Month: June 2016

Local banks offer online merchant accounts that are tailored for big companies. The high cost of online merchant accounts is a strong disincentive for smaller entities to use the service.

Below is a quick examination of the fees charged by local banks for online merchant accounts.

Setup Fee

The charge ranges from USD 100 to USD 750 to set an account.

Security Deposit

The security deposit could be a minimum of $25,000. 

Usage Fee Structure

The usage fee structure refers to what merchants pay to use the service. The fee structure comprises a discount rate, a transaction fee and a monthly charge. The usage fee structure of three local banks are examined below.

Discount Rate

This is the interest rate charged by the bank on the credit card payment amount. This rate is assessed by the bank for each merchant. The higher the assessed risk the higher the rate.

Fee per Transaction

A fee charged per transaction. Normally, the fee is stated in USD cents.

Monthly Fee

This is a general fee charged per month regardless of any transaction activity. The fee is a USD dollar amount.

Fee Structure Applied

This is an example of the monthly sales and transaction volume for a merchant. Based on these figures the average monthly fees paid is calculated and an annual cost estimated.

A discount rate of 3.9% is used. In other words, it is assumed that all banks assess the same merchant at the same risk. However, this is not always the case.

Looking at the discount fee and the fee per transaction, there is no real difference in cost amongst the banks (based on the assumption that all banks assess the same merchant as the same risk).

However, the monthly fee makes a big difference in what is paid. Depending on the bank and total transaction value the monthly fee can account for over 50% of the fees paid.

Chargebacks are unavoidable once you accept credit card payments. Chargebacks are similar to refunds where a customer returns an item and the business refunds the purchase amount. However, there are major differences between the two.

The Banks – Judge and Jury

A business has the discretion to accept a return or not and the leeway to negotiate a cash refund or an exchange with the customer. Under a chargeback, the customer makes a claim against a purchase but the business does not have the final say. The banks decide if the purchase amount is returned to the cardholder. In the majority of instances, it is.  

Higher Claims. Higher Losses

Compared to refunds, chargeback claims are higher due to increasing fraudulent transactions associated with online transactions. The potential for higher claims leads to the potential for higher losses.

Account Restrictions

The typical chargeback rate per month is less than 1% of transaction volume. That is the number of chargeback transactions divided by the total transactions for a period. High chargebacks over consecutive periods could lead to restrictions on the merchant account or closure.

High Cost

Merchants pay a fee for each chargeback. The chargeback fee varies depending on the financial institution. In addition, the merchant may incur an additional administrative cost to provide supporting information to the bank to investigate the claim.

Longer Resolution

A refund may take minutes or a few days to settle. However, the chargeback process can take 6 weeks to 6 months.

The merchant is at a disadvantage when it comes to chargebacks. However, all is not lost. Merchants can limit chargebacks by following best practices and being proactive.