What's the Best Deal for My Business Line and Processing Volume?

Regular merchant accounts differ from 3rd party processors in some basic ways. All third party processors include their own internet payment gateway as a basic part of their service.  For merchant accounts, the payment gateway is a separate expense item for ecommerce accounts that may cost several hundred dollars for setup fees, monthly fees of $10 to $20 and transaction fees in the range of 5 to 10 cents.  Sometimes the payment gateway is bundled in the merchant account offer.  Usually the merchant account provider gives you several options for payment gateways and Point of Sales (POS) equipment depending on your business needs.

Merchant accounts also charge monthly service fees often called 'statement fees' or 'customer service fees.'  These fees range from $8 to $15 a month.  Some 3rd party processors also include regular monthly services fees, but most do not.  Instead of regular monthly fees and gateway fees, you will find that the 3rd party processors charge a discount rate on each transaction that is usually higher than the discount rate charged by merchant account providers. 

The discount rates for merchant accounts range from around 1.8% to 2.5% whereas the range for 3rd party processors varies from around 2.29% all the way to 32%.  There are also a few merchant account providers that handle high risk content, adult and offshore accounts who charge discount rates from 5% up.  Several 3rd party processors also accept high risk content and charge higher rates for these accounts as well.  We will show that it may be easier to find a high risk processor with lower rates among 3rd party alternatives than among merchant account providers.

Transaction fees tend to be higher for most 3rd party processors than for merchant accounts.  The transaction fees for merchant accounts are usually between $0.25 to $0.30 with a few exceptions (high risk or added services).  Keep in mind, that with merchant accounts you are also paying transaction fees for your payment gateway on top of your processing transaction fees.  For 3rd party processors, the fees range from zero to $5.00.  PayPal and Yahoo! PayDirect, charge $0.30 per transaction, for example.  These two providers also have lower discount rates than most other 3rd party processors.  Those 3rd party processors that offer zero transaction fees may charge higher discount rates from 5% to 8% or comparatively higher monthly and annual fees.

Merchant accounts also charge batch fees and minimum monthly fees which are not charged by 3rd party processors.  Batch fees are the result of payment gateway transactions which are uploaded perhaps once or twice a day to capture the approved transactions.  For each batch you may be charged $0.25 to $0.30.  You will not incur batch fees if all your transactions are swiped using POS equipment.  There are other POS authorization fees, however, that are charged based on the type of connection or phone line you use for your authorization service. 

Minimum monthly fees for merchant accounts are usually set at about $25.  These fees guarantee that the processor will get paid a minimum amount of discount revenue from your transactions regardless of your actual processing level for the given month.  If you process enough sales during the month to pay a net discount above the minimum fee, you will not be charged anything for this fee. 

The 3rd party processors actually pay all these merchant account fees themselves when they process your transactions with their own merchant accounts. They levy these charges to merchants based on (usually) more simple rate structures including a discount rate and transaction fee, and sometimes a monthly or annual fee of some kind.

Merchant account monthly costs are generally higher than the costs of 3rd party processors for lower monthly sales volumes.  This is due to the higher monthly fees charged by the merchant account providers.  The break-even point between the two depends on your monthly volume and average ticket.  With a monthly volume lower than $5,000 to $10,000, the balance usually falls in favor of 3rd party processors. 

Above that processing range, the merchant account monthly processing cost is generally lower.  To be more precise in comparing any two options, you need a customized merchant account calculator similar to the Maculator, and a few others found on the web, that allows you to enter your monthly processing figures for calculating costs.  The competition between merchant accounts and third party processors is not based on cost alone, however.  For some 3rd party processors are higher in cost than most merchant accounts. 

Since 3rd party providers actually are underwritten by regular merchant accounts as aggregators, one might ask how could the rates be lower for 3rd party processors than for merchant account providers in some cases?  Without doing a thorough discussion on this question, there are a few factors that are clearly evident. 

• For one, the 3rd party provider has one merchant account which was originally underwritten for certain types of products and risks.  There is no additional cost of applying for a new merchant account every time a new 3rd party account is established. 
• Secondly, by focusing on risk management for certain types of products and sales venues, such as auction portals or digital products, for example, the costs of chargebacks can be lowered. 
• Thirdly, the costs in one area can be offset by the revenue in others and made to favor the economic situation of the seller.  For example, a lower discount rate can be offset by higher chargeback fees, lower chargeback fees by higher discount rates or monthly fees or annual fees.  Higher transaction fees can help to offset other costs, as well. 
• Finally, by mixing higher and lower risk accounts together in the same aggregated account, the overall chargeback ratio will be lower and less costly to the processor.

