Merchant Account Terms and Procedures
Here are some very common terms and procedures that you will encounter when setting up a high risk/offshore merchant account.
MID or Merchant Identification Number
MID is industry terminology for merchant account and is a unique number assigned to an individual merchant account to identify it.
A Direct merchant account has its own MID, while aggregated merchant accounts include several merchants under the same MID.
Direct Merchant Account vs. Aggregated Merchant Account (3rd Party Account)
A Direct merchant account is used by only one merchant while an aggregated merchant account is utilized by several merchants.
When managed properly, aggregated accounts are great for high chargeback merchants and clean merchants alike. The processor will maintain the MID to make sure that the overall chargeback threshold is not reached. Normally these accounts are utilized by smaller merchants that are unable to qualify for a direct account.
3D Secure is a technical feature created by Visa and MasterCard to further secure card-holder not present transactions over the Internet.
MasterCard’s 3D Secure system is ‘MasterCard SecureCode’ and Visa’s is ‘Verified by Visa’.
3D Secure shields a buyer’s credit card from unauthorized use when purchasing online. This simple service allows buyers to validate transactions they make over the internet by requesting a personal code (usually sent to your cell phone or email address as a one time PIN). It helps protect against fraudulent use by unauthorized individuals.
Interchange-plus pricing is sometimes referred to by different names, such as interchange pass through pricing or cost-plus pricing. While the actual numbers may get complex, at its core interchange-plus pricing is rather simple. The pricing model comprises of two parts: an “interchange” and a “plus.”
The interchange is the percentage of the transaction that must be paid to both; the credit card association and the issuing bank. The payment processor has to pay this charge and they will pass it on to you. The plus is the amount over and above the interchange costs that you’ll also have to pay to your processor. It’s their markup for processing your transaction, and it’s intended to cover their costs.
Interchange-plus pricing rates are usually expressed as the interchange rate plus a markup, which can be a percentage, a flat, per-transaction fee, or both. These interchange fees are set directly by the credit card associations, and they can get pretty complicated. There are different rates for debit and credit cards, for example, as well as different rates for different types of credit cards. Card-present and card-not-present transactions also have different rates, as they reflect the level of risk the issuing bank is taking in extending credit for a given transaction. If you really want to earn more, the rate information from Visa and MasterCard is also available on their respective websites.
Discount Rate (MDR)
The discount rate is the percentage charged on every transaction your company processes.
A transaction fee is charged on every transaction; approved or declined.
A refund fee is charged on every refund. Refunds are more expensive offshore because they need to be manually processed to avoid merchants receiving a wire payout and then refunding all of their transactions.
Statement Fee / Monthly Fee
Different processors have different names for this fee type but it is charged for reconciling transactions for a specific payout period.
Domestically it is normally done on a monthly basis while offshore it is normally done on a weekly basis.
The gateway fee is usually charged on a monthly basis. The gateway allows merchants to charge card not present transactions like; internet and phone orders.
Monthly Minimum Fee
The monthly minimum is a fee usually charged only on domestic accounts. It specifies the minimum amount of fees your provider expects to be generated by your discount rate.
For example: if your average discount rate (with all downgrades and interchange) is 2% and your monthly minimum is $20. You need to process at least $1,000 per month in order to fully avoid the monthly minimum. If you process over $1,000 per month, you won’t pay any monthly minimum fees. If you process $500, you will pay $10 in monthly minimum fees.
This is a one-time fee for underwriting an application and does not guarantee approval.
Setup Fee / Implementation Fee
This is a one-time fee for approving and setting up a merchant account. This fee might be deducted from an offshore processing payout or paid at the time of approval.
This is a fee that a processor charges on an annual basis.
Retrieval Request Fee
A retrieval fee is charged when a customer or the customer’s card issuing bank requests information on a transaction, normally a copy of a sales invoice or other KYC in order to validate a transaction. This is called a retrieval request, and most card processors charge a small retrieval fee to process a retrieval request.
A retrieval request is sent by the cardholder’s issuing bank to the processing bank which in turn sends the request to the business. At this point a processor will charge a retrieval fee. A retrieval request does not involve the refund or reversal of a transaction. A reversal is only commenced if a chargeback happens.
A fee assessed by the bank to a merchant when a customer disputes a charge on their card bill. Usually, chargebacks will occur for one of these reasons:
• A bookkeeping error, such as a customer being charged twice or being billed for an incorrect amount.
• Customer dissatisfaction, such as not receiving a product or service at all or receiving a product or service different than what was paid for.
• Fraud — when a customer claims they did not authorize a purchase.
For most transactions, customers have 180 days from the sale to dispute a charge.
Chargeback Management Fee
Some payment processors have the ability of inserting “clean” transactions into a merchant’s account in order to decrease the merchant’s overall chargeback ratio. This is usually only available with aggregated accounts.
Know your customer or client is the process of a business identifying and verifying the identity of its clients.
