How To Get The Best Merchant Account For Your Small Business admin | February 22nd, 2011

A few years ago, one Saturday afternoon, my car broke down in the middle of Chicago. Stranded—and unwilling to leave my car parked on an expressway overnight—I had the car towed to the only shop still open for the day. The homemade sign hanging on for dear life above the front door as I walked in told me the place was shady—I knew I was about to be taken. A mechanic looked under the hood and then told me that the {something} was broken and that {something, something and something} would have to be repaired.

My back was against the wall–he knew everything and I knew nothing. Given the timetable and location, I had no way to independently verify his assessment. After a short discussion, he quoted me around $1,500 to make the repairs. Feeling uneasy, I paid the tow truck driver $150 to take my car to a shop by my house, 20 miles away.

I relay this story because the situation correctly represents the buying process of merchant services. The credit card processing industry is inherently complex and vendors use their information advantage for their own benefit. The industry is notorious for its trickery and purposeful deception.

Today, however, is your lucky day because I’m going to help you become an informed buyer of merchant services, or at least make you dangerous.

Find a good fit for your needs

It’s worthwhile to invest adequate time upfront to find the right provider.  Too often, we see merchants make rash decisions based on advertised fees (which are typically misleading). There are just too many unknowns, even for those with previous payments experience, that could cause serious problems down the road.

To accept credit card payments, you’ll at least need a merchant account and payment gateway. The merchant account, which is not a bank account, requires approval through an underwriting process.  The payment gateway is the software that communicates with the financial institutions that issued the cards you’re accepting.  You may also need recurring billing, remote credit card storage, and unique solutions for Payment Card Industry (PCI) compliance. Some providers package all these services in a bundle, while others only offer one or two, requiring you to assemble your vendors, maintain multiple relationships, and potentially manage the relationships between your vendors. If you can find a vendor that can offer you a bundled solution, take it; otherwise, try to limit yourself to two or three providers who already have working relationships with one another.

Get the truth, the whole truth, and nothing but the truth about your fees

Once you have narrowed your options, then analyze price. It’s not uncommon to receive a quote of 1.99% and $.20 to process an online transaction, but that’s akin to me offering you a long distance calling plan of $.05 per minute, with fine print that clarifies that calls outside your regional calling area will be $.10.

Press prospective vendors to disclose all fees. Specifically, to get the conversation started and signal to them that you know what your talking about, ask about:

  • Rates for rewards, business, and international cards – These rates are higher than typical transaction fees, but are often disclosed under asterisks.
  • Minimums and annual fees – Most vendors maintain a monthly minimum that is charged if a certain amount of money isn’t processed. Likewise, vendors may charge annual fees.
  • Chargebacks – This is when a customer disputes a transaction. Fees are typically charged per occurrence.
  • Address Verification Service (AVS) – a customer’s billing address can be sent to the financial institution along with the transaction to verify accuracy. It can be useful to prevent fraudulent transactions and fight chargebacks. It can also lower your transaction fees.
  • PCI compliance – Every merchant that accepts credit card payments, regardless of size, must achieve and maintain compliance. This can be an expensive undertaking for your company, but some vendors make it easy and affordable. Others won’t help much at all or they’ll require you to use a hosted payments page. Inquire how the vendor will help you with this daunting task.

These are only a few of the potential fees, so be sure to get a complete list and ask them to explain when they’ll be charged. Pricing is just one factor to consider and you shouldn’t choose your vendor based the lowest price. I’d recommend that you aim for a fair and reasonable price but don’t make it your central focus, as it typically creates blind spots that create bigger problems down the road.

Find out about the API and technical specifications

If you’re not a developer, make sure you ask your technical crew to evaluate the providers’ APIs. There are substantial differences in what is offered. Questions you should ask to get the conversation started:

  • Does the functionality offered meet our needs?
  • Will the API be easy for our developers to integrate with?
  • Is this API robust enough to support growing needs and potential business model changes?
  • Are there developers on staff that can help if we have integration questions?
  • What impact does use of the API have on our PCI compliance? Will our application store or transmit sensitive credit card data?
  • To what extent is the API under active development?  Are there regular releases of new features? What will happen if one of our developers believes they’ve found a bug in the API?
  • Will the API remain backwards compatible as new versions are released or will we be required to make changes in the future to keep our integration working?

