Some processors require a deposit when setting up the account, others pay in delay, yet most acquirers set a rolling reserve mechanism. In principle it should have been easy. A standard rolling reserve mechanism, with a single negotiable parameter – the rolling reserve percentage.

Reality shows that this is not the case. Surprisingly enough acquirers are much creative and tend to set different rolling reserve mechanisms, using in-house algorithms, generating unexpected outcomes.

Just recently I came across a very creative international acquirer with a weekly based rolling reserve algorithm that could only go up. The sophisticated algorithm was supported with an extensive blocking period disabling funds release on account termination.

Negotiating the rolling reserve terms, the acquirer agreed that the mechanism used resulted with a higher reserve percentage than the industry standard, and yet pushed back due to the fact that changing the algorithm will be highly problematic, due to further development needed for implementation of a new replacement mechanism.

The solution was changing the percentage stated on the commercial terms – a point the acquirer had a hard time arguing, once agreeing that the algorithm used resulted with a higher effective rolling reserve rate. On the same opportunity additional provisions causing delays of funds release on account termination were deleted.

Most merchants do not believe that rolling reserves are negotiable and tend to agree to the terms offered. Others try negotiating the rolling reserve percentage, yet fail to read the fine prints… Walk the extra mile – understand the algorithm behind reserve creation and funds release – it isn’t complicated and can do wonders to your cash flow!

Gidi Argov, Founder and CEO
www.CreditCardProcessing-r-us.com

If you wish to accept credit cards, you can either open a direct merchant account, or use third party processing.

In order to know what you’re offered, take a look at the footer of the site you consider using. If you see an ISO/MSP indication, you are going after a direct merchant account. Otherwise – third party processing.

Direct merchant account

Visa, MasterCard, American Express and Discover – all have programs that enable sales agents to market merchant accounts. As always, no standardization exist and each association has named its program differently. Visa has chosen Independent Sales Organization (ISO), MasterCard – Member Service Provider (MSP), American Express – External Sales Agent (ESA) and Discover – Referral Agent Program (RAP). Putting aside closed loop/open loop systems, the essence is identical. Your application will be submitted the an acquirer, for approval, in order to open you a merchant account with same acquirer.

Third party processing

Direct merchant account agents accuse third party processors for:

1. High processing fees – 5% plus;
2. Long and delayed payment schedules;
3. Funds delayed are not FDIC insured;
4. Merchant’s name missing on credit card statements.

Not all accusations are accurate, for example, many IPSPs are now capable of adding through ‘soft descriptors’ the (real) merchant’s name. Moreover, there are cases third party processing is your only choice…

Many startups get rejected when applying for a direct merchant account and lack the knowhow needed to manage direct online credit card processing. Using third party processing functions as an incubating stage, through which volume reaches a point starting a direct merchant account makes sense. Other high risk businesses find it easier to operate under a third party processing umbrella. In many cases working behind a third party processor sets a ‘fire wall’ between the merchant and the associations, which saves the merchant the risk associated with owning a direct merchant account.

Once you are familiar with the different options and better understand each pros and cons you are more likely to make the decision that suits you best.

Gidi Argov, Founder and CEO
www.CreditCardProcessing-r-us.com

This new rule, effective as of October 18, 2010, allows a leverage of up to 50:1 on major currencies (minimum 2% security deposit) and 20:1 (minimum 5% of the notional value of the transaction) for all other currencies.

The U.S. FX industry will have to accommodate, while worldwide FX brokers could continue offering higher ratios (IBfx enables 400:1). US individuals already trading globally are expected to try maintaining their global trading accounts. Those who don’t might try taking their trading elsewhere.

As with gambling, the U.S. authorities will most likely try blocking Americans from trading out of the U.S. This can be accomplished by assigning the 7995 MCC to foreign forex brokers.

Should this happen, global FX brokers, IPSPs providing credit card processing services to such and their acquiring banks will have to, once again, distinguish Americans from the rest of the world.

Gidi Argov, Founder and CEO
www.CreditCardProcessing-r-us.com

Sophisticated international merchants should add BIN check within their processing workflow. The BIN check result should be used both for acquirer routing as well as for anti fraud score set.

