BACKBURNER: How to get Good Terms for Your Merchant ID and Merchant Account

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BACKBURNER: How to get Good Terms for Your Merchant ID and Merchant Account

What is a Merchant ID or MID?

A Merchant ID is an essential component to running an ecommerce business. If you don’t have one (or many) you can’t accept credit or debit card payments.   A Merchant ID is assigned to every merchant account.  The merchant account is the account where the money is deposited when your customer buys from you on the Internet (or offline of course with Square or Point-of-Sale POS solution).

A Merchant ID (MID) is issued when you get the account and it is a unique identifier for your payment processor and the bank that enables them to authorize transactions to (and from) you.

In short, if you don’t have a Merchant ID, you don’t exist to the world of ecommerce. The Merchant ID is the key piece of infrastructure that enables you to collect money.

The typical way you collect money into a Merchant Account is through Credit or Debit cards.

So how do you get a MID?

You enter into a Merchant Agreement, typically with a Bank. In some cases you have a Payment Processor, an Independent Sales Organization (ISO) or a Member Service Provider (MSP) who are a party to the Merchant Agreement, which is the agreement used to set up the account.

Before you enter into a Merchant Agreement, you should be familiar with the jargon below so you can negotiate your best agreement.  Sometimes it’s good enough to just get started with a set of terms and then obtain later Merchant IDs under better terms once you have some transaction volume.

One challenge with negotiating with a bank is that they see thousands of merchants, whereas often times merchants are talking to their first bank ever or maybe only talking to a few banks.

Here’s some knowledge to help you get an edge when talking to your merchant bank. Arming yourself with a bit of knowledge ahead of time can pay off later on.

Basic Merchant Account Jargon to know:

Qualification: What does it mean to be qualified? It means that certain cards can provide you certain rates, depending on the quality of the card. These fall into several categories, below:

Qualified Rate: This is how much you are charged when you accept ordinary credit cards using standard processing solutions. These are the lowest cost rated you incur.

Mid-Qualified: If you don’t meet the Qualified Rate, which are the best credit cards, these rates can be applies by when cards are not put through an approved payment processing system  (like typed in over the phone instead of swiped) or special types of cards.

Non-Qualified: If they are not qualified or partially qualified, the rest fall into this bucket. These are often Corporate Cards.

Basis Points:The term is used to describe percentage rates, which are the majority of card processing fees you would pay. Each basis point is 1/100 of a percentage point.

Interchange: the fee paid to the issuing bank by the card acquiring bank. Interchange rates vary based on retail sector, card type, transaction amounts, and risk analysis. All Visa and MasterCard credit and debit cards incur this cost.

Discount Rates: includes app payments including any assessments, dues, fees, dues, markups and network charges merchants must pay for accepting credit and debit cards. The biggest component of the discount rate is the “Interchange” defined above.

Here’s the thing though. Even if you know the basic jargon, there are a whole new set of issues you will want to consider for your business:

Advanced Merchant Account Jargon to know:

Limits: One of the industry’s dirty secrets is that every Merchant ID has limits. When applying for a Merchant ID one thing to understand is that from the perspective of the issuing bank, they are extending credit. Why does a bank thinkin those terms? Merchant accounts typically start with no money in them–so where is the credit component?

Typically, buyers using credit and debit cards can reverse charges (called Chargebacks) up to 180 days after the date of purchase. Some businesses, like Affiliate Marketing and Continuity Subscription Ecommerce businesses, suffer from a pretty high rate of such chargebacks. Typically, the merchant is responsible for chargebacks.  Of course if they got the money in the first place, they should be able to refund the money from such an incident.

Unfortunately, there are situations where companies for whatever reason are unable to pay.  In most cases they went out of business, but in some cases there is a form of fraud involved. In such cases, the Bank has to underwrite the cost in order to stay in the VISA or Mastercard program, and this is perceived as risk.

As a result, Banks place limits on Merchant IDs, including capping a maximum ticket amount, as well as a maximum monthly amount. This is crucial because woe betide any ecommerce vendor who exceeds the monthly limit.  The business grinds to a halt and is unable to make any further transactions. Exceeding your limit can result in missed deposits, held funds and even account shut downs.

In conclusion

It’s essential to negotiate good limits and to maintain good visibility into the health of your Merchant IDs to make sure that none of these valuable assets is compromised. The quantity, health and the maximum limits of your Merchant IDs limit the ability of your organization to scale and grow.