In order to use Chargify to charge customers’ credit cards, you need to connect your Chargify account to a payment gateway and merchant account, but not everyone knows why or how these parts work together. Explaining this can be complicated, so to make it easy, we’ve broken it down using a water system analogy (it’s a bit long but a really great way to understand how the pieces work together).
Your water system has several components:
- City water supply
- The pipe that connects the water supply to your house
- The water valves that control the flow.
- A control box to open and close the valves
- Your sprinklers
The water supply is your credit card processing network (the banks and networks that process transactions and provide credit cards to customers e.g. Visa, Mastercard).
When it comes to credit cards, money should be flowing from your customers to your business. However, this can often be a two-way network as money does occasionally flow back to customers: when you issue a refund to someone or, worse yet, if your customer does a “charge-back”.
The pipe connecting the water supply to your house is the merchant account. The merchant account is your “node” on the credit card processing network; a bank account that you cannot access directly but plays an important role in the billing process.
You can get a merchant account from banks both large and small including Wells Fargo, Bank of America, Barclays Bank, etc., or through a broker. A merchant account typically takes 1-2 weeks to get approved, since the bank needs to check your credit and determine the type of business you’re operating. Newer options combine the gateway and merchant account and can move more quickly, getting the approval time down to a few days or even hours. If you’re working with a large bank, give yourself a couple of weeks to be safe.
The bank is basically giving you, the merchant, credit: you will get paid a few days after a customer makes a purchase, but the customer can technically ask the bank for his money back at any time. What if you’ve closed your business & the bank can’t get the money back from you? That’s credit risk. That’s why the Merchant Account bank charges a “discount rate” on each transaction, usually between 2-4% plus a flat fee of, around 30 cents. There is also usually a monthly minimum, say, $30/month. Note: The more risky the type of business, the higher the fees will be.
Side note about countries…
Your customers can be anywhere; it’s where your bank is located that matters. Your Merchant Account will be linked to your regular business bank account, but for the most part, your Merchant Account needs to be in the same country as your regular business bank account. 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, so there are exceptions in areas like the EU.
The water valves are your “Payment Gateway”. Your payment gateway acts as your interface and allows you to access your Merchant Account.
The Payment Gateway lets you process charges and refunds to your customers while also providing services like fraud prevention and secure credit card data storage.
And just like physical water valves, you can operate your Payment Gateway manually. You can process charges & refunds, view transaction history & error messages and in some cases set up recurring billing, all by logging into your account via the web. When it comes to recurring billing, most payment gateways do not have the breadth or depth of a service like Chargify but they do have breadth & depth in the processing charges, refunds, preventing fraud and keeping data secure.
When it comes to cost, Payment Gateways typically charge 5-10 cents per transaction, plus a monthly fee or minimum of $20-30/month. There are also usually extra fees for fraud prevention (around 5 cents per address verification) and $20/month for secure data storage.
Side note about countries…
Your customers can be anywhere. It’s where your Merchant Account is located that matters as payment gateways only work with merchant accounts in specific countries.
If you’re in the USA or Canada, we have a partner company that can provide a merchant account and payment gateway in a couple of days: go to our Merchant Accounts page to apply.
There are also a number of other options in the USA, Canada, and many other countries on our Payment Gateways page (most of these gateway companies have a built-in merchant account or can point you to a good provider in your country).
The control box builds upon all the other components to do cool things, like only watering on certain days, only watering if the ground is dry, or allowing you to interface with it from your office computer.
Now, we like to think that 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 usage-based plans, do software license/seat billing, email customers when a trial period is about to end, email customers when their next payment is coming, automatically prorate when customers change plans, accept coupons from your customers, provide signup pages for your customers, provide a portal for your customers to self-manage, etc… pretty much the total life cycle of a multi-year recurring billing customer.
The point of this analogy is, Chargify builds on the existing systems to add a whole new layer of functionality, and that new layer gets better over time. We keep adding functionality as merchants tell us what they need to manage their businesses.