will need to investigate merchant service providers (processors) that have a payment gateway with an open and fully documented API (application programmer’s interface) available.
My business has neither a shopping cart nor an Internet merchant account. You are at the beginning phase of establishing an eCommerce site.
- You will want to select a merchant service provider (processor) that offers a payment gateway that is compatible with multiple pre-built shopping carts and offers a open and fully documented API (application programmer’s interface). More information on starting an ecommerce website
What kinds of credit card processing solutions are available?
Determining the right credit card processing solution is easier than you might think. There are quite a few credit card processing solutions available and selecting the right one depends upon how your business is set up to accept payments.
Credit card processing solutions can usually be grouped into one of 4 solution categories.
- Retail Account
- MOTO Account
- Internet Account
- POS Account
A retail account
is reserved for any business that has a physical location at which the customer visits to purchase good and services. This is traditionally thought of as a brick and mortar establishment. The important factor that drives qualification for a retail account is 80%, or more, of the payments accepted by the business need to be swiped through a credit card terminal. The rates for a retail location are the lowest of all the solutions.
A MOTO account (mail order, telephone order) is reserved for businesses that conduct the majority (21% or greater) of the payment processing via the telephone or mail. The rates for a MOTO account will be slightly higher than a retail account. For more information please see - Why are rates higher for Internet, Mail and Telephone order charges?
An internet account is selected for businesses that conduct sales over the internet. An internet credit card processing solution processes payments from the businesses website in real time. An internet account typically comes with a virtual terminal that allow for one-off payments to be transacted from a web-based terminal. There are also a number of other features available through the virtual terminal. The rates for an internet account are usually the same as a MOTO account.
A POS account
(point of sale account) is a credit card processing solution
that works with a POS hardware solution. A POS hardware solution includes a cash drawer, scanner, receipt printer, credit card swipe device and many other options that manage sales and inventory at the business location. A retail merchant account
is typically integrated into the POS system via a middleware solution such as IC Verify or PC Charge (to name a few).
How long does it take to get a credit card processing account set up?
The time it takes to get a credit card processing account set up depends on a few factors but can usually be set up in as little as 24hrs to as long as 2 weeks. The factors that determine the length of time it takes to get a credit card processing account set up are as follows and generally revolve around risk:
- Type of business
- Industry of the business
- Requested account volume
The type of business affects the time-line of approval on a credit card processing account. Retail businesses are much quicker to set up than on-line business. This is due to the fact that a retail business is less likely to disappear over night. Therefore there is less risk associated with a retail location making it easier and quicker to set up.
The industry of the business can have dramatic effects on the length of time it takes to get an account set up. The more risky the businesses industry the longer the processes takes. This is due to the fact that additional scrutiny in need to determine how the business is functioning in the industry. Traditional high risk accounts include; credit consolidation, continuity, debt reduction, porn, gambling, bail bondsmen etc.
The requested account volume is the total dollar amount of credit card sales the business is asking for on a monthly basis. The higher the requested amount the more analysis is needed to determine if the business can cover the line of credit and therefore lengthens the time needed for approval. For more information please see why is a merchant account a line of credit?
The businesses financials are also a determining factor in the length of time it takes to get a credit card processing account approved. If the business has strong financials is speeds up the process dramatically.
For more information of setting up a credit card processing account please refer to our guide on how to avoid costly mistakes when setting up a merchant account.
*Image provided by Andres Rueda
Why are merchant account rates higher for Internet, Mail and Telephone Order transactions?
The rates charged for credit card transactions vary based on the perceived risk associated with the transaction. The transaction is perceived to be more risky when there is less control over who is initiating the transaction. Transaction risk has been established by the credit card associations (Visa, Master Card, Discover, etc) and can be grouped into three categories:
- Card present, person present transactions
- Keyed transactions
- International and corporate card transactions
Card present, person present transactions, also known as swiped transactions, represent the lowest risk. The risk is lower because the merchant has more control over the customer initiating the transaction. The merchant can check the customer’s identification to make sure it matches the credit card being used. This greatly reduces the probability that the transaction is fraudulent.