And how will that increase the credit card processing volume at a lower risk? One question at a time… Credit card processing volume will increase as different cards, issued by different issuers will be routed, through different merchant accounts to different acquirers for processing. As different acquirers have different capabilities, risk mechanisms and preferences, some will decline 100% of a certain issuer, while others will have his cards passed with flying colors…

Regarding lower risk – use the BIN check to match issuing bank country with customer’s country address. Whenever those two don’t match, show a higher score and perform additional anti fraud checks prior to charging the card.

As funny as it may sound you don’t need to invest in sales and marketing or penetrate new markets to show an immediate improvement in your bottom line. Optimizing your credit card processing flow will immediately have the same effect – an effect you can work with on years to come!

Gidi Argov, Founder and CEO
www.CreditCardProcessing-r-us.com

As a merchant accepting credit cards online, you must read the comments Claus got on his superb Credit Card Number Generator post. Ninety Nine percent of the comments were received from potential buyers or sellers of stolen credit card numbers.

Buyers asked for HELP as they truly wanted to buy something on the internet and NEEDED a credit card number (that works…) and sellers were just trying to make a living… A potential buyer (playing it safe) wrote: “I need genuine credit cards with all the details. If you give valid credit cards, I will pay you once I try it and it worked”…

Sellers, trying to “make a living”, testified regarding the quality of data provided: “fresh”, “valid”, “today”, “that works”, etc., had Tariffs for different card brands, types and geographical issuing locations, and offered packages (prices for minimum of 5 cards…).

I strongly recommend reading the comments Claus received. It’s a wakeup call! Once you do, you feel the danger and must ask yourself what are the measures you have taken to fight the fraud attempts coming your way…

Gidi Argov, Founder and CEO
www.CreditCardProcessing-r-us.com

MasterCard SecureCode, was, surprisingly enough, initially developed by Visa, and offered as a service to Visa customers under the commercial name: “Verified by Visa” (also known as VBV). Nowadays “3-D Secure” or in short “3-D” is a generic term which relates to: VBV, MasterCard SecureCode and J/Secure (JCB International 3-D commercial name).

3-D Secure adds, through an XML based protocol, another authentication step for online processing solutions. Shoppers generate a code (the “SecureCode”…) known only to them and their issuing bank, which must be entered to finalize an online transaction on sites which implemented this additional security step.

Merchants implementing 3-D Secure, benefit from chargebacks reduction (chargebacks previously initiated due to: “unauthorized transaction”), yet might see a volume decrease due to transaction failures, or simply lower conversion, directly related to the additional step required…

At the end of the day, at least until 3-D Secure will be imposed by the associations, every merchant needs to make the decision, whether to implement 3-D Secure or not. It has a lot to do with the nature of your online business and the chargeback rate you are facing today.

Gidi Argov, Founder and CEO
www.CreditCardProcessing-r-us.com

Does the provider support digital goods transactions? Can he manage international fraud? Will he enable multi-currency processing? Does he provide help with import/export limitations as well as EU VAT or other international taxation?

Expanding internationally is different than being an ‘international merchant’ (i.e. – operating out of the US). Most of the US merchant account providers will decline an international merchant, yet will enable a US merchant to accept international cards. Many US merchants may choose what looks like the easiest way out and start accepting international cards using their domestic merchant account, soon to discover their decision was somewhat problematic, mainly due to: cross border transaction fees, limping international fraud management and lack of multi-currency processing capabilities.

You can read all about cross border transaction fees and how to avoid them. The bottom line is that establishing one insignificant local presence in Cyprus (and an EU merchant account) can do wonders to you and your European customers, decreasing chargeback rates as an additional bonus.

Optimizing fraud management is another big issue a merchant should consider. Whether you manage the risk internally, or outsource the decision making process, you must realize by now that prior to accepting a card you assess the fraud risk embedded in that transaction. Accepting the wrong cards increases your chargeback rate, causes losses and puts at risk your credit card processing future. Declining honest shoppers shrinks your business and damages the shopping experience.

International fraud management is much more complicated than domestic. Many of the tools used by US merchant account providers do not work when accepting international cards. For example, the time the shopper entered your site has little meaning if not normalized to shopper’s origin. Address verification methods tend to work differently when out of the US. Different billing and shipping countries, not to mention problematic or forbidden countries are other examples.

Multi-currency management is a standalone issue, affecting both you and your shoppers. The majority of the US merchant account providers are currency clueless. They understand USD only and enable you to process only USD transactions. If you truly want to grow internationally, you need to consider presenting and processing other currencies to improve the global shopping experience and increase international shoppers’ conversion rates.