The convenience factor  generally favors 3rd party processors.  There is no credit application or underwriting based on the seller's credit rating for most 3rd party accounts.  Usually, you can sign up and start processing right away on the same day.  For merchant accounts, it may take two to five days to complete the application process which is similar to an involved credit application.  In fact, the approval process involves underwriters who do very much the same types of services as done in home mortgage applications.  Because of the cost of processing the application, checking your credit and verifying the information about your business, an application fee is often charged.  Some 3rd party processors also charge setup fees, but most do not.

When it comes to retail brick-and-mortar businesses, you need a merchant account provider who will also provide you with a range of POS devices.  You do not necessarily need a payment gateway, unless you intend to sell products online as well as in your physical storefront.  In this case, the 3rd party processor is not useful or necessary unless you have some products or services that can better be supported by specific 3rd party processors on the web. 

Merchant accounts with payment gateways generally give you more flexibility in the setup of shopping carts.  They also allow you to design your customer interface without bouncing the customer to an external payment form on another website, such as a page on the website of PayPal, 2CheckOut, iKobo and so forth.  Many 3rd party processors do allow you to customize your shopping cart, however, but it is still clear to the customer that they have been bounced to another website.

Whether customers have more confidence in PayPal or StormPay than they do in the merchant's own shopping cart is a question of debate.  Some merchants use both a regular merchant account and a 3rd party processor on the same page and they witness that a good percentage of customers use the 3rd party processor even though the customers have a choice.  On one of our websites, we point out to customers that one of the advantages of the 3rd party processor is that only the processor, not the merchant,  knows the credit card number of the buyer. 

If you have used a particular 3rd party processor one time in the past to purchase a product, and if you had a positive experience with the transaction, you are likely to feel confident in using the same processor again on another website.  As a buyer, you may not be aware of the many parties involved in your transaction including 1) the shopping cart provider, 2) gateway provider, 3) merchant account provider,  4) at least two banks and 5) one back-end processor.  The security of this complex system rests with the fact that all parties involved have more to benefit by keeping your private information secure than they do by being careless or by deliberately forsaking your confidence. 

Security, of course,  is a major concern for merchant account providers, payment gateways, shopping card providers and 3rd party providers alike.  Since there are one or two less parties involved in actually seeing your credit card information with 3rd party processors, one might argue that the potential risk for security gaps is lower for 3rd party processors than it is for merchant accounts.  This is not necessarily the perspective of your customers, however, unless you advise them accordingly.

The customer experience with 3rd party processors may be compromised by the identification of the transaction on their credit card statement.  Using a merchant account results in a credit card statement with your own account identifier, in other words, the name of your business.  Using a 3rd party processor, the customer sees the name of the processor on the statement, not the name of your business.  To some buyers this may be confusing.  If you communicate with your buyers and provide good customer service, you may be able to offset this confusion.

Chargebacks may be handled differently by merchant accounts and 3rd party processors. In most cases, however, the merchant will be charged for the reversal of the transaction and possibly penalty fees for both merchant accounts and 3rd party processors.  Among merchant account providers, there is also a variation of the effort made to contest chargebacks to the benefit of the merchant. This variation also applies to 3rd party processors.  If you have good customer service and keep your chargebacks down to less than one percent, you will not have problems with either type of processor. 

Some merchants complain that PayPal is too likely to give in to chargeback issues in favor of the buyer rather than advocate the merchant's position, for example, that the product was delivered and was exactly what the buyer ordered.  Other 3rd party providers like Moneybookers, NoChex and  DigitalCandle handle all chargeback costs on their end and underwrite these costs by their regular fees to merchants.  StormPay is a 3rd party processor that allows up to 2% for the chargeback ratio and charges a discount rate of 6.9% and a transaction fee of $0.69.  StormPay also has higher rate tiers for merchants with higher chargeback ratios.  You generally won't find a regular merchant account provider like StormPay that will allow you to continue your account with chargeback ratios at 2% or above!.

