Ecommerce: Merchant Account and Credit Card Processing

Having an online business that takes in money over the internet requires the ability to accept credit cards directly from your website. This is commonly known as “ecommerce”, or electronic commerce. This tutorial will help explain all there is to know about processing credit cards over the internet.

The Basics

Terms to Know:

  • Shopping Cart: An online application that collects all your products and gets them ready for checkout, passing the information about the transaction to the payment gateway.
  • Merchant Account: The bank or financial institution that actually processes and handles the transaction of debiting one account and crediting another.
  • Payment Gateway: The program or application that communicates between the website and merchant account, verifying the credit card information and executing the transaction.
  • Web Hosting: Serving your website or web page from a web server to any requesting client browser.
  • Secured Socket Layer (SSL): The process by which information is securely exchanged between the web server and the client browser. 128-bit encryption is the most secure.
  • Secure Certificate: A certificate of authentication that assures website visitors that the website being used is safe, secure and tested and up-to-date.
  • IP Address (internet protocol address): The physical, numerical address that is associated with the domain name. There are two types of IP addresses:
      1. Static IP: There is one IP address that is associated with a domain name, and it never changes.
      2. Dynamic IP: The IP address can change at any time, depending on the need and whenever necessary, as determined by the hosting company.

There are 3 things required for credit card processing:
  1. A web hosting account with a static IP address
  2. A merchant account with a reputable company
  3. A current, secure SSL certificate

Web Hosting

There are many web hosting companies that operate online, and choosing one is not too difficult. However, there are a couple requirements that you need to look for when choosing your company. The hosting account must have a static IP address because a secure SSL certificate is required when transferring confidential information over the internet through the payment gateway.

Merchant Account

A merchant account is required for credit card processing because this is how the payment will be processed; money must be taken out the buyer’s account and deposited into the seller’s account. The merchant account is the generic name for the process by which all transactions are handled. This is explained in detail:

  1. The website visitor selects the product or service to purchase and initiates the sale.
  2. The website takes the visitor to secure area of website (with gold lock on bottom of browser) and requests payment information (credit card info).
  3. The visitor completes the required information and clicks ‘submit’.
  4. The information is sent securely through the payment gateway for the information to be verified as valid or invalid.
  5. After verifying the accuracy of the credit card information, the transaction amount is debited from the buyers account (bank or credit card) and deposited into the seller’s bank account.
  6. The buyer receives a payment confirmation via the website.

Account Fees & Charges:

There are two basic charges associated with a merchant account. These are:

  • Administrative Fee: This is usually a monthly fee that is assessed for all administrative fees.
  • Discount Rate: This is a fee (percentage based) that is imposed based on the total amount of the sale.
  • Per Transaction: This is a payment gateway fee that is charged with each transaction that comes from your website.

The way this fee system works is the same, no matter what merchant account provider you use. For instance, let’s say you have a transaction rate of $0.25 and a discount rate of 2.5%. If you have a product that you sell for $10 from your website, each time the product is purchased you will receive $10 deposited into your account. You will also be charged $0.25 for the transaction, and $0.25 discount rate (computed at the end of the month). That’s a total of $0.50 in fees for the $10 sale of your product.

Most merchant account providers will impose a monthly base (minimum) fee for the account. Let’s say the base fee is $15. This base rate is an either/or charge, meaning you are charged that amount unless your discount rate and per transaction fee amount to more than the base amount.

For example, through the course of business, you sell your $10 product to 20 buyers. At the discount rate and per transaction rate used above ($0.25 transaction and 2.5% discount), your fees amount to $10 on $300 ($10 x 30) in sales. Since this amount is less than the base rate ($15), you will be charged the base rate for the month. However, if you sell your $10 product to 90 buyers, your fees amount to $45 dollars for the month. Since your fees amount to more than the base rate ($45 vs. $15), you will be charged $45 on $900 in sales.

Types of Transactions

There are two basic types of transactions when purchasing goods or services online:

  1. One-time Purchase
  2. Recurring Subscription

Most online stores and catalogs deal with ‘one-time’ purchases, meaning you find a product online and purchase it. After confirmation of sale, this ends the relationship between buyer and seller.

The other type, ‘recurring subscription’, is based on interval billing. This type of purchase can be for membership fees, or for any other type of fee that is billed on intervals.

Payment Gateway

The payment gateway is an application that you integrate into your website. Most payment gateways have an API that allows for easy, seamless integration into your website, meaning the user’s experience on your website remains consistent, even through the credit card processing phase. The payment gateway is responsible for validating the credit card information provided, such as address verification and security code matching. There are many payment gateways available on the market, but to ensure compatibility, it’s recommended that you use the one provided at the time of your merchant account setup.

SSL Certificate

The secure digital certificate validates the site as being secure, letting the buyer know that the information exchanged over the internet will be sent using the best possible encryption. In other words, the personal, confidential information sent will be scrambled to avoid interception by a 3rd party and used fraudulently. An SSL certificate requires a static IP address, but does not have to be associated with your website. You can link the transaction to another website (sharing a certificate) to handle the transaction. However, it is recommended that your website have its own static IP and secure certificate to maintain site continuity. Think of it this way; you're at the supermarket, and when you go to checkout, you are either taken across the street to handle the transaction, or the transaction can be handled at the store you're currently at. Basically, it looks more professional to process the transaction immediately, rather than take the buyer somewhere else.

In Conclusion

That is what merchant accounts are all about. All merchant accounts operate on the same guidelines, and determining which merchant account you want to conduct business with is up to you. The main things to consider are the per transaction fee, discount rate and base monthly rate. Make certain that the merchant account provider you are going to use is a top-tier provider, meaning the company is the actual processor, and not a reseller of another provider. This is important when it comes to the fees and customer service for your account.

This article was written by Gus Garcia, owner and operator of http://www.merchantaccountchoices.com, a free-to-use merchant account comparison website.

Click here to see the top credit card merchant account providers in the industry.