Excerpted from:

Dhealthstore.com
Online

Business
Course
Manual

Copyright 2012. All rights reserved

Chapter 5.
Payment Processors, Payment Gateways, Merchant Account
Services, and Aggregator Services
Now that you have your on-line website (store) set up,
youll need to be able to accept on-line payments which is done
with credit cards (Visa, MasterCard, Discover, and American
Express) primarily, but nowadays, also with debit cards and
electronic checks.
Personally, I recommend that you always be able to accept
payment in any form (including personal checks, money orders
and cashiers checks), however, youll want the fastest way in
which customers money will enter into your business checking
account and this has a lot to do with the payment gateway
service provider.
A payment processor allows you to process payments
online. Payment processing companies use a payment gateway
that authorizes the payments. This is a separate service from the
merchant account service.
A payment gateway service is an e-commerce service that
authorizes payments for e-businesses and online retailers. It is
the equivalent of a physical POS (point-of-sale) terminal located
in most brick-and-mortar retail outlets.
A merchant account provider is typically a separate
company from the payment gateway. Some merchant account

providers have their own payment gateways but the majority of

companies use 3rd party payment gateways.
The gateway usually has two components: (1) the virtual
terminal that can allow for a merchant to secure login and key in
credit card numbers or (2) have the websites shopping-cart
connect to the gateway via an API to allow for real time
processing from the merchants website.
A merchant account is a type of bank account that allows
businesses to accept payments by payment cards, typically credit
cards and debit cards and established under an agreement
between an acceptor and a merchant acquiring bank for the
settlement of payment card transactions.
In some cases a payment processor, independent sales
organization (ISO), or merchant service provider (MSP) is also a
party to the merchant agreement.
Whether a merchant enters into a merchant agreement
directly with an acquiring bank or through an aggregator such as
PayPal, the agreement contractually binds the merchant to obey
the operating regulations established by the card associations.
It is very important on how fast you receive your funds
from on-line business transactions because that money may
serve as working capital for your business and youll need quick
access to it to keep your business up and running smoothly,
especially during the early stages of your business.

Depending on the payment gateway service provider, your

money could take up to 2 to 5 days to enter into your business
merchant account. Therefore, youll want to go with a payment
gateway service provider that can guarantee that your funds will
enter your business checking account in two days minimum,
three days maximum.
When we first established Dhealthstore.com, we went with
Flagship Merchant Services i-Payment our payment gateway
service provider. It took approximately 4-5 business days for our
money to enter into our business checking account. This was too
long to wait for money to cross over into our business checking
account, especially for a start-up business, but we put up with up
for a few months and what helped us was that we (my wife and
I) had personal money available for the business if and when it
was needed.
It is very important to have some money saved for your
new business venture because in business one things for sure: it
takes money (spending or investing it) in order to make
(generate) money.
We ended up losing that account with i-Payment due to iPayment accessing us as a liability business simply because we
were generating too much cash for a start-up business. On our
application we were told to start at $5,000.00 as far as what we
expected to generate monthly. Well, we only had one month of
business where we did less than $5,000.00 in sales and that was
the first month of our agreement with i-Payment.

Because of the business exponential growth and i-Payment

deemed us a liability to them, they held our funds for 30 days
and after it happened again they terminated the account and
service, after giving us notice of course. This was a blessing in
disguise because it forced us to seek out other payment gateway
service providers.
However, we learned that when your account is terminated
by a payment gateway service provider, your business name is
blacklisted so to speak.
Basically, your business (name) enters a computer database
shared by the payment gateway and merchant account industry
and so when you attempt to acquire payment gateway services
from other payment gateway service providers, your business
comes up as a red flag making it extremely challenging to
establish payment gateway service.
Dhealthstore.com was generating so much money that we
had a real dilemma on our hands. However, I know that dilemma
is a word with a two-fold meaning: problem and opportunity.
After no luck with any other payment gateway service
provider, I remembered my last resort company for payment
gateway services: PayPal.
When all else failed, PayPal was there to save the day. We
actually set up a PayPal business account months earlier while
we still had i-Payment as our payment gateway service provider
so our customers had several options in which to make payment.