Many merchant account providers and 3rd party processors offer referral fees to affiliates who provide leads from their websites.  If you're looking for multi-tier affiliate programs with residuals there are several that we have discovered in both categories.  For example, CardService International has a 2-tier program that pays for leads and processing residuals including 10% of all income from 2nd tier affiliates.  Most other merchant account providers pay only an initial lead fee or application acceptance fee, but no recurring residuals. 

Among 3rd party processors, there are two that offer multi-tier residuals (up to 10 tiers) including iKobo and StormPay, and many more that offer lead fees, single-tier residuals or other referral fees.  Very few merchant account providers offer multi-tier affiliate programs at this depth.

Many 3rd party processors also include reseller affiliate support.  This includes software and processing to enable other resellers to sell your own individual products for referral fees which fees will automatically be deducted from your revenue.  You won't find this level of service with regular merchant accounts.  Most of the 3rd party processors that specialize in digital products offer this kind of service. 

Another marketing service that is provided by many 3rd party processors, and not by merchant account providers, is directory marketing.  Many 3rd party processors host a directory tree by subject of products sold by their accounts.  The cost of this service is usually free, however, some providers require compensation or consideration of some kind.  There may also be a fee for reseller software support from some 3rd party providers. 

A number (up to 10) of 3rd party processors underwrite and invite high risk content.  Although there are also a few merchant account providers that also accept high risk content, it is generally a difficult task to identify them.  The numbers that we have seen would indicate that some of the 3rd party processors who accept high risk content may offer better rates than the merchant account providers in this category. 

One of the most peculiar differences between merchant accounts and 3rd party processors is the way they handle higher monthly volume amounts.  Most 3rd party processors with multi-tier rates give you a lower discount rate for higher monthly sales volumes.  This applies to PayPal, Yahoo! PayDirect, CCBill, CCNow, iBill, Jettis, Kagi, MembershipPlus, Reg.Net and V-Share.  In some cases the rate is based on higher ticket amounts, but in general the higher the ticket or monthly sales volume, the lower the cost to you. 

For merchant accounts, on the other hand, if you exceed your declared monthly volume that you estimated when you started your account, they will either penalize you or close you down (or both).  Although you can request an increase in your monthly limit, you have to basically apologize for being successful!  And even if you request an increase in your monthly limit, they may not grant the increase or sometimes they may insist that you start all over and apply for a new merchant account with possibly higher discount rates!  The merchant account providers call this policy 'risk management.'

What the new entrepreneur needs to figure out is which kind of cost structure best suits his or her own anticipated business profile.  This includes all of the factors we've discussed above as well as the different offers of pricing structures and services among the many 3rd party processors.  Our research has identified and profiled a robust portfolio of 41 third party processors each with it's own unique features and special advantages.

Do you need the lowest cost provider, do you need a regular merchant account, or do you need the special services or features provided by some of the higher cost alternatives?  Which provider offers the lowest cost for you based on your anticipated monthly sales volume, average ticket and anticipated chargeback ratio?  Hopefully, this analysis will help you look for the best alternative for your business!

For more information see the article entitled A Closer Look at Third Party Credit Card Processors by Ray Cruz.

This article may be re-published in its entirety as long as the following information and links are included.

Ray Cruz is the analyst and developer of The Maculator located at www.mgoldmine.net .  All 3rd party processors mentioned in this article are profiled in the Maculator.  The Maculator is a merchant account calculator which allows you to calculate and compare monthly processing costs for Third Party Processors and Merchant Accounts based on your monthly sales volume.   Other e-commerce information compiled by Ray Cruz is published at Merchant Goldmine and Cardsettle.com.  Copyright (c) Ray Cruz 2004 All Rights Reserved.

Cardsettle does not endorse any e-commerce service listed on this site.  The information provided is to help you become aware of numerous options that you should investigate on your own. Every effort has been made to include all credit card processing alternatives whether affiliated or not. 

Quickly compare rates and monthly costs between 2Checkout, Affero, BTClick&Buy, CCAvenue, CCBill, CCNow, ClickBank, DigiBuy, DigitalCandle,  FastPay, iBill, iKobo, ImagineNation, InstaBill, Jettis, Kagi, MembershipPlus, Moneybookers, MultiCards, MyPaySystems, NoChex, PayPal,  PartyKey, Pay-Line, Paymate, Process54, ProPay, Reg.Net, RegNow, RegSoft, Share*It, StormPay, SWREG, V-Share, Verotel, VolPay, Yahoo! PayDirect and other alternatives, including Merchant Accounts with the Maculator™

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