If you want to sell online, you need to be
able to accept credit card payments. The traditional way is to
open a merchant account. However, opening a merchant account is
expensive, especially for small businesses who are just starting.
In the last few years, however, a number of companies have entered
the market with a new concept: third party credit card processing
services (for example, Paypal). This option offers small
businesses a quick and easy way to accept cretit card payments. It
by-passes the need to open a merchant account, plus, the sign-up
process is much easier and faster: you can literally sign-up, be
approved and start accepting payments online in minutes.
Traditional merchant accounts are expensive primarily because they
charge fixed fees that you will have to pay even if you don't sell
anything.
For example, depending on the case, a merchant account will
require that you pay:
An application fee (whether you are approved or not)
A set-up fee (once your application has been approved)
The discount rate: usually between 2% and 3% of every sale.
A per transaction fee.
A monthly minimum fee (if the dollar amount of the discount
rate falls below the amount of the fee).
Statement, gateway and connection fixed fees.
Third party credit card services usually just charge a percentage
of sales and, in some cases, a per-transaction fee, so you only
pay when you sell something.
If your sales volume is not very high, a third party service can
save you money.
For example, lets assume that you make 10 sales a month at $25 per
sale, to compare the merchant account option vs. the third party
option:
If a merchant account charges you a $25 montly minimum fee, $50 in
gateway and connection fees, a discount rate of 2.0% of sales, and
a fee of $0.30 per transaction (for simplicity's sake we're not
factoring in any application fee or set-up fee), the charges you
would have to pay your merchant account provider amount to $83.00.
If you use a third party service that, like Paypal, charges you
2.9% of sales plus $0.30 per transaction, it would only cost you
$10.25.
However, the advantages of using a third party service start to
diminish as your sales start growing. In other words, since the
discount rate charged by traditional merchant account providers is
lower than the percentage of sales charged by third parties, the
higher your sales the more the fixed fees of the merchant account
will be offset by its lower discount rate.
For example, let's assume that instead of making 10 sales per
month, you make 1000 sales, at the same $25 dollars per sale
(total sales per month: $25,000). You will then have to pay your
merchant account provider $850.00 (the $25 minimum will be waived
because the dollar amount of the discount rate will be greater
than $25).
If you use the third party service, you will pay $1025 for the
same $25,000 in sales.
Your break even point in this example would be 222 transactions
(sales) of $25 dollars each: if you make 222 sales or less, you
would be better off with a third party service. If you make 223
sales or more, your best bet would be a merchant account.
In summary, the more you sell the more you should consider opening
your own merchant account. However, if you are a small business
just beginning to market your products on the net, or if you want
to start quickly and don't expect huge sales in the near future,
you may want to go the third party route.
In summary, check all your options first and choose the one that
is most likely to fit your needs in the long run. Remember that
cost is only one of the variables you should consider in your
analysis. Spending some time visiting the websites of merchant
account providers and third party credit card service providers,
and doing your due diligence early, can save you thousands of
dollars in the future.
Mario Sanchez is a Miami based freelance writer who focuses on
Internet marketing and web design topics. He publishes The
Internet Digest www.theinternetdigest.net
|
