What Is An Online Merchant?

An online merchant is a business that sells goods and processes payments over the Internet. This e-commerce store transacts through a virtual terminal and payment gateway. These merchants are similar to physical store merchants except that the point-of-sale and all business is conducted online.

What Does An Online Merchant Do?

The role of an online merchant is to sell products on their website. It is most common for new business owners to start off as online sellers. This is different than an online merchant because the merchant has more responsibilities such as managing inventory and organizing payment services. These merchants can choose to charge a flat rate or monthly fee aka recurring billing.

For an online merchant to be successful, they must maintain the product or service quality, set pricing, manage payment services, and execute strategic marketing. Advertising online is essential for business growth and sustainability. It is important for the merchant to be knowledgable of new media trends in order to properly maintain the company brand and successfully sell products.

Online Merchant Transaction Process

The process of a transaction from the card holder’s bank account to the online merchant account is intricate, but broken down becomes quite simple and clear. Below is a flow of online payment processing from point-of-sale to the online merchant bank account.

What Are The Different Kinds Of Online Merchants?

01. E-commerce Merchant

An E-commerce merchant sells products or services exclusively over the Internet. An online merchant account is different than an online seller. The online seller only buys products and sells them for profit. The online merchant has additional responsibilities. The major responsibility is that the online merchant is in charge of payment processing. They also need to manage inventory, develop the company brand, and promote the products or services.

02. Wholesale Merchant

A wholesale merchant, also known as a wholesaler, purchases goods in bulk. After the products are purchased, the merchant redistributes them to retailers in smaller volumes. In the past, it was more common for wholesale merchants to operate out of large warehouses, but lately, the trend has swayed towards the merchant acting as a broker of the transaction. This method of business is called drop shipping.

03. Retail Merchant

A retail merchant, also known as a retailer, purchases goods from wholesale merchants in smaller quantities. The retailer sells products directly to consumers. Usually these types of merchants are much better at marketing and advertising then wholesalers.

Retail prices are always higher than wholesale. One major contributor to the price difference is that retail spends more on promotion, PR, advertisements, and marketing. The retailer is also more responsible for their public image and customer service since they are customer-facing.

Retail merchants are essentially resellers. This allows them to change labels and repackage products using a different brand. Not all companies allow the packaging to be changed. Trademark rights and other agreements can affect the freedom a retailer has for re-branding. This selling strategy is effective, however there is much more involved in product promotion. Reselling seems to be the most popular form of product distribution among business owners. In the wake of the Covid-19 pandemic, it is apparent that retail merchants will be taking their business online more and more as social distancing and shelter-in-place continue.

04. Affiliate Merchant

An affiliate merchant is a business that generates sales of products through a network of affiliates using links and ads. Affiliate merchants advertise merchandise on a website and then earn a percentage of the sale when the buyer makes a purchase. A membership fee is commonly charged for merchants to be a part of the network. An additional commission is taken from every sale in order for the affiliate program to function.

The Status Of Online Merchants

Every year online sales grow as more merchants open online. This trend is likely to continue, especially considering the effects of the Covid-19 pandemic on the public’s decision to not shop at physical locations. Instead, shoppers are being driven to use their debit card, American Express, Visa, Mastercard or Apple Pay to purchase products from online merchants using e-commerce websites and online credit card processing resources. Source

Credit Card Processing Best Practices

Following best practices for processing credit card transactions can help businesses avoid potential fines, protect against payments fraud and improve customer satisfaction...

• Maintain sufficient funds to cover processing fees. Otherwise, an account could be sent to collections, and collections fees would be incurred.
• Reconcile deposits regularly to identify and resolve discrepancies quicker.
• Avoid excessively retrying a declined card. Repeatedly attempting to make a transaction with the same card can lead to authorization issues; instead, instruct staff to request an alternative payment method from the customer.
• Respond promptly to chargebacks. Merchants are given a limited amount of time to respond to chargebacks, and failure to respond in time could result in the merchant losing the case.
• Monitor and analyze transaction history to detect anomalies that might be signs of fraud and identify trends that could inform payment processing strategies.
• Maintain compliance with the Payment Card Industry Data Security Standard (PCI DSS). This worldwide information security standard, defined by the Payment Card Industry Security Standards Council, helps prevent fraud through increased controls of the data held and exchanged by businesses that process card payments. Using a PCI-compliant payment processor can simplify the compliance process.
• Equip POS terminals with EMV chip readers. EMV chip transactions are more secure than transactions using a magnetic stripe, as EMV technology encrypts transaction data.
• Implement point-to-point encryption (P2PE) and tokenization. With P2PE, payment data is encrypted at the point of sale and can be read with the appropriate key. Alternatively, tokenization can be used to minimize data breach risks. Tokenization allows the cardholder to make a payment without providing card or bank account information to the merchant.
• Educate staff on secure processing procedures, including proper handling of card transactions and recognizing signs of fraud.