This allowed our customers around the nation and especially

around the world to make purchases, including those who didnt
even have a credit card because through PayPal they could pay
by electronic check.
But a PayPal business account is not the same thing as a
payment gateway. The good thing about PayPal is that they
provided both - business account and payment gateway service,
which undoubtedly gives PayPal an advantage over most other
payment gateway service providers.
A PayPal business account allows customers to send you
money directly to your account using PayPal and a PayPal
payment gateway account allows your customers to make
payments to you (your business) on your website (your online
store) using credit cards and debit cards in addition to giving
them the option to make payment with their PayPal account.
When we sought payment gateway services from PayPal,
because we already had a PayPal business account which
allowed PayPal to see how much money we were doing in
volume pertaining to sales, within a day or two they granted our
application for PayPal payment gateway services. It was a very
easy process and it saved the day for us.
And it also turned out to be better for us because PayPal
gave us the control to transfer our funds over into our business
checking account, just like PayPal does with a personal PayPal
account after you receive payment(s), and the wait for the funds
to transfer isnt long at all. Just two days.

Continuing,
Youll also want to consider the fees associated with having
a payment gateway account. Theres no way around paying fees
(as thats how payment gateway service providers make money
or generate their income) so you want to make sure that you
choose a payment gateway provider with fees you can live with
paying.
Again, youre going to pay fees (individual transaction fees
and monthly service fees in addition to other applicable fees), so
dont even trip on this. Just look for a service provider that has
fees you can live with (afford) and that are not too high,
especially since your just starting out.
When applying for a payment gateway account, make sure
to read the contract too, the entire contract. If the contract
mentions how the payment gateway provider can hold your
funds (for a certain amount of months) for several different
reasons, abstain from doing business with this kind of provider.
Another thing to be aware of with payment gateway service
account is the monthly amount they start new businesses off
with (something I touched on above).
For example, when initially applying for the payment
gateway account, they will ask you how much money do you
expect to generate on a monthly basis (states will also ask you
this on their retail licenses or sellers permit applications).

Go low in the amount you expect to generate in sales on a

monthly bases and do so on both payment gateway and state
sellers permits application.
So again, for starters, go low because you can always
increase the amount in the future, giving the payment gateway
service provider advance notice that youll need to raise the
amount of money youre expecting to generate monthly with
your business.
Always take the initiative here lest you find yourself in
trouble with the payment gateway service provider who can
penalize you for making too much money with your new
business.
And as far as dealing with states and their sellers permit
application and how to fill them out, purchase our business
document State Sellers Permits - What You Need To Know.
Now some merchant providers, e.g. Flagship Merchant
Services, Secure Pay, etc. will start you off on the low end, e.g.
$5,000.00 per month but if and when you exceed this amount,
youll need to contact the payment gateway service provider as
soon as possible and request an increase due to high volume of
business. Remember, you must take the initiative to do thus
(request an increase), and while you can do it over the phone, it
is best (and more professional) to do in writing. See Example
Letter attached.

As soon as you realize your business is at the $5,000.00

mark consistently or nearing said amount (if in fact you started
out with this amount), apply for the increase. Again, your failure
to do so can result in certain payment gateway service providers
holding your funds in accordance pursuant to contractual
agreement which could potentially jeopardize your business,
especially if you are dependent upon the funds that are being
held against your wishes by the payment gateway service
provider. i-Payment for example is notorious for this.
The best payment gateway and/or merchant account service
provider, especially for the small or start up business, is PayPal.
PayPal gives you more freedom and flexibility. Theres a
small monthly fee, usually around $30.00 and a deduction for
every order that comes in (c. 2% - 5%), and as stated supra,
PayPal allows you to transfer money over (into your business
checking account) as soon as you make a sales transaction with
your online store and the money appears in your PayPal account.
Other payment gateway service providers automatically
make the transfers to your business checking account, which
will usually take about 4-5 days to enter your business checking
account, which in my honest opinion is too long to receive your
money if youre a start up business.
PayPal will have your money into your business checking
account in about two days, with the exception of weekends. The
sooner you can get your money the better.

