The Evolution of Merchant Accounts for Online Auction Sellers
By Yisroel (Izzy) Goodman
November 17, 2002

With millions of folks buying and selling on eBay and over the Internet, there had to be a way for small businesses and individuals to accept payment electronically. But merchant accounts that allowed sellers to accept credit cards had various fees and monthly minimum charges that were too costly for many small sellers.

Along came online payment services that offered small sellers to ability to accept credit payments. Services like PayPal acted as a middleman, allowing money to change hands quickly and for less cost than merchant accounts. There were some drawbacks to this approach, including that both buyers and sellers were required to register with the same service; minor problems that sometimes caused accounts to be restricted; and sellers' lack of control over chargeback disputes. Many sellers also discovered that having their own merchant account would give them a more professional appearance and more protection against fraud. But merchant accounts were still costly.

A second payment solution evolved: the hybrid merchant account. Companies like ProPay allowed merchants to "look like" they had a merchant account. Using ProPay, the merchant validated the customer and entered the transaction at the site. There were no monthly fees, statement fees or minimums; it was strictly pay-as-you-go.

However, there were still some disadvantages, including high transaction fees and limits on the amount of money that could be processed. (ProPay limits individual transactions to no more than $250 each and no more than $1,000 in total per month, unless the merchant signs up for a different account and sends in a large deposit.)

Now comes the third phase in the evolution of payment solutions: the dynamic merchant account. The concept is simple - an adjustable merchant account where you choose from different plans according to your business requirements. At first, you pay as you go with higher per-transaction fees but no monthly minimums. When you see your business growing, switch to a plan with a small monthly minimum and lower rates and per-transaction fees. When your sales increase, you can opt for a traditional merchant account with higher minimums and even lower rates.

I found two companies offering such a plan, Payquake http://www.payquake.com and Intelli-Collect http://www.intelli-collect.com/nominimum.html. Both offer real merchant accounts. You charge cards through secure payment gateways and can use fraud prevention techniques (CVV and AVS). Any disputes are handled between you and the issuing card. Even the introductory plan gives you very generous limits ($5,000 per month, which can be expanded). Unlike traditional merchant accounts, both companies want you to try out the service before you make a commitment.

Payquake's annual fee is not charged until you have been using the service for 60 days. Neither company has cancellation fees. Payquake has an annual fee of $49, a percentage rate of 3.75% and a transaction fee of 50 cents. Intelli-Collect has an annual fee of $25, a percentage rate of 3.5% and a transaction fee of 40 cents. Both companies have been in business for several years. Both companies responded to my emails quickly and spent a long time on the phone answering my questions.

Payquake has a three-tier system, where the merchant account dynamically grows according to the seller's needs. Each month the seller receives a statement showing the month's activity and the total fees that would be charged under all three plans. At any time, the seller can visit the site and click a button to upgrade to the next tier.

Payquake uses the gateway provided by Authorize.net, one of the most popular on the Internet. Sellers should have no problem finding software and shopping carts designed to work with this gateway.

Intelli-Collect concentrates on finding the lowest cost processing methods, requiring the seller to do a little more work in exchange for those lower rates. They have two offerings, the no-minimum account and a full merchant account. It is up to the seller to decide at what point the change should be made, and there is no quick URL to accomplish this; you will have to contact Intelli-Collect and apply for the other account. The no-minimum account is being offered by Provident Bank via United Bank Card, which also provides the gateway for entering the transactions.

The gateway appears to be secure and offers address verification and CVV. It has one advantage over Authorize.net in that the CVV can be turned on or off for individual transactions. The Authorize.Net gateway requires that you set this option globally for an account, so to disable it for one transaction requires that you turn it off in your global settings, process the transaction and then activate it again. How well the UBC gateway will integrate into existing shopping cart software remains to be seen. But for sellers who process each transaction manually, integration is not necessary, and saving some money at the outset may be worth it.

With payment services coming and going, it has become a matter of survival of the fittest. The no-minimum, pay-as-you-go, dynamic and upgradable merchant account appears to be a solid concept that can stand on its own.