Now, the rates for internet, mail order and telephone orders fall into our second category, keyed transactions. When a credit card transaction is completed via the internet, mail or telephone the order must be keyed into the credit card terminal by the business. The credit card is not present at the time of the transaction and therefore the identity of the customer placing the order can not be verified. Due to the fact that there is less control over the customer, the perceived risk is higher and therefore the rate is higher.
The last category, international and corporate cards represents the highest perceived risk. This is due to the fact that international cards are unable to be address verified leading to higher fraud and corporate cards have multiple authorized users also leading to higher instances of fraud.
If you would like help opening a merchant account please contact our friendly staff at (800)917-8026 and we can get you set up quickly and easily.
What is a merchant account?
A merchant account is a financial vehicle that lets you accept payments from someone else. The three important factors to understand about a merchant account are as follows:
A merchant account is….
- Underwritten by a financial institution
- Allows you to accept payments
- Is a line of credit
A merchant account is underwritten by any number of financial institutions. Most major banks have the capability to set up a merchant account. However, most banks will actually refer the account to a licensed merchant service provider (MSP) or independent sales office (ISO). The reason; most banks see their core competency outside the merchant services area and will refer your business to an expert (for a commission, of course). An MSP/ISO is an institution that establishes relationships with a network of credit card issuing banks and credit card associations (Visa, Master Card, AMEX, etc) for the purpose of processing payments. In addition most MSP/ISO organizations offer many other services such as fraud detection, fund remittance, detailed reporting and customer service.
A merchant account allows you or your business to accept payments. Payment acceptance can be in the form of credit and debit card payments, automated clearing house (ACH) payments, and electronic check payments.
A merchant account is a line of credit. The reason a merchant account is a line of credit is a function of the liability that charge backs create.
If you are considering opening a merchant account please refer to – 7 items to consider with an affordable merchant account.
*Image provided by Andres Rueda
Why is a merchant account a line of credit?
- The way merchant accounts are underwritten
- Charge backs
How is a merchant account underwritten?
When a business applies for a merchant account they indicate the volume (dollars processed via credit card) they would like to be approved for. For our example we’ll use $50,000 a month as the volume being applied for.
The bank/processor underwrites the account much the same way banks underwrite any loan application. A credit risk profile is generated based on the volume requested and ultimately determines whether or not the business is approved for the merchant account.
It can be confusing as to why a “credit” risk profile drives a merchant account approval. After all, the business is collecting funds directly from the customer who purchases good and services with their credit card. Credit risk is between the credit card issuer and customer. Why is the business scrutinized for credit liability for the customer’s use of a credit card? In order to answer this question it’s important to understand the concept of a charge back.
What is a charge back?
A charge back occurs when a customer contacts their credit card issuer and disputes a charge on their statement. When this occurs the card issuer refunds the money to the customer and then investigates the claim to determine if the customer deserves to keep their money. All customers have the ability to institute a charge back on any credit card and on any purchase that has occurred over the previous 18 months.
Now, let’s relate this back to application for $50,000 a month in processing volume and why the merchant account is a line of credit. When the business is approved for the merchant account they have the ability to collect $50,000 a month in credit card payments from their customers. Funds collected from customers are typically deposited the next day into the businesses bank account. So at the end of the month the business has collected $50,000.
Now, worst case scenario, all customers charge back the following month. The bank refunds the money to the customers and is on the hook for that money until the investigation completes. At that point if the customers “win” the bank must recoup the funds from the business. The $50,000 becomes a line of credit extended to the business on behalf of the bank.
So in conclusion, a merchant account is a line of credit because of the credit liability associated with possible charge backs.
If you would like help opening a merchant account please contact our friendly and helpful staff at (800)917-8026.