Archive for June, 2010

Merchant Accounts & Payment Gateways… Keeping the Grass Green!

I have this conversation every day, so I decided I should do a (long) blog post on it…

To use Chargify, you need to have a Merchant Account and a Payment Gateway.

Most people don’t know what these things are or how to get them, because most people never need to know what these things are until they have a business and they want to accept credit card payments from customers.
As long as this is, I tried not to go into every detail, but it should suffice for most developers and business folks who just want to know what they need.

WATER SYSTEM ANALOGY

Imagine the outdoor watering system for your typical suburban home…
  1. You have a city water supply that provides water to the homes on your street.
  2. You have have a pipe that connects your house to the city water pipe under your street.
  3. You have a set of water valves that control flow to your grass & plants. Older valves are opened & closed manually. Newer valves are operated electrically.
  4. If your sprinkler valves are electric, then you have a control box that you can program to open & close the valves on a schedule, changing the schedule for the season, giving more water to some plants and less to others, etc. And really new systems have sensers for sunlight, temperature, and moisture, so they can water exactly the right amounts at the right times and still save water.
  5. At the end of the system, you have sprinklers and other devices that provide water directly to grass and plants.
With that as a rough analogy and visualization, here’s how credit card processing works for your business…

WATER SUPPLY –> CREDIT CARD PROCESSING NETWORK

The water supply is the credit card processing network… all the banks and computer networks that process transactions. The big players in this system are Visa, MasterCard, and the card-issuing banks, which actually provide credit cards to customers.
Water flows one way in this analogy and that’s fine for purposes of illustration. Most of the time, when it comes to credit cards, money should be flowing from your customers to your business.
But the network really is two-way. Money does occasionally flow back to customers: when you issue a refund to someone or, worse yet, if your customer does a “charge-back” (this is when they call their credit card bank and say they’re not satisfied with your service, so the bank yanks the money out of your bank account, plus an additional charge-back fee that’s usually around $30).
Charge-backs are bad. The fees can add up very quickly, and you’ll be cut off from the credit card network if your business generates more than a few charge-backs per year. The best way to avoid them is to run a good business and provide your customers with many ways to contact you if they don’t understand a charge on their credit card statement. Make sure the info that appears on their statement includes a web address or telephone number (more on this in the next section).
Imagine if you were pushing dirty water back into your city’s water supply. They’d cut you off pretty quickly!

PIPE TO YOUR HOUSE –> MERCHANT ACCOUNT

The pipe to your house is your “Merchant Account”. Think of your Merchant Account as your “node” on the credit card processing network that spans the world. It’s a bank account, but it’s a pretty unusual bank account. You cannot access it directly like a regular checking or savings account, but it links to one of your regular bank accounts…
Charges & refunds that are processed through your Merchant Account will be deposited into or taken out of a bank account that you specify (probably your main business checking account).
Most banks large and small can provide Merchant Accounts. You can get a Merchant Account by walking into Wells Fargo, Bank of America, Barclays Bank, Bank of Australia, etc. Or you can contact a broker who will help you get the best Merchant Account for your business.
It usually takes 1-3 weeks to get approved for a Merchant Account. The bank needs to check your credit and consider the kind of business you’re operating before they give you a Merchant Account. Why? Because dealing with credit cards is a touchy issue and everyone wants to protect the whole system from abuse, so they need to know something about the merchants who are charging customer’ cards.
The bank is literally giving you, the merchant, credit: you’ll get paid within a few days after a customer makes a purchase, but the customer can ask the bank for his money back months later. What if you’ve gone out of business and the bank can’t get the money back from you? That’s credit risk. That’s why the Merchant Account bank must charge a “discount rate” on every transaction, usually between 2-4% plus a flat fee of, say, 30 cents. There is usually a monthly minimum of, say, $30/month. The more risky the type of business, the higher the fees will be.
I mentioned charge-backs in the prior section. The only note I want to add is this: when you set up your Merchant Account, you’ll be asked for the business name as you want it to appear on customers’ credit card statements. Be sure the business name is something they’ll recognize, and better yet, make sure it includes a web address or telephone number. That makes it really easy for customers to contact you if they’re confused about a charge, and therefore much less likely to do a charge-back!
Note about Countries…
Your customers can be anywhere. It’s where your bank is located that matters below…
Your Merchant Account will be linked to your regular business bank account, wherever that may be. For the most part, your Merchant Account needs to be in the same country as your regular business bank accounts. It’s rare that banks or governments will allow these to be in separate countries, but…
We have seen examples of Dutch and German merchants getting Merchant Accounts at Barclays Bank in the UK. This makes sense, since all three countries are in the EU. I don’t know how much of this is allowed, but it seems logical.

WATER VALVES –> PAYMENT GATEWAY

The water valves are your “Payment Gateway”, which allows you to access your Merchant Account. Remember, your Merchant Account is a bank account that you cannot directly access. Your Payment Gateway is your interface.
The Payment Gateway allows you to process charges and refunds to your customers. It also provides services like fraud prevention (through card billing address verification) and secure storage of credit card data.
And just like physical water valves, you *can* operate your Payment Gateway manually. You can log into it via the web and process charges & refunds. If transactions were declined, you can view a history and see what error messages, if any, came back from the credit card network. Some Payment Gateways have simple features to handle recurring billing, too, but because their business focus is not recurring billing, they don’t have the breadth or depth of a service like Chargify. Of course, they *do* have breadth & depth in the processing of charges & refunds, fraud prevention, secure data storage, etc.
The Payment Gateway usually charges 5-10 cents per transaction, plus perhaps a monthly fee or minimum of $20-30/month. There are also usually extra fees for fraud prevention (like 5 cents per address verification) and $20/month for secure data storage.
Note about Countries…
Your customers can be anywhere. It’s where your Merchant Account is located that matters below…
Payment Gateways only work with Merchant Accounts in specific countries. Here are a few examples:
For Merchant Accounts in the USA: Authorize.Net, TrustCommerce
For Merchant Accounts in Canada: Beanstream
For Merchant Accounts in the UK, Australia, and New Zealand: Payment Express
(FYI, Braintree & VersaPay gateways will be added later this summer)