By keeping on top of the technical side of your investigation, not only will you ensure that your development time goes as quickly and as smoothly as possible, but you’ll also know that you’re setting your team up with the best tools to build a robust and reliable integration.

Get exceptional customer service

This is an important decision variable because accepting payments and getting your money on time is such a vital part of your business. You want a vendor that provides human (people that care) support and can help you through all the complexities in the industry.  The difference between providers is substantial, ranging from impossible to contact to unhelpful call centers. I’d also suggest you ask their customers, not them, to find this out.

You’ll want to know if you can get a human on the phone, average email response time, and the competency of those on the front lines. Escalating to competence can be very challenging.

Avoid getting locked in

Make sure you can transfer stored credit card data. Most providers will hold your stored credit card data hostage. That means that if you store 20,000 credit cards with them, and you ever want to switch providers, you’ll have to ask those 20,000 customers to re-enter their information, which is going to cost you a lot of money in attrition. Unfortunately, this is how many vendors keep you from switching to another provider. We created the Credit Card Data Portability Initiative to help solve this industry problem.

Also, be wary of a contract or penalties. If a vendor is looking for more than a 2-3 year agreement and a few hundred dollars for a cancellation fee, they want too much. I’d recommend trying to avoid a contract or any cancellation fees, because the vendor is essentially penalizing the merchant for their own poor service and bad solution. Find a vendor that is willing to work with you on problems rather than use these other techniques to keep you from switching your business to another provider.

The time you invest up front to make the right decision will pay large dividends for years to come. Choose wisely!

image credit: Andres Rueda

Bryan Johnson is the CEO of Braintree, a Web 2.0 payments company based out of Chicago. If your small business or startup wants to process credit cards, take a look and see why other companies like Braintree.

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  • This article couldn’t be any more timely. I’m currently analyzing my business’s current provider and looking at alternatives. Has anyone ever heard of VISA and MC charging an extra percentage on certain cards (generally business cards) for NOT submitting the processing amount as two amounts, one for the cost of the goods and another amount which is the tax amount? For example, if I have a $1000 order with $60 in tax, the total is obviously $1060. One merchant is telling me that I need to submit the $1060 amount, specifying that $60 is tax. If I neglect to specify the tax amount, I’ll be charged and extra percentage, anywhere from 0.25% to 1%. I’m also asked to specify a “dummy” tax amount on sales which are tax exempt. The amount entered into the “tax” field just needs to be at least 1% of the transaction amount.

    Has anyone heard of this? I’m then told the two amounts entered for processing will show up separately on the card holders statement. I think this would be rather annoying if I were the client.

    Any thoughts?

  • Writingourbook

    I just analyzed for my business and found the reviews at merchant maverick to be very helpful

  • Chelgy

    Hey Dru,
    This is accurate as Visa and MC now REQUIRE a dollar amount for ALL corporate cards regardless of “tax exempt” status. They require an amount of 1-22% of the transaction. Unfortunately, this is another way for VISA/MC to make more money on thier merchants knowing full well that many of the B2B customers are going to be tax exempt. Many merchants choose not to put the “dummy tax” in, but then are subject to higher fees. This is where they make thier extra 1% in most cases. It’s actually more annoying for us as merchant services providers because it makes it more difficult to deliver a strong proposal as we do not know if you are going to submit the data or not. I have not heard of any repurcussions to the “dummy tax” at this point. So good luck! If you have a way for me to get a hold of you I would love to help you out!

  • Hey Chelgy, thank you for the solid reply. Lets discuss, 407.679.3895. Just ask for Dru. Look forward to chatting!

  • Pingback: 5 Tips To Get Your Small Business Online « crowdSPRING Blog()

  • Great article, tons of great information for small business . One of the biggest points we make at is that all merchant providers are not created equal, but even more important is that not every deal signed by even the top processor is the same. It really is up to each owner to prepare themselves fully for negotiating the best merchant service account for their business, and knowing their business type and the transaction they are most likely to see is a huge step in that process.

  • Your article made good sense in figuring out how the process works and explains it in a way that makes sense to the merchant. I’m going to make a digital copy of this so I can use it to explain it to customers that ask me questions on this.

  • Shlomo Momi Levi

    The problem with this industry is that there are multiple pricing plans. lat, Tiered and Pass Through and this is where the difficulty understanding comes in for merchants.

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