Most of the international merchant account providers will enable processing in more than one currency, yet only some will be able to settle in different currencies. At the end of the day, the question is who manages the currency risk and how much the conversion from those other currencies to USD costs. Though this should be addressed separately, I’ll summarize by saying that the best result is achieved when your merchant account provider settles the actual currencies and currency management is outsourced to E4X or FXmicropay (depending on acquiring bank).

Many digital goods merchants already made the international leap, yet only few physical goods merchants have successfully made it through. Until recently this was indeed one hell of a task, yet nowadays a physical goods merchant can choose to outsource the international activity all together! FiftyOne offers a comprehensive global ecommerce solution that enables US merchants to easily transact across borders. Some of the top 500 US merchants have already signed up, so it might workout for you as well…

Gidi Argov, Founder and CEO
www.CreditCardProcessing-r-us.com

As the online micropayment industry grows, people are working on alternative solutions, to bypass the credit card associations and enable a true support for a single purchase of online micropayment products.

The solution should have been provided by the credit card associations long ago. A simple micropayment pricing, could solve all of the micropayment industry needs in a second. As of today the associations charge (on most transactions) a fixed 10 Cents per transaction fee. This fee, first calculated and forced long ago, was justified when processing, encoding, saving and backing up transactions was cost consuming. In today’s world the cost of processing a single transaction is insignificant and surely runs below 1 Cent.

The risk embedded in online micropayment transactions is minimal. Micropayment transactions’ amount is immaterial, which automatically lowers the inherent risk embedded in a micropayment transaction to a ridiculous threshold. The nature of an online micropayment transaction lowers the risk even further. 99.99% of online micropayment transactions are digital goods with zero cost and no market value fraudsters can gain for re-selling the downloaded content.

That said, there’s no doubt that the cost structure set by the associations as of today, simply does not meet the micropayment criteria, and must change.

So why does it not? Once showing that the act of processing has long gone below the 10 cents currently charged, the associations will have a hard time explaining why such is charged on non micropayment transactions… Believe it or not, this is the true obstacle currently putting at hold the micropayment industry.

Instead of waiting for the associations to come to their senses – use PayPal. They offer a micropayment solution for 5% plus $0.05 per transaction. Open a PayPal Business (or premier) account, then search at PayPal search box for “micropayments”. Press on “PayPal Micropayments Website” and then “Signup”. Now request to change the Business (or Premier) account you just opened to a micropayment account. Congratulations – you just opened the best micropayment card solution currently available!

Gidi Argov, Founder and CEO
www.CreditCardProcessing-r-us.com

Regardless of what you were told, or the ‘as low as’ pricing you were counting on when applying for a merchant account, the actual cost of credit card processing will catch you by surprise each time you will try to figure it out.

Once you start accepting credit and debit cards, you realize that every transaction is unique. There are 123 pages to the MasterCard Worldwide U.S. and Interregional Interchange Rates guide and endless number of rate scenarios. Visa is not much better as can be seen at Visa U.S. Interchange Reimbursement Fees guide, taking into consideration that this guide applies to transactions within the US only.

The credit card associations explain that this pricing structure is a direct result of merchants and regulators demand for transparent pricing. These demands forced the associations to reveal the complexity behind credit card processing. No one doubts the end result – no merchant can see the forest through so many trees.

What could possibly be so complicated, that requires such a complex pricing structure? The complexity exists at ‘both sides of the equation’. Merchants and shoppers (or cards) both carry different sets of risks and rewards, to which the associations relate. Fraudulent transactions are more common online than at the local grocery store. Debit cards lack the credit risk embedded within each credit card transaction. Different card types have different sets of benefits. All these, and much more, are taken into consideration when pricing the cost of processing a single transaction.

Processing a regular Visa card will cost less than processing a Gold MasterCard, which will still cost less than processing an American Express card. Merchants that process in a single step (do the authorization and capture together) will process for less than merchants who are forced to split the authorization and capture, due to physical merchandise location and delivery regulations, making them capture in delay.

And the funniest part – all of the above is the least of your concerns. As long as your merchant account provider uses an “interchange plus” basis, you’re on safe ground. The plus is the element you should negotiate and feel comfortable with. No one is big enough to get a better deal from the associations

Gidi Argov, Founder and CEO
www.CreditCardProcessing-r-us.com

As credit card processing comes with a cost, this question should trigger a serious decision making process, featuring costing and marketing exercises, making sure accepting credit cards is indeed feasible.

