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Considering Opening a Merchant Account? Read This Article ...

Posted by Tom Lombardo | Tue, Nov 04, 2014 @ 10:00 AM

Merchant AccountWe know why you’re here: you’ve been researching merchant account and payment processing options and have become so confused that you just want someone to sum up the “bottom line.”

Given all the legal wrangling between the credit card processing companies and a number of huge retailers, it can be difficult to discern what’s changed, what hasn’t, and which of those things matter to you.Is Duopoly as Bad as Monopoly?

Let’s dismiss the confusion by clarifying it briefly. It began back in 1996 when Wal-Mart and other retailers sued Visa and MasterCard, claiming that they controlled the credit card payment processing market and drove up fees in violation of anti-trust laws. Needless to say, as soon as the courts got involved everything slowed down, so no trial was set until 2003. Days before appearing in court MasterCard reached an out-of-court settlement, and two days later Visa did too. Both companies agreed to reduce their fees and to pay billions in damages.

Retailers still grumbled because their “interchange fees,” which they paid to the credit card processors and which even today include a per-transaction fee and a fee equal to up to 4% of the value of the transaction, fell into several different categories with widely varying percentages. Debit card charges were different from reward card charges and both of them were different depending on what kind of merchant was running the transaction. According to the Government Accounting Office, in 2009 Visa had 60 and MasterCard had 243 different rate categories.

This made it very difficult for a merchant to predict how much his interchange fees would come to in any given month – a significant concern, since for many merchants these fees are their second largest expense after employee wages, often exceeding even rent.

And annoyingly, merchants were not allowed to require a minimum purchase amount to use a card, so for a small purchase the fee would eat a significant portion of their profit. They were also not allowed to charge the interchange fee separately, which may have reduced prices and perhaps increased sales to people paying with checks or cash. As the conflict between merchants and the credit card processors became more acrimonious, these policies became particular sources of ire.

Yes Virginia, There Is a Santa Claus

Then in 2006 MasterCard went public and in 2008 Visa did, too, with its stock surging 28% in what was at that time the biggest IPO ever. Since then each company’s stock has performed extremely well.

One reason may be that after they went public they made their merchants pay more and more in interchange fees, as you can see in this chart from the Government Accounting Office’s 2009 report on the topic:

Changes in Interchange Fee Costs

But regulators didn’t address the issue until the Federal Reserve and Congress handled the 2008 crisis by bailing out most major banks. Widespread outcry against providing vast amounts of essentially free credit to institutions that in turn charged “predatory” interest on credit cards issued to the public resulted in the 2009 CARD act. It was supposed to reform the industry but since it was passed with overwhelming bipartisan support you would be correct in guessing that it was mostly window-dressing that did little to reform credit card practices, other than capping consumer late fees at $25. It did not cap or regulate the fees merchants pay to credit card companies.

A year later and also in response to the crisis came the Dodd-Frank Wall Street Reform and Consumer Protection Act, which included the Durbin Amendment, specifically aimed at the merchant fees  charged by credit card processors. This time the law actually had teeth. First, it allowed merchants to institute a minimum-charge policy for credit card purchases that could be as high as $10. Second, it allowed merchants to charge the interchange fee separately.

And it directed the Federal Reserve to set a cap on how much the interchange fee could be, with the guideline that it should set it around $0.12 plus a percentage of the transaction.

The Fed published Congress’ fee guideline and asked for public input, and 11,000 comments poured in. It took them about a year to reach a conclusion that was –no surprise here – widely considered to be a give-away to the banks.

Debit card fees were capped at $0.21 – almost twice what Congress suggested – plus 0.05% of the transaction’s value, and these regulations applied only to banks with over $10 billion in assets. Pre-paid debit cards (which usually means gift cards) were not regulated at all. And no cap was put upon credit card interchange fees.

If You Want It Done Right…

Merchant Banking AccountU.S. merchants paying fees sometimes as high as 4% of their sale wonder why Visa and MasterCard are able to offer the exact same service in France for 0.22% of the transaction plus 10 Euro cents (about 8 U.S. cents).

Perhaps with this sort of comparison in mind and not long after the Federal Reserve set its Durbin Amendment rules, Wal-Mart, among others, dropped out of the multi-billion dollar out-of-court settlement so it could sue Visa on its own, claiming it suffered “enormous damage” from 2004 through 2012 because of Visa’s pricing practices.

Wal-Mart also helped found the Merchant Customer Exchange (MCX), whose “owner-members include leaders in the big-box, convenience, pharmacy, fuel, grocery, quick- and full-service dining, specialty-retail and travel categories” that operate more than 110,000 locations and annually process more than $1 trillion in payments. Target, ExxonMobile, Best Buy and Dicks Sporting Goods are all in, as are dozens of other mainstream brands – sixty-eight altogether.

As you may have guessed, they have every intention of competing with Visa and MasterCard with their own service.

They’ve already developed a phone app, cleverly named “CurrentC” with an ingenious innovation that will allow it to compete with ApplePay and GoogleWallet. Whereas both of those payment methods work only on phones with “near-field communications” capability – and both rely upon Visa and MasterCard – the CurrentC app works on any smart phone, producing a competitive level of security by displaying a unique QRC code that the merchant scans for payment. (Whoops – CurrentC has already been hacked!)

Throughout 2014 the group plans to test its system at select locations in preparation for a nation-wide roll-out in 2015. 

What About Now?

We don’t have a crystal ball either so we can’t predict how Wal-Mart’s suit or MCX may impact the credit card payments space, other than to observe that competition usually drives down price and drives up quality.

When evaluating payment processing options, it may be best to keep as many options open as possible, and to avoid making too long-term a commitment since the environment may change in the short term.

The How To

Opening a Merchant Account

Regarding the merchant account, in common usage a “merchant account” is one specifically for accepting payment cards, and while you once needed one to accept credit card payments that is no longer the case. Credit card readers from Square, PayPal and others require only a checking account and a Social Security Number (SSN) to enable deposits from credit card purchases.  

That may be adequate for a solo entrepreneur, but generally speaking a business owner will want to deposit payments into a merchant account separate from her own personal banking accounts.

Merchant accounts are associated with the business’ Employer Identification Number (EIN) instead of an individual’s SSN. You can get an EIN for your business for free. Besides the obvious security benefit of keeping your assets separate, the merchant account usually provides significant bookkeeping advantages and will almost certainly make filing your taxes easier.

As your business grows and as you write more checks as a business, your bank may steer you into a “business account,” a different type of account for which banks often have special “demand deposit accounting” systems and whose users typically must provide detail and balance reporting to adhere to stricter regulatory oversight. Often business accounts include perks not offered to consumers, such as full or partial account reconciliation, Automated Clearing House (ACH) transfers, wire transfers, controlled disbursements, and other services.

You will also need a business or merchant account if you want to accept checks made out to your business name, which may be a critical customer service to provide while the payments industry goes through this growth spurt. If you can imagine how difficult it must have been for a merchant to parse 243 payment categories, you have an idea how consumers feel when they peruse the ever-expanding array of digital payment options and the spectacular instances of fraud they seem to invite.

A lot of people opt for simplicity as a sure path to security. Over the course of the recession one in five people increased their usage of checks, especially for purchases over $100, and when it comes to payment control few methods can compete with checks. A handwritten and signed commitment to pay leaves no room for confusion, which is one reason checks have the highest rating for bookkeeping accuracy.

Accepting checks securely and guaranteeing the revenue from them can not only help you close those sales, it can also be one of the most affordable payment types you can accept. Let us explain the details. 

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Topics: Retail

Written by Tom Lombardo