CONTROL BOX –> CHARGIFY

The sexiest part of the water system analogy is, of course, the Control Box :-). It builds upon all the other resources to do truly cool stuff, like only watering on certain days, only watering if the ground is not already wet, and allowing you to interface with it from your office computer.
Of course, Chargify does a lot more than a sprinkler control box.
Chargify allows you to define all of your products & pricing, then bill for flat-rate and metered-rate plans, do “iTunes style” billing, do software license/seat billing, automatically prorate when customers change plans, accept discount coupons from your customers, etc.
It allows you to track your signups & revenue on your iPhone. It emails your customers if their card is declined and points them to a web form to update their card info. And many other wonderful things :-).
The point is, Chargify builds on the existing systems to add a whole new layer of functionality, and that new layer gets better over time. We’re working on new features and expanding our technology and business to better suit the needs of a growing list of merchants – over 1,600 as I write this.
You’ll pay Chargify $0 as you grow their business, then bump up to $50/month when you reach 50 paying customers, etc.

GREEN GRASS –> YOUR BANK ACCOUNT

When things work properly, money from your customers flows into your bank account, much like water onto your lush, green grass.

HOW TO GET STARTED

  • You can go through a broker that handles everything. Brokers can usually get you better pricing and they typically know which Merchant Account banks will be friendly to your type of business. Check the Chargify page on Merchant Accounts. TransFS is an automated broker, much like LendingTree for mortgages… they take your application and submit it to multiple Merchant Account banks. I’m not sure if TransFS will also get you set up with a Payment Gateway, but I think they do. Millennium Bankcard is a human-powered broker, much like a real estate broker… they take your application and push the process through until you’ve got your Merchant Account and Payment Gateway.
  • You can walk into your favorite bank and ask about a Merchant Account. Most banks will be happy to sell you one, and they’ll help you get set up with a Payment Gateway, too. Just make sure they give you a Payment Gateway that works with Chargify.
  • You can also contact any of the Payment Gateways directly and most of them will be happy to help you find a bank for your Merchant Account, too, or they may even resell Merchant Accounts themselves.

SUMMARY

This is a long post and it may seem that there’s a lot to know, but getting your Merchant Account and Payment Gateway are actually pretty easy.
Plan on waiting about 2 weeks and then be delighted if it gets done sooner. I’ve seen it as short as 3 days (USA) and as long as 6 weeks (UK).
If you have decent credit and can put up with a bit of paperwork, it’s really not that bad. If you want to save time and potential hassles, use a broker. I’ve also heard good things about Wells Fargo, but in general, large banks seem to take a bit longer to work with, especially if you’re starting a new business.
It does cost money to have this structure in place. You’ll pay a minimum of $70-100/month for your Merchant Account & Payment Gateway, and then $50/month when you reach the first paid tier at Chargify. So you need to generate enough profit to keep your grass green after paying these expenses, or you need to plan to cover the bill for these things until your business generates enough revenue.
I hope this helps!
I really do like seeing new merchants get started every day in every different business, in every different part of the world.
I’ll update this as it becomes clear what needs clarification.

Fun Stuff & Business History


@lancewalley
lwalley@chargify.com

Motorcycles
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I co-founded Parallax in 1987 with my best friend. We were both fresh out of high school. We grew from a bedroom operation to a $3M/yr business.

I learned a TON at Parallax! We strugged for several years to find a market we fit, but once we did, were were able to "pivot" (today's term!) into that market and then execute on manufacturing, marketing, and distribution. We didn't even know the term "VC", so we *had* to make money! We took $20K from friends & family and had day jobs to bootstrap those early years.

As I left Parallax in Winter 1996, Radio Shack started carrying our BASIC Stamp computer.

I spent a few years trying to make money in the mobile-messaging space. Unfortunately, I learned lessons about how to spend all of my cash chasing a market that simply was not yet developed enough. I wish I had known about VC :-)! I closed up shop and put up a notice saying "goodbye" to my customers.

Which led to a San Francisco VC-funded startup in 1998. They were in the mobile-messaging space and were on the normal VC route as everyone else back then. Unfortunately, it didn't end pretty, but my friends and I learned a lot through the CEO, who was nice enough to tell us how things worked with his Board, the investors, etc.

I got laid off along with most other tech folks in SF in 2000. What does one do at a time like that? Start Quality Humans, Inc. as a way to offer my programming services to clients. QHI grew to employ 8 guys working around the USA.

My friend and QHI consultant, Tom Mornini, saw Ruby on Rails coming over the horizon, so we started offering Rails consulting. Within a few months, Tom noticed that Rails clients didn't want to worry about details; they just wanted to deploy their apps.

That led me to co-found Engine Yard in 2006 with Tom, Ezra Zygmuntowicz, and Jayson Vantuyl. We built a great business and then took VC after a year from Amazon, Benchmark, New Enterprise Associates, and others. I served as CEO until Jan, 2009, when we started building an executive team who can take EY up a few more notches.

I reflected on major pain points we experienced at EY, and recurring billing was one of them. That led me to Chargify.

In Chargify, I joined great folks from Grasshopper. It's been very cool working with the team as we grow Chargify in 2011.

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