Let’s say for a minute you already decided to accept credit cards. Your second question would probably be, ‘where do I find the cheapest merchant account around?’

Now, that is a tricky question. Obviously, as a merchant, you need to minimize your costs. But when it comes to merchant accounts there is no straight forward way to make sure that what you see is what you get.

In the world of online payment solutions there are many factors you need to take into account when you try to figure out how much you will pay and what would be the quality of the services you get.

A partial list of factors will contain discount rate, other fees, the need to use a gateway, contract terms and customer services.

Discount rate

Your very first task would be to try and figure how your discount rate might behave. The discount rate is the fee that will apply to each and every transaction you process. It is comprised of several fees and dues such as network fees, assessment fees and interchange fee (the largest portion).

Your basic –qualified- discount rate will be set by your merchant account provider and should cover  most of your transactions (i.e., for instance,  all transactions that will come from a basic, non rewards, credit cards and that will be swiped in your terminal – in other words a ‘Card present transaction’). You have to bear in mind the discount rate might eventually become higher and turn into a Mid-qualified rate (for instance, in cases where you would key in the credit card details, instead of swiping the card- otherwise known as ’Card not present transaction’) or even turn into a Non-qualified (incase a certain reward card is accepted).

You really need to try and make few assumptions on how your credit card transactions will split between the different types of discount rates. Your potential merchant account provider might help you with statistics he gathered, based on his experience with merchant from the same line of business.

 Other fees (look for them in the contract or even better, ask the provider!)

• Per transaction fee

Will apply to each and every transaction you process

• Batch fee

Charged for ‘batching ‘ transactions and sending into the network, to start the settling process (should happen at least once a day)

• Chargeback fee

Your merchant account provider will help you fight (represent) chargebacks and will expect to be rewarded for it. The fee can be charged even if the representation process failed and your customer got away with all his money.

• Set up fee

Charged upon the setting of the account.

• Statement fee/ monthly fee

Covering the activity statement you will receive each month.

• Quarterly/Annual fee

Paid for the maintenance of the account.

• Monthly minimum fee

Assuring the provider receives a minimum of processing fees each month. You will not have to pay it if you will process transactions above a certain amount (if you processed to some extant, yet did not reach the required level, you will usually be requested to pay the difference only).

• Customer Service fee

 Covering the support services you get from your provider.

• Early Termination fee

 Will apply should you elect to terminate your contract earlier than expected.

• Gateway fees

If you are an e-commerce merchant you will have to pay for gateway services that will enable your secure connectivity with the credit card processing network. These fees might be paid to a different provider (if services are not bundled by your merchant account provider into one package), and might include, among others, a set up fee, authorization fee (per transaction), monthly fee, virtual terminal fee and reporting system fees.

• Fraud detection fees

Should you decide to use fraud detection services (and unless you will be doing the fraud prevention internally, you should), either through your gateway or by other sources, you will have to pay fees. Some of the fees are per transaction, other fixed, depending on the depth and volume of services rendered.

The fees above (and other fees) come in different ‘shapes and sizes’ and in different combinations. You will find that some fees are completely waived by some merchant account providers, while between others, that do charge them, there are substantial differences. One thing you should bear in mind, there are no free lunches in the credit card processing industry. Merchant account providers need to earn their living, exactly as you do. They render services and charge fees based on risk management models and this industry has substantial embedded risks.
As an informed merchant you need to understand that there is a tradeoff between the different pricing models offered by the different providers. The best you can do is make sure the merchant account you signup with provides you with the combination of fees and level of services that suits you most. For instance, you might decide to work with a merchant that offers 24/7 customer support, and charge for it, rather than choosing one that waives the fee but maintains office hour’s support. You may decide to prefer working with a merchant that charge a bit more in the discount rate or in the per transaction fee, just because he waived the termination fee (and right now you don’t feel you can make a long term commitment).
An important thing you should remember is that there is always some place for negotiation. A merchant account deal should leave both you and your merchant account provider satisfied, otherwise, it will not last long.
Use http://www.creditcardprocessing-r-us.com to learn more about the industry, get acquainted with the providers, compare, and pick the provider that suits you most. 

Dan Pirogovsky, Co-Founder and SVP Business Development
www.CreditCardProcessing-r-us.com