QUICK OVERVIEWBrick and mortar businesses use merchant accounts that accept point of sale (POS) transactions, because the customer is standing right there. In contrast, online businesses need a merchant account that accepts transactions in which the customer isn't present, or CNP (cardholder not present) transactions. This type of merchant account is sometimes called a MOTO (mail order/telephone order) merchant account.
Because there's a higher rate of fraud over the Internet than at brick and mortar stores, the fees tend to be higher for an Internet merchant account. Because of the higher fraud rates, banks tend to be leery of Internet merchant accounts. Many banks won't offer an Internet merchant account to a first time online entrepreneur. Instead, plenty of new e-business owners get their merchant accounts through an ISO, or Independent Service Organization.
MERCHANT ACCOUNTSTo accept online credit card payments from your customers, you must have an Internet merchant account. Merchant accounts are set up with what's called an acquiring institution or a middleman company that works with a bank. This bank authorizes the transaction or declines it, if there's a problem with the shopper's credit card and deposits the money into the merchant's bank account.
One highly popular and well-respected provider of Internet merchant accounts is Authorize.net. If you're brand new to the idea of merchant accounts, it's worth your while to browse their site and find out the terms, conditions, and services they offer. Authorize.net provides full-service electronic payment solutions for merchants, third-party transaction processing (gateways), and total commercial card payment programs; the third largest processor of bankcard transactions in the U.S. and a leading issuer of MasterCard and Visa commercial cards.
PAYMENT GATEWAYSA payment gateway is a separate service that essentially acts an intermediary between the online shopping cart and all the financial networks involved with the transaction, including the customer's credit card issuer and your merchant account. Some merchant account providers also offer payment gateway solutions as part of an overall package, so it pays to do your research.
A payment gateway processes online transactions by linking your shopping cart or buy page to the credit card associations and your merchant account. The customer credit card information is forwarded to the payment gateway via your shopping cart and a secure (SSL) connection. (Shopping carts are generally configured to send information in a specific format that is acceptable to the particular gateway.)
The payment gateway then obtains authorization for payment from the credit card associations (the customer's card issuing bank) and handles the transfer of funds into your merchant account. Because of this, you must have a merchant account from a bank that is on the same network as your payment gateway.
Payment gateways also check for validity, encrypt transaction details, verify that the details are sent to the correct destination, and then decrypt the responses, which are finally sent back to the shopping cart on your e-commerce site.