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Think of a Payment Gateway like a credit card terminal for the Internet. The main function of a Payment Gateway is to encrypt sensitive credit card data and securely send it across the Internet for a live authorization. In a nutshell, a payment gateway’s job is to keep your sensitive data safe when traveling over the Internet.
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Jay Wigdore Is Credit Card Processing Specialist Accepting Credit Cards and Electronic Payments
Jay Wigdore What is a merchant account, and why do I need one? Amerchant account is a business account with a bank that allows an organization to accept credit card payments for donations or other products/services. Why do you need one? • Your merchant service provider (MSP) manages the technical aspects of physically taking credit cards – through a terminal, website, or smartphone. • Credit card transactions carry risk! Disputes on donations/purchases; fraud disputes. Your MSP reduces these risks, and manages fraud if it does happen. • Your MSP pays you for your credit card sales! The MSP manages the connection to your bank account.
Credit Card Transactions All credit card transactions involve several entities: • Customer • Merchant (that’s you!) • Card-issuing bank • Merchant Service Provider (MSP)
High Merchant Accounts Who are the different entities involved in a transaction? Customer: In every credit card transaction, the customer is the person/organization who is making the purchase or donation. Merchant: That’s you! The merchant is the organization accepting the payment. Card Issuing Bank: Also known as the “issuer.” The card issuing bank is your customer’s bank. The card issuing bank represents your customer and will defend your customer in the event of a dispute. Merchant Service Provider (MSP): Also known as the “acquiring bank.” The MSP is your bank for credit card transactions. The MSP represents you, the merchant. The MSP manages risk, funds the merchant, ensures your account meets Visa/MC regulations, and reports income back to the IRS per federal law. Independent Sales Organization (ISO): An ISO is a partner of an MSP, and acts on behalf of the MSP. Many MSPs do not have their own sales acquisition channels, and an ISO acts as the “agent” for merchants; and, is responsible for signing new merchants, integrating technical details, setting fees/terms, and providing customer support.
Payment Gateway What is a payment gateway? Think of a Payment Gateway like a credit card terminal for the Internet. The main function of a Payment Gateway is to encrypt sensitive credit card data and securely send it across the Internet for a live authorization. In a nutshell, a payment gateway’s job is to keep your sensitive data safe when traveling over the Internet. Do I need one? That depends! If you accept online payments, you’ll almost certainly need a payment gateway. A payment gateway is the only system that allows for live, real-time authorizations in an Internet environment.
Flow Diagram What does the transaction flow look like?
Online Payment Gateway • Why do I need a separate vendor for a payment gateway? • The main reason is to be able to easily integrate with outside services. For example – popular gateways like Authorize.net can automatically sync your sales with QuickBooks or can integrate with your CRM (like SalesForce). • Gateways can provide many advanced features. Some gateways allow for automatic recurring donations, secure credit card data storage, or smartphone acceptance. A good gateway will allow your organization access to an easy-to-use “front-end” system for accepting credit cards, running reports, and managing your donors. • Some MSPs do have their own gateways. However, because most MSPs don’t want their customers to easily switch to another provider, the “internal” gateways often have strict limitations about what processor they can connect with. As such, many merchants intentionally choose an “agnostic” gateway, so that they can connect with any MSP down the line, without having to modify their entire system.
Credit Card Processing • How does credit card pricing work? • There are three main components to the cost of all credit card transactions: • Interchange: Interchange rates are the base-costs of every sale and are the fees that are paid back to the card issuing bank. Interchange fees are fixed and apply to all merchants. • Card Association Fees: Card association fees are paid as a percentage of every sale and the fees are paid back to the Card Associations, such as Visa, MasterCard, and Discover. • MSP Margins: Your MSP will charge a fee for their service to cover administrative costs, risk mitigation, hardware, processing, customer support, etc.
Best Service Providers What is Interchange? For every credit/debit card that exists, there is a pre-set rate that the MSP pays to the issuing bank. This rate is known as the Interchange rate. Upon completion of a sale, the interchange rate is paid to the card-issuing bank immediatelyby the MSP. These rates correlate to the cost that each bank has set for these cards. Typically, cards with more “perks” or “extras” will have higher Interchange rates because the card-issuing bank has additional costs to recoup. (Think rewards, points, or airline miles.) Other cards are very inexpensive to process and, thus, have lower interchange rates. (Think debit cards – these are essentially taking money from a checking account and considered low-risk for a bank.) These interchange rates apply to allMSPs, from the largest providers to the smallest. That means that at the end of the day, all providers are competitive since they all share the same costs. Interchange will always appear in a two-component format, such as: 2.00% + $0.10/transaction
Card Association What are Card Association Fees? Card Association Fees (also known as Card Brand Fees) are the fees that are actually paid back to Visa/MasterCard/Discover. These are also commonly referred to as NABU fees (Network Access and Brand Usage fees). Most merchants don’t realize that the vast majority of the fees paid aren’t actually paid to the Card Associations, but instead to the banks that physically issue the cards. The Card Associations do make their money, though! There are literally dozens of different small circumstantial fees charged by the associations that apply in all different circumstances. Keep in mind that these are not charged by your MSP. These are fees collected by your MSP and immediately passed through to the Corporate brand of card your customer used. The average card association fees are 0.12% + $0.02/transaction.
Best Service Provider Why choose a full-service provider? • A full-service MSP assists you with making cost-effective payment decisions. If your organization is accepting payments across multiple channels and takes over $10,000/month in donations/payments, you’ll likely benefit from working with a full-service provider. Full-service MSPs are “on call” for emergencies and offer professional guidance to assist your organization with keeping costs low, protecting you from fraud, and implementing services that can increase your donations and conversions. • A full-service MSP can help you reduce costs significantly. Especially at volume levels of $25,000/month and above, a full-service provider who offers interchange-plus pricing can typically offer vast savings over “all-inclusive” providers like Square or PayPal.
Basic Online Payments Basic Online Payments: What are the costs? It all depends. Fundamentally, you’ll always need these components to accept online payments. Costs will vary, but these are good estimates: • Merchant Account: Most MSPs have a small monthly fee between $10 - $20/month, and processing fees will typically be between 2.00% and 3.50% for “card-not-present” payments, depending on certain factors. • Payment Gateway: Most Payment Gateways will have a monthly fee of $20/month or similar, along with a per-transaction fee of $0.05 - $0.10/transaction. • Most payment gateways do offer “basic” payment pages as an out-of-the-box feature, so fundamentally, these are all that’s required.
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