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Credit Card Processing Fees

When businesses accept credit card payments, they incur credit card processing fees, which vary in amount depending on the type of card, transaction volume and payment processor.

The three main categories of credit card processing fees are:

1.) Interchange fees: These are fees merchants pay to issuing banks to cover the costs of issuing cards and processing card transactions. Card networks set these fees.

2.) Assessment fees: These are fees merchants pay to card networks to help cover their operating costs. Card networks also set these fees.

3.) Payment processor fees: These are fees merchants pay to their payment processor (often the merchant bank or a third-party processor) for facilitating the transaction. Payment processors set these fees, which may be a flat fee per transaction, a monthly fee or a percentage of the transaction amount.

Beyond these three main fees, some payment processors charge an annual fee for maintaining payment card industry (PCI) compliance or helping the business achieve compliance.

Additionally, while not a fee, the costs associated with leasing or purchasing card readers or POS terminals are an important consideration for businesses that need to accept in-person payments. Source

How does Credit Card Processing work?

Credit card processing happens in three phases: authorization, clearing and settlement;

Authorization

The first phase is credit card authorization, which typically only takes a few seconds.

A customer pays for a purchase with a card at a point-of-sale (POS) terminal in a store, online or by mail order/telephone order (MOTO).

The merchant submits an online authorization request for the charge amount to the merchant bank. This request is usually transmitted through a POS terminal or payment gateway.

The authorization request is routed through the appropriate card network to the issuing bank.

The issuing bank reviews the cardholder’s account and approves or declines the transaction. If the transaction is approved, the issuing bank places a hold on the cardholder’s credit limit for the amount of the charge.

The issuing bank sends the approval or denial back through the card network to the merchant.

Clearing

The second phase is the clearing process, which is how payment information is communicated through the card network.

The merchant electronically sends batches of authorized card transaction data to the merchant bank, typically at the end of the business day.

The merchant bank forwards the transaction data through the card network to the issuing bank.

The issuing bank receives the transaction data and converts the hold on the cardholder’s account to a charge that will appear on the cardholder’s monthly billing statement.

Settlement

The final phase is the settlement process, which typically occurs the day after the clearing transaction is submitted to the card network.

The card network establishes the net positions of all settlement participants (i.e., issuers and acquirers), collects funds from the issuing bank and transfers the funds to the merchant bank.

For cross-border transactions involving more than one currency — such as when a card issued in one country is used for purchases in another country — foreign currency exchange is handled as part of the settlement process.

The merchant receives either a gross settlement or a net settlement. In the case of a net settlement, the merchant receives the transaction value minus fees. In the case of a gross settlement, the merchant receives the full transaction value and is periodically invoiced for the fees due to the various parties.

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Components of the Process

Here are a few components and their roles that aid in the process of Bank Card Processing...

• Cardholder: The consumer making the purchase.
• Merchant: The business accepting the payment.
• POS Terminal/Gateway: The hardware or software capturing payment data.
• Acquiring Bank: The merchant's bank that receives the funds.
• Issuing Bank: The customer's bank that approves or declines the transaction.
• Card Network: Networks like Visa or Mastercard that facilitate the transfer. Source

Key Stages of Bank Card Processing

Here are some of the key stages in Bank Card Processing...