The only downside to payment gateway services with

PayPal is it doesnt allow merchants to accept Amex (American
Express). Again, you want to be able to accept all forms of
payment.
If your business is primarily online (online business), youll
need a payment gateway company and provider, e.g.
Authorize.net, as the go between between your company and the
merchant account provider company.
Some companies, e.g. Secure Pay and PayPal, offer both
merchant account services and payment gateway services all in
one, which I highly recommend for the start-up business.
Most companies dont offer both, so youd you need a
payment gateway service provider in addition to a merchant
account service provider which are plentiful including financial
institutions, e.g. Bank of America, Wells Fargo Bank, etc.
A payment gateway allows you to track and monitor your
sales and batches to see how much money you are generating
daily, weekly, monthly and yearly. They allow you to create
reports.
If you will take orders over the phone then it is imperative
that you have a payment gateway service provider, e.g.
Authorize.net or PayPal, so as to have access to a virtual
terminal so as to process credit and/or debit card payments.

A virtual terminal is a web-based application that allows

you (merchant) to login in from any computer with a username
and password so as to input credit and/or debit card data for
payment processing.
Like the traditional credit card terminals that you see at
retail stores, virtual terminals can accept both swiped and keyed
transactions. Now, in order to accept swiped transactions for an
actual brick-and-mortar business, merchants must use a terminal
that is compatible with a card reader that plugs into the
computers USB port.
Payment processing and merchant account companies sell
these card reading terminals for an extra fee. You an purchase
the terminal outright or lease it. Even if you purchase the
terminal youll still have to pay monthly service fees for the
processing of all transactions.
Virtual terminals offer many advantages over physical
terminals such as the ability to access them from any computer,
no equipment leases, real-time processing, tracking and
reporting, recurring billing and employee sales monitoring as
well as many other dynamic features.
Virtual terminals are ideal for the online business that is
being operated from a house or an apartment.
Lastly, a great thing about virtual terminals is that you can
process payments (credit cards and debit cards) right from your

Smart Phone (which has Internet access). Now how awesome is

that?
In conclusion, newcomers to online businesses who may
not be legally astute need to know that if you think you can
operate an online business and not have to report income or hide
income, youre in for a rude awakening.
Laws changed in 2011 and as of January 1, 2011, all
merchant services and payment gateway providers are required
by law to report income of merchants. Thats right! Income
received through credit card and debit card transactions will be
reported to the Internal Revenue Service.
Banks and merchant service providers will report annual
gross payments processed by credit or debit cards to the IRS and
merchants. Credit card payments will be reported by the
merchant service provider using IRS tax form Form 1099-K
with copies sent to the business and to the IRS.
The IRS plans to collect ten billion dollars in new taxes
over the next decade. Government realized the new income
opportunity by taxing the online merchant after developing a
scheme in which to force banks and merchant service providers
to provide financial information about their merchants who
bring in a certain amount of money and/or who do a certain
number of transactions yearly.
An online business should not be seen as a way to generate
money without having to pay taxes on the income or profit.

What To Look For When Choosing A

Merchant Account
A merchant account is a simple but important thing. When
you are shopping for a MAS (merchant account service), always
keep in mind that the service needs you more than you need it.
There is no reason to go with anything less than the best
company you can find.
Account Set Up Time.
In addition to having low start-up and monthly costs, the best
companies turn your application around with a day or two after
you submit it. Lesser services can take up to a week.
Annual Fee.
Make sure the merchant account provider does not charge an
annual fee for the service. many merchant account providers
charge an annual fee anywhere between $99.95 and $300.00
Application.
Choose a merchant account service that does not charge money
for an application. Application fees are a red flag.
Average Approval Rating.
The approval rating for merchant account services refers to the
percentage of applications a company approves. The higher a

services approval rating, the higher the chance you have of

getting an account through that service. This is an important
number to know, especially of the service changes an application
fee.
Business Reputation.
How does the credit card processing company stack up with
others that provide merchant accounts? Check the Better
Business Bureau (as well as online reviews) for complaints
about the company before committing. If there are numerous
complaints against the merchant account service provider, move
on.
Contract.
Compare merchant account contract terms and duration of
commitment or find a credit card processing service that does
not require a contract at all for your merchant account. If you
decide to commit to a contract, it should be for one year
minimum, two years max. However, no contract (on duration of
commitment) is best.
Cost Per Month.
It will do you little good as a retailer to accept payments if the
service takes more in fees than you make in profit. The best
merchant account services offer low monthly service fees as
well as low per-transaction costs.
Customer Service.

