This section explains what to consider when applying for a merchant account to accept card payments.
Click on the links below for more information:
- Choosing an acquiring bank
- How to accept cards
- Which terminal?
- Pricing
- Merchant Service Agreement
- Payments
Choosing an acquiring bank
Before a merchant can start accepting card payments, they will need an agreement with an acquiring bank to process their card transactions for them. There are a number of acquiring banks in the UK, all of which offer a wide range of products, services and prices that can be tailored to the different ways businesses operate, and to help them realise their future plans.
In a majority of cases, the high street banks will also have a merchant services operation that merchants can contact to find out what they have to offer. There is a list of acquiring banks in our resources and useful links section that may also be able to help.
As an integral part of the card transaction process, a merchant’s acquiring bank will be aware of any changes made by the card schemes on how a transaction should be processed, the rules that they make, or the introduction of new card types e.g. the recent change in the UK from Switch to MAESTRO. The acquiring bank will amend their systems, provide guidance on actions that need to be taken and communicate these changes to their merchants. This may also include changing the way in which a bank owned terminal has to work, which in most cases, can be done without disrupting a merchant’s business.
Apart from the key function of processing card transactions and obtaining an authorisation for the merchant, an acquiring bank can also offer a wide range of services; examples are listed in the products & services section.
How to accept cards
There are two ways a merchant can accept a card transaction for purchases depending on where the cardholder is at the time.
Traditionally, the majority of card transactions have been face–to–face where a cardholder, physically, gives their card to a merchant to pay for their purchases; this is known as a card present transaction.
Alternatively, there are an increasing number of purchases made where the cardholder is not with the merchant; when they make a purchase using a remote channel e.g. buying over the telephone or internet. This is known as a card not present transaction and additional steps may be required to accept this kind of transaction.
A merchant may find that their business plan starts with a shop which sells goods on the high street, and they, subsequently, may want to add a remote sales channel or vice versa. In either case, it is important to discuss these plans with an acquiring bank when applying for a merchant account.
Which terminal?
At the most basic level, a merchant can accept a card transaction using a standalone terminal where they manually add up the individual items purchased and then key this amount into the terminal for an authorisation.
The decision about which terminal to use will depend on the level of interaction required with a merchant’s business operations and processes. For example, if a merchant is going to give customers an itemised receipt from a number of bar code scanned products, and the total figure is then passed electronically to a terminal to take a card payment, they may need an integrated terminal; also known as an integrated point-of-sale.
The majority of businesses require a terminal that is serviced for them, and will, probably, choose a terminal that they rent from their acquiring bank, known as a bank owned terminal, as part of their card acceptance package. A merchant can see the full range of terminal options here.
Alternatively, a merchant can source their own terminal and an acquiring bank may have a list of approved suppliers who use terminals that are compatible with their systems.
Pricing
The pricing for transactions or card acceptance that a merchant will negotiate with their acquiring bank is known as their merchant service charge (MSC).
It is not possible to provide facts and figures on pricing as this will depend on the nature of a merchant’s business and how it operates; pricing will be decided by negotiation between the merchant and their prospective acquiring bank. However, this website can provide information on the key elements involved in pricing to help merchants understand the basis on which pricing is determined and how a MSC is calculated.
As with all costs to a merchant they will want to negotiate the lowest rates for their card acceptance. It is worth reflecting on how cards could improve a merchant’s business when making a judgment as to whether they will be getting good value for money; below are a few areas to consider:
- By not accepting cards, a merchant may be at a competitive disadvantage.
- Cards are a highly effective way of taking a payment. Merchants should consider what would be required to take cash or cheques, for example providing change and making sure any notes are not counterfeit, and banking the takings.
- With a comprehensive statement of what has gone through the terminal a merchant can easily track sales and create a better understanding of their customers’ payment preferences.
- An acquiring bank’s service may also include access to a comprehensive call centre to help merchants experiencing difficulties with their card transactions e.g. if a merchant’s bank owned terminal is not connecting properly, their acquiring bank will advise what course of action should be taken. In addition, they will help with any requests for information or chargebacks made on card transactions they have accepted.
- With card purchases credited directly to the merchant’s bank account by direct debit, they can track sales on a daily basis to spot the busiest times in the week and staff accordingly.
- An agreed MSC, enables a merchant to easily track their card processing costs and budget for these.
- The MSC is taken by direct debit from a merchant’s bank account thereby reducing administration.
Types of Card
Credit and debit cards are the two main card types a merchant is likely to accept and these are, traditionally, priced in two different ways:
- Credit cards are priced on a percentage of the total value or ad valorem basis. This is a % of the value of the card transaction.
- Debit cards are priced on a per transaction basis. This is usually expressed as pence per transaction.
Incorporated in the pricing will be the interchange fee that the acquiring bank pays the issuer for each processed transaction. Further details can be found on the MasterCard website and Visa website.
This explanation on pricing provides a simplistic way to understand the merchant service charge for card transactions. Each card scheme will have a different level of interchange for each of their card types e.g. Visa Debit and MasterCard’s MAESTRO and the type of transaction being processed e.g. a chip and PIN or internet card not present transaction.