• Authorization:
  • Initiation: A customer swipes, inserts, or taps their card at a terminal, or enters details online.
  • Routing: The payment gateway sends encrypted data to the merchant's acquiring bank, which routes it to the card network (Visa, Mastercard, etc.) and then to the customer's issuing bank
    .
  Approval/Denial: The issuing bank verifies funds and fraud risk, sending an approval or decline code back through the network to the merchant.
Settlement and Funding:
• Batching: Merchants typically submit a "batch" of daily authorized transactions to their processor.
• Transfer: The processor sends these transactions to the card network, which transfers funds from the issuing bank to the merchant's account.
• Timing: While debit transactions can be near-instant, credit card settlements usually take 1-3 business days, although some providers offer faster, often paid, options. Source

Banking 101

You are likely clear on the concept of interest – you owe more than what you borrowed when paying back over a period of time. However, the topic of interest rates might be a little murkier. There are a lot of terms surrounding interest rates that include acronyms and financial jargon, which can be confusing.

In truth, interest rates are a critical component to many of the financial decisions that we make. Borrowing, saving and spending can all be influenced by the current rates. For this latest Banking 101 piece, we will tackle the most common terminology surrounding interest rates and simplify some of the terms you might see or hear on commercials, billboards or other advertisements.

Simple Interest vs. Compound Interest

These are two of the most common interest types, and there is a key difference between the two. Simple interest is an annual percentage of the amount owed, whereas compound interest accrues or builds over time. You often hear the term “compound interest” when referencing the interest someone can earn from a savings account.

So, let’s use a savings account as an example. If a savings account has $1,000 in it at an annual 5.0% simple interest rate, you will earn $50 in interest each year as long as your original $1,000 stays in your account. Over 10 years, that $1,000 investment will have earned you an extra $500.

However, compound interest builds upon itself over time. The interest you earn from the previous year will build upon next year’s total savings. While year one will be the same as the “simple interest” scenario, in year two, you will be earning interest on $1,050 instead of $1,000. After 10 years with a 5.0% compound interest rate, you will have totaled $1,628.89, more than $100 above the simple interest rate scenario.

APR vs. APY

Both of these acronyms, APR (Annual Percentage Rate) and APY (Annual Percentage Yield), are very common amongst banks, credit unions, mortgage companies and other financial institutions when advertising their rates. APR refers to the yearly interest rate that the borrower assumes on a loan or the rate you earn before compounding interest if you lend it.

You’ll often see APR used alongside credit cards, mortgages, car loans or personal loans.

Meanwhile, APY refers to the rate which your money grows in a year when factoring in compound interest. APY is most often used when highlighting savings accounts such as money market accounts or certificates of deposit (CDs).

Fixed Rate vs. Variable Rate

This terminology is fairly easy to explain in the context of a home loan.

A fixed interest rate loan is a loan where the rate remains constant during the entire term of the loan. So, if you get a 30-year fixed rate home mortgage, the interest rate will be the same in year 1 as it is in year 30, with no change in between.

A variable rate loan, on the other hand, fluctuates throughout the term of the loan based on how market rates change, and often correlates directly to US Treasury rates (more on that below). Having a variable interest rate on your home loan could result in a lower introductory rate but will increase in a growing rate environment or could decrease in a declining environment.

In certain situations, a loan may start off with a fixed rate but then convert to variable at some point in the future.

Prime Rate vs. Federal Funds Rate

Now that we have the basics of some common interest rate terminology down, let’s get a little more complex with the prime rate vs. the federal rate. Both rates are benchmark rates that financial institutions use to set their own interest rates.

The federal funds rate is set by the Federal Reserve Open Market Committee (FOMC) at their periodic meetings.   It’s based on a multitude of factors including inflation, employment indicators and the general state of the economy. The FOMC meets eight times a year to establish that rate with a primary goal of keeping the U.S. economy steady. Currently, this rate sits in a range of 3.75% to 4.00%. The Fed Funds rate is generally the rate banks borrow funds on an overnight basis, and it is often tied to the APYs offered on various money market, savings accounts and CDs.

You may have seen recently that the Fed Fundsrate was lowered by 0.25% in each of their September and October FOMC meetings.  These changes affect the next rate we will dive into – the prime rate.

The prime rate is often a starting point for Banks when setting the rate for its most creditworthy customers and is typically set at 3% above the Federal Funds rate.  There are numerous other indexes banks use in setting rates for small business loans, mortgages, credit card, auto and personal loans.  Some of these you may have heard of, including Federal Home Loan Bank (FHLB) and US Treasury Note rates and the Secured Overnight Financing Rate (SOFR).

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