Wire Transfer Fee
A fee charged every time the processor wires money to them.
Fraud Scrub Fee
A fee charged for scrubbing transactions and declining transactions considered risky. This service may or may not be required by the processor.
Call Verification Fees
A fee that is charged, per contact, relating to billing charges and disputes. These are outbound calls to customers, to verify that a charge to their card is legitimate. If a processor believes that certain transactions are suspicious, they may call the customer direct.
Call Center & Support Tickets (including Refunds)
A fee that is charged, per contact, relating to billing charges and disputes. These are inbound calls/support tickets from customers that are inquiring about a charge on their card. This fee is also charged if a customer calls or submits a support ticket and requests a refund from the processor directly.
When you cancel or terminate a merchant account before the stipulated date, your merchant account provider might charge a cancellation fee. This fee, if charged, is usually charged by domestic processors. Offshore processors do not normally charge this fee.
The rolling reserve is the most common reserve and is required on 95%+ of all high risk accounts. Under this reserve model, a percentage (normally 10%) is held for a predetermined amount of time (normally 6 months).
For example: a merchant that processes $100k per month consistently with a 10%, 6 month rolling reserve, will have 10% of every month’s volume held for 6 months. The reserve from the 1st month ($10k) will be paid out during the 7th month and the reserve from the 2nd month ($10k) will be paid out during the 8th month and so on. The processor will always have 10% of 6 months volume.
Up-front reserves are less common. They require a merchant to deposit, upfront, a set amount of funds, normally equal to one month of total processing volume. This reserve model is usually used with merchants that are deemed very high risk and/or processing large transactions with limited or no previous processing history.
The second option for funding an upfront reserve is for the processor to hold 100% of funds until the reserve has been fully funded.
Accrual Reserve or Capped Reserve
Accrual reserves are even less common. Similar to the second type of up-front reserve mentioned above but, instead of holding 100% of the processing volume, they will hold a smaller percentage, maybe 20%-30%, until the predetermined reserve balance is met (normally 1 month of total processing volume).
The normal payout delay for high risk domestic is 2 days. The most common payout delays for offshore are: 7 days, 10 days or 14 days. It is standard for offshore banks to payout any funds weekly from the previous statement period.
A 7 day delay means that your funds will be held for 7 days from the end-date of your most recent statement period. If your statement ends on a Thursday (Thursday 11:59 PM / 23:59), your transactions will funded the next Friday.
For example: February 1st is a Thursday. If your statement ends on Thursday and you are on a 7 day delay, you will be wired this period’s funds on the 9th. This continues for the lifetime of the account. See below.
If you are on a 10 day or 14 day delay, you will just add these additional days to the 7 day payout delay calendar above. A 10 day delay is just adding 3 more days. For example: transactions from February 2nd-5th would be paid out on the 16th while transactions from February 6th-8th would be paid out of the 23rd since there needs to be ATLEAST 10 days of hold time on transactions before the payout is made.
If you were on a 14 day delay, your funds from the period ending on the 1st would be paid out on the 16th.
How To Avoid Additional Offshore Payout Delays
-Meet the minimum payout amount
Your processor will clearly note the minimum payout amount on the agreement. You need to NET this amount AFTER the discount rate and all other fees have been deducted. If you have not met this minimum, your funds will be moved forward to the next settlement period.
-Maintain an acceptable chargeback ratio
The best rule of thumb is to always keep your chargebacks under 1%, which is the universal banking chargeback threshold; easier said than done. Offshore banks and processors will have their own chargeback threshold which they will share with you. It normally is 2%-4% and depends on if you have a direct MID or you are in an aggregated MID and how much “clean” volume they have to “dilute” chargebacks.
-Maintain continuous and sufficient processing in the pipeline
Your processing volume for the current period (that has not been paid out yet, known as the “pipeline”) should be similar/equal or greater than your payout amount for the previous payout period.
See below, if it is February 16th and you are waiting for your wire to be issued for the period that ended on the 8th, your processing for the period ending on the 15th must be similar/equal or greater than the wire you are waiting on (payout period ending on the 8th). In other words, you should not stop or greatly reduce your processing volume and expect a wire payout. This is very suspicious to banks and payment processors.
Fee Occurrences and Example Calculation
Every transaction will be subject to the following fees and deductions:
Your merchant account has a; discount rate of 10%, reserve of 10% and a transaction fee of $.50.
You process a transaction for $100.
-10 discount rate
-.50 transaction fee
$79.50 gross payout (minus any applicable fees below)
Account maintenance fees are scheduled fees and will be marked as (weekly, monthly, annually etc.) You can plan accordingly for these fees since their names explain when you will be charged (weekly, monthly, annually etc.)
-Monthly minimum fee
Per occurrence fees are charged when they occur.
-Wire transfer fee
-Chargeback management fee
-Customer support ticket fee
One-time fees are charged, one-time.
-Setup or implementation fee