Your Merchant Account and Puffy Director Pants Taxes

I’d like to say setting up a merchant account and real-time credit card processing is quick and painless. But then, of course, I would be a big fat liar.

The process reminds me a lot of that episode of “The Simpsons” when the big Hollywood studio comes to Springfield to film the latest “Radioactive Man” movie and the whole town gouges the poor movie crew repeatedly with taxes and fees. The episode culminates in one of my all-time favorite lines in which Mayor Quimby tells the movie’s director there is now a tax for wearing “puffy director pants.” The director explains that he doesn’t wear “puffy director pants,” to which Quimby replies, “Err… I mean it is a tax on NOT wearing puffy director pants.”

You’ve gotta pay “puffy director pants” tax to do business with merchant account providers because they are the only game in town. And they all seem to have the same lackluster service. So your only protection is understanding what you are buying.

How It All Works

In simplest terms, here’s what happens when people order with a credit card from your site. They go through five steps:

  1. The “picking what I want to order” step
  2. The “checking my order and giving you my contact information” step
  3. The “giving you my credit card number” step
  4. The “checking if the credit card number is good” step
  5. The “generating a receipt (if the card is good)” step.

The solutions out there range from, on the low end, handing this whole process over to another company to, on the high end, having this whole process occur on your very own server.

Now, since we are a small business and trying to do this within a budget ($4,600 is what we have left after last week), I’m not even going to discuss the high-end solution. Just know that it exists, that you eventually will want it, and that you will someday pay some technical geek a lot of money to build it for you. So start saving.

But it the meantime, a small business only has two options.

I’m Ready for My Options, Mr. DeMille

First, you can “rent” the capability from a number of companies. What I mean by this is that you pay a monthly fee, and usually a percentage of each transaction, to a company that hosts all the software for the entire five-step process I outlined above. Your web site is just a pretty front end to their software. This is your only option if you can’t get a merchant account (you must have good credit to get your own account). Personally, I would use this option only in that case because I like to have as much control over the process as possible.

So that leaves option two getting your own merchant account and shopping cart software. This is what we did at In our case what happens is that steps 1 and 2 occur on our server, then the customer is handed off to our merchant account provider, CardService International, for steps 3 and 4, then CardService hands the customer back to us for step 5.

It is important to point out that, in some cases, there is an intermediary party, called an authorization gateway, that is the interface between your web site and merchant account providers that can’t handle transactions coming to them from a web site. (Remember, merchant accounts were originally invented to handle offline transactions.) If you already have a merchant account from a brick-and-mortar business that’s never heard of the Internet, you will need to get an authorization gateway provider.

OK, It Works, BUT…

The big caveat to our system, and really many online transaction systems, is that its smoothness is predicated on the merchant account provider’s server being up and running. If that server craps out either while we are handing the customer off to them, or it’s handing the customer back to us, the transaction is screwed up.

The dirty little secret no one ever tells you is that the merchant server responds slowly and even totally craps out more frequently than anyone wants to admit. See, the problem is that credit card processing is optimized for the offline world, where the card holder hands me a card, I swipe it, and hand it back to him or her. If there is a problem, I just fill out a paper slip and process the transaction later, but the sale still occurs. Online if there is a problem, the sale stops in its tracks, the customer gets irritated, blames the site and leaves.

And we all wonder why the shopping cart abandonment rate is so high.

The only way we’ve been able to sidestep this issue at is to set up “red flags” in the form of emails at critical steps of the process. When people buy from us, I know when they have completed steps 2, 4 and 5. If I don’t see three emails for every transaction, I know to check and see if the CardService server is up or unusually slow. If I find either case to be true, I can quickly change some configuration settings to cut CardService out of the loop and have the shopping cart send the information directly to us so we can process it later. Sort of our virtual answer to the paper slip in the real world.

What Is the “Puffy Director Pants” Tax?

OK, so how much will this all actually cost you? Here is a rundown of our expenses. (Your mileage may vary.)

Purchase/Lease of Software: We purchased the software we use to process credit card transactions for $600.00. What that really means is we have access via the web to an interface that lets us manage our account. However, you can lease the software for around $40.00 per month. You will probably have to sign a two-year lease.

Discount Rate: This term is confusing. You don’t get a discount. In fact, no one gets a discount. It is the amount discounted from the transaction to pay the credit card firms. This standard discount rate usually ranges from three to five percent or more depending on what credit card your customer is using. For example, if your customer makes a $10 purchase using his American Express card, and the discount is five percent, American Express will keep five percent of that purchase ($0.50). If your customer makes a $100 purchase, American Express will take $5.

Per Transaction Fees: You will be charged a set fee for each transaction you process. We pay $0.30 per transaction. If we process 200 sales in a month, our transaction fees are $60.

Monthly Minimum: Most merchant firms require a monthly minimum of $25 for combined discount rates and transaction fees.

Statement Fee: This is for administrative charges associated with the firm’s processing of your transactions, around $10 per month.

Authorization Gateway Fee: This is for monthly access to the authorization servers for processing of transactions, around $20 per month.

Totals: So, if we sold 200 ebooks last month totaling $3,000, our total merchant account expenses would be $205.

Equipment/Software Lease: $40
Statement Fee: $10
Average Discount (2.5%): $75.00
Transaction fees (200 * .30): $60.00
Gateway fees: $20.00

When you apply for a merchant account, you will receive an application, similar to a credit card application. You’ll be required to divulge your credit history and details about your business.

Next week, I’ll tell you what to watch out for in this process, and we’ll get into the shopping cart issue.

So, if we assume we’re going to buy the software to get our merchant account going, we need to deduct about $600 from our budget, which was $4600 after last week’s buying spree for web development tools. That leaves us a budget of $4000 going into next week when we buy shopping cart software.

Keyboard at you then!

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