Allowing a company to handle your payments involves a huge

amount of trust. If a company does not have great customer
service, it doesnt deserve to handle your livelihood. What do
former customers have to say about them? Do they have a free
customer service number? What are their customer service
hours? These are all questions you should ask.
Discount Rates.
Credit card processing companies will charge your merchant
account for each transaction (also known as Per Transaction
Cost). This is called the discount rate. The merchant account
discount rate is typically 1.5 percent to 2 percent.
Fees.
Make sure all fees associated with your merchant account are
reasonable. But also, make sure that a merchant account
provider fees arent too good to be true. You shouldnt have to
pay an application fee, setup fee, installation fee, annual fee, or
cancellation fee. Those are a lot of fees that many less-thanreputable merchant account providers will try to bill you for.
Merchant Account Company Features.
merchant accounts usually accept credit cards that are either
swiped through an electronic reader or have the credit card
number typed into the computer for orders received over the
phone. If you will be using the same point of sale (POS

( terminal for both swiped and typed transactions, find out if

there is a higher fee for typed transactions. The merchant
account discount rate for keyed-in cards is usually 2.2 percent to
3 percent.
Number of Credit Cards Accepted.
Seek out a credit card processing company that works with all of
the major credit cards: Visa, MasterCard, Discover and
American Express. The more cards you accept through your
merchant account the better for your business.
Risk.
Does the merchant account provider process and manage a
diverse range of both high risk and low risk merchant accounts?
This may be important if your new business is considered a high
risk. many merchant accounts will not take high risk businesses
or if they do, they will charge the high risk business
astronomical fees to establish an account.
Start Up Costs.
If a merchant account is too expensive to start up so as to start
accepting payments, avoid the company. The best services
charge you nothing to set up a merchant account.
In conclusion, choose a merchant account provider that meets
your technical needs and has a proven track record, with
thousands of satisfied clients. Additionally, verify that the

merchant account provider offers excellent customer service and

low fees, along with a guarantee.
Technical Support.
Technical support with your merchant account is critical. If you
need technical support, when is it available? Around the clock
(24 hours)? Monday through Friday, 7 a.m. or 8 a.m. till 4 p.m.
or 5 p.m.? Is technical support available during weekends?
These are questions you need to ask.
CONCLUSION
After seeking all of the above, you should have no
problems (or unanswered questions) about merchant account
service provides and/or payment gateway providers. You save
money and time in selecting the service providers that are ideal
for your new business.
Remember, in business, profit is the lifeblood of business,
and an online business is a business, and is thus dependent upon
sales for purposes of profit. By being able to process payments
(via online and telephone via virtual terminal) your business gets
to make the necessary sales so as to make a profit.

Merchant Account Providers and Payment

Gateway Providers

Authorize.net
P.O. Box 8999
San Francisco, California 94128-8999
Tel: 1.877.447.3938
Fax: 1.801.492.6489
www.authorize.net
Card Payment Options
www.cardpaymentoptions.com
ECS World:
www.ecs-world.com
First Data:
5565 Glenridge Connector NE, Suite 2000
Atlanta, Georgia 30342
Tel: 1.800.735.3362
Fax: 1.303.967.8000
www.firstdata.com
Flagship
Tel: 1.866.473.3760
www.cardservicesales.com
Intuit
2632 Marine Way
Mountain View, California 9043
Tel: 1.888.254.8163
www.payments.intuit.com

Leaders
Tel: 1.800.249.8035
www.rockbottommerchantaccount.com
Merchants Accounts.cn
www.merchantaccounts.cn
Pay By Web
www.paybyweb.com
PayPal
Tel: 1.877.419.7765
www.paypal.com
Pay Simple
Tel: 1.866.585.6178
www.paysimple.com
Secure Pay:
1515 Hancock Street, Suite 301
Quincy, Massachusetts 02169
Tel: 1.800.932.5708
Fax: 1.866.999.6601
www.securepay.com

GLOSSARY OF TERMS

Aggregator. Also known as Payment Aggregator and Merchant

Aggregator. A payment or merchant aggregator is a service
provider through which e-commerce merchants can process their
payment transactions. Aggregators allow merchants to accept
credit cards and bank transfers without having to setup a
merchant account with a bank or card association. The
aggregator provides the means for facilitating payment from the
consumer via credit cards, stored value accounts or bank transfer
to the merchant. The merchant is paid by the aggregator. These
services are the most popular forms of payment behind credit
cards.
API. Abbreviated form of Application Programming Interface
(API) is a specification intended to be used as an interface by
software components to communicate with each other. An API
may include specifications for routines, data structures, object
classes and variables.
E-Business. E-Business is the conduct of business on the
Internet, not only buying and selling but also servicing
customers and collaborating with business partners. The term
E-Business derived from such terms as e-mail and ecommerce, the E standing for electronic.
Electronic check. An E-Check (or electronic check) is an
electronic version of a paper check used to make payments
online. Anyone with a checking account can pay by E-Check
through a merchant account, payment gateway, or aggregator
(i.e. PayPal). To make a payment with an E-Check, you simply
provide the following information: your bank routing number,