To negotiate the correct pricing for its card acceptance service, an acquiring bank will want to know, at least, the following aspects about a merchant’s business:
- Which industry a merchant is operating in.
- Where a merchant’s shop is going to be sited.
- What type of goods or services a merchant is selling.
- If there are any guarantees attached to the goods or services.
- What will the merchant’s actual or forecast card volumes be.
When discussing the mix of card volumes, an acquiring bank will want to know:
- Which card type – debit or credit and MasterCard or Visa. For example a debit card could be MAESTRO or Visa Electron.
- How many debit and credit card transactions there will be.
- Whether a transaction will be processed as card present or card not present.
- The average value for each card transaction – known as the ATV or average ticket value.
- How the transaction is going to be processed. For example, with a card not present transaction which is processed using both Address Verification Service (AVS) and Card Security Code (CSC) this may influence the price for that type of transaction.
If a merchant does not currently accept cards, to forecast their card volumes may be difficult at this stage. An acquiring bank will have an understanding from its own experience of how different businesses by industry type e.g. hairdressers and size of business by sales turnover are likely to operate and can help a merchant to forecast their card volumes.
With an understanding of a merchant’s business and details of the projected card mix, values and volumes an acquiring bank will be in a position to negotiate a 'merchant service charge' with their merchant.
If a merchant is just starting up in business or only expects to take a small number of transactions, they can ask their acquiring bank if they have any specific pricing packages for a smaller business.
To accept American Express and Diners Club a merchant will need a separate card processing agreement with these organisations. An acquiring bank will be able to discuss these card types and advise on how to take forward an application.
Terminal Rental
In the case of a bank owned terminal, typically, terminal rental is on a monthly basis + VAT, usually with a minimum contract of up to 36 months.
Alternatively, merchants may choose to source a terminal from a separate provider to their bank – known as a retailer owned terminal.
A merchant may also require a polled terminal that, typically, attracts an additional charge to the terminal rental.
Other Fees
Typically, these are some of the other costs an acquiring bank may levy:
- Joining fees or set up fees – to cover the costs of setting up a new account.
- Minimum Monthly Service Charge (MMSC). This is a minimum fee which will be applied by an acquiring bank where their merchant service charges (MSC) for accepting cards during the month is less than the MMSC. For example, with an MSC of £17.50p for that month and a MMSC of £20, an acquiring bank would make a charge of £20 for the month. Over time, as a merchant’s business grows, they are less likely to pay a MMSC.
Internet Trading
When trading over the internet, a merchant will not only have to accept cards from their customers but they will also need to provide a secure facility or payment page for them to provide their card details.
The charges for accepting or acquiring the cards online are explained in the Card Types section of the web site. There will also be a charge from a Payment Service Provider (PSP) who provides the secure payment page. Typically, there will be a set up fee to run the account and a per transaction fee or click fee that will cover each card transaction that they pass onto the merchant’s acquiring bank and the authorisation response which is passed back to the merchant.
All these pricing elements will need to be taken into consideration when a merchant calculates the cost of accepting online card transactions for their business.
An acquiring bank will explain the different elements of pricing for the products and services they offer when they negotiate pricing with a merchant. They can also discuss the range of fraud prevention tools available which could help reduce a merchant’s card acceptance costs.
Merchant Service Agreement
As part of a merchant’s application, they will need to sign a Merchant Service Agreement (MSA) that sets out the terms and conditions of the contract they will enter into for an acquiring bank to process their card transactions. This agreement may also include agreed pricing, how cards will be accepted (a bank or retailer owned terminal) and which card types can be accepted.
Please note that to accept American Express and Diners Club, a merchant will need a separate agreement with these card schemes.
Payments
An acquiring bank will pass payments (also known as a credit), for cards a merchant has accepted, to their nominated bank account. The acquiring bank will also debit a merchant’s nominated bank account on an agreed date for any service charges, card processing fees or other bank charges e.g. chargebacks as they occur.
The time it takes for a card payment to reach a merchant’s bank account will vary depending on the type of transaction and are ranked below showing the fastest first:
- Card present transaction - up to four working days
- Card not present transaction (mail order or telephone order) – can be more than four working days
- Card not present transaction (internet) – can be 30 working days or more
A merchant can check that their bank account has been credited with the correct amount of funds by printing a daily summary of what card business has been transacted. This can be done by performing the end–of–day procedure through their terminal and then reconciling this figure with the entry in their bank account. Where these do not match, an acquiring bank will be able to assist in understanding any discrepancies.
Invoice / Statement
An acquiring bank will usually provide a merchant with a monthly invoice or statement, detailing all of their charges and the basis on which these have been calculated.
Please note this section (Your Merchant Account) has only provided a high level overview on areas for a merchant to consider when discussing a card acceptance facility with an acquiring bank. An acquiring bank will be able to discuss the more detailed aspects of their service with a merchant and a list of providers can be seen here.
