Should You Get A Merchant Account, Or Not?

Accepting credit cards online is vital to any business wanting to successfully sell goods and services on the Internet. Back in the early days of the Internet it was thought that using credit cards for Internet purchases was a bad idea, because it was trying to apply an offline technology to the digital world. Various companies tried to offer "micro payment" currencies such as "beenz", but they didn't achieve critical mass. Here we are, roughly a decade on from the commercial birth of the Internet, still using credit card to make online purchases and therefore accepting credit cards as payment for goods online is still as important as ever.

There are basically two ways to accept credit cards online. A business can either apply for their own merchant account, which allows them to process credit cards in their own business name, or they can go with a third party processor, who does the actual credit card processing on behalf of the company. Getting a merchant account costs more initially, but has lower per transaction fees. Using a third party processor costs less initially, but has higher per transaction fees.

The decision as to whether or not to go for a full merchant account or use a third party processor is simply a question of crunching the numbers. Let's look at two different business types...

In most cases, established businesses who are already trading locally and want to expand online will be more suited to getting a merchant account. Most likely, they will already have an offline merchant account and will expand the remit of that account to add the ability to do "MOTO", which is "Mail Order Telephone Order" processing and simply means that the cardholder is not present at the point of sale.

For micro businesses starting out online selling new software or a new ebook, it is strongly suggested that they begin by testing their marketing using a third party processor. The advantage to the new business is that there's very little upfront cost which means they can test their market cheaply and easily. If sales boom, they can eventually look to reducing the per-transaction cost by getting their own merchant account. If sales are poor, they can at least exit the market without having paid significant upfront costs to get their own merchant account, perhaps being tied into monthly minimum fees too.

When the sales volume generated by a business is sufficiently high that the costs of getting a merchant account to process credit cards in the name of the business more than offset the per-item transaction costs incurred by using a third party processor, that's when getting a merchant account makes sense. It does not make sense for micro-businesses starting out online.