your bank account number (typically a checking account), and

the name on your bank account. This information is printed on
your paper checks.
E-Commerce. E-Commerce is the buying and selling of
products or services over electronic systems such as the Internet
and other computer networks.
E-Tailer. A person involved in the selling of retail goods on the
Internet.
E-Tailing. E-Tailing is the selling of retail goods on the Internet.
Short for electronic retailing, and deriving from words such as
e-mail, e-business, and e-commerce. E-tailing is
synonymous with business-to-consumer (b2C) transaction.
ISO. Abbreviation for Independent Sales Organization. An ISO
is an organization or individual that is not an Association (Visa
or MasterCard) member, but that has a bank card relationship
with an Association member that involves acquiring or issuing
functions such as the ISO soliciting merchant accounts,
arranging for terminal purchases or leases, providing customer
service, and soliciting cardholders.
Merchant account. A merchant account is a type of bank
account that allows businesses to accept payments by payment
cards, typically debit or credit cards, and are established under
an agreement between an acceptor and a merchant acquiring
bank for the settlement of payment card transactions. In some
cases a payment processor, independent sales organization

(ISO), or merchant service provider (MSP) is also a party to the

merchant agreement; and whether a merchant enters into a
merchant agreement directly with an acquiring bank or through
an aggregator such as PayPal, the agreement contractually binds
the merchant to obey the operating regulations established by
the card associations.
MSP. Abbreviation for Member Service Provider. A member
service provider is a non-member that is registered by the
corporation [i.e. MasterCard] as an MSP to provide Program
Services to a member, or any member that is required to register,
in the Corporations sole discretion, and has been registered as
an MSP to provide Third Party Processor Program Services to
another member. The acquirer must register all ISO / MSPs
with the applicable Association.
Payment gateway. A payment gateway is an e-commerce
application service provider that authorizes payments for ebusinesses, online retailers, bricks and clicks, or traditional brick
and mortar and is the equivalent of a physical point of sale
(POS) located in most retail outlets, and which protect credit
card details by encrypting sensitive information, such as credit
card numbers, to ensure that information is passed securely
between the customer and the merchant and also between
merchant and the payment processor.
Payment processor. A payment processor is a company (often a
third party) appointed by a merchant to handle credit card
transactions for merchant-acquiring banks. They are usually
broken down into to types: front-end and back-end. Front-end

processors have connections to various card associations and

supply authorization and settlement services to the merchant
banks. backend processors accept settlements from front-end
processors and, via The Federal Reserve Bank, and move the
money from the issuing bank to the merchant bank. In an
operation that will usually take a few seconds, the payment
processor will both check the details received by forwarding
them to the respective cards bank issuing bank or card
association for verification, and also carry out a series of antifraud measures against the transaction.
POS (point of sale). Also sometimes referred to as point of
purchase (POP) or checkout is the location where a transaction
occurs. A checkout refers to a POS terminal or more generally
to the hardware and software used for checkouts, the equivalent
of an electronic cash register. A POS terminal manages the
selling process by a salesperson accessible interface. The same
system allows the creation and printing of the receipt.
Smart phone. A smartphone is a mobile phone built on a mobile
computing platform, with more advanced computing ability and
connectivity than a feature phone, i.e. high resolution touchscreens, web browsers, Wi-Fi, mobile broadband, digital camera,
pocket video camera, portable media players, and GPS
navigation units.
Shopping cart. A shopping cart is software used in e-commerce
to assist people making purchases online. The software allows
online shopping customers to accumulate a list of items for
purchase, described metaphorically as placing items in the

shopping cart or adding to cart. Upon checkout, the software

typically calculates a total for the order, including shipping and
handling (i.e. postage and packing) charges and the associated
taxes, as applicable.
Virtual terminal. A virtual terminal is a web-based application
that allows merchants to accept credit card payments using their
Internet connected computers.

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