What is merchant processing?
Imagine if your business only accepted cash payments. How badly would it hit your bottom line? What if you didn't make sales on the phone, or online? Make no mistake, credit cards keep businesses alive. It's simple math: If you accept credit card payments, your revenue potential increases dramatically. A charge card can be used in person, over the telephone, and is the preferred payment method for most e-commerce. Credit institutions like VISA, Mastercard, AMEX, and Discover all offer some kind of corporate and merchant services.
It's not just traditional end-user customers who are using their plastic to finance purchases, either -- for more and more companies, business-to-business credit card transactions are becoming much more commonplace as a way to manage short term cash flow. It can often be easier and cheaper to settle an account using a credit card than to use a short-term loan -- especially when access to loans is increasingly scarce. According to the SBA's
Annual Report to the President, credit card debt accounts for 1.5 percent of small business (less than 20 employees) debt -- on average a balance of around $10,000.
This guide is going to address:
If your small business has never accepted credit cards before, it can be a daunting task to
untangle the jargon and processes around merchant services. If you're looking for a merchant account provider, this guide should help you to avoid the pitfalls and get the best deal for your business.
How does credit card processing work?
Your business can accept a credit card payment:
In personOver the telephoneThrough your web site shopping cart
The card and payment information is captured electronically and sent to your credit card processor. Your processor requests the payment from the customer's bank or credit card issuer, and the payment is authorized, or declined, in just a few seconds. Then the real work of transferring funds from the customer's charge account to your merchant account begins. The settlement process will normally take a few days.
The customer payment information can be captured in several ways:
The customer may be in your store and swipe the card through a payment card terminal.The customer visits your secure Web site and enter their card details in your shopping cart.If you offer mail order or telephone order (MOTO) services, you're either going to be manually entering the customer card data on the payment terminal, or the customer will enter their information using a touch-tone phone.
In order to accept card payments you must have a merchant account with your processor. A merchant account is similar to a bank account. It allows your processor to make deposits into it, and also to make withdrawals in the event of a chargeback (which occurs when a customer disputes a charge on their card.) Your merchant account provider may require you keep a reserve (like a minimum balance) to cover chargebacks.
The payment terminal may be provided by your merchant service provider, though not in all cases. You may choose to lease one or purchase your own eqipment. While most terminals are able to operate on several different processors' networks, you should check that any new hardware is going to work with your current processor's infrastructure.
An important note: If you accept card payments, you're going to have to be able to demonstrate compliance with the
Payment Card Industry Data Security Standards (PCI DSS). You probably want to read our
article about PCI Compliance so you don't fall foul of the credit card companies. Talk to your processor about steps you have to take to be compliant, and ask them to explain how their processes demonstrate compliance with the Data Security Standards.
Card-present transactions, where the card is physically swiped through the terminal, are usually sent in batches at the end of a particular time period, though the batch can be single swipe and sent instantly, or every transaction might be saved up and sent in a single file at the end of the day. Online payments work differently. Obviously the customer doesn't swipe their card, but inputs their card information into a data capture form on a secure web site. That data is transmitted through a payment gateway.
A payment gateway encrypts the card data, using Secure Socket Layer (SSL) encryption, so that it remains secure as it is transmitted from consumer to merchant, and from merchant to payment processor.
If you have a web site and are using shopping cart software like Storefront, Shopsite Pro, or
BigCommerce, you can expect your virtual terminal software to have security features built in to them that are PCI DSS compliant. You should talk to your vendors to make sure that your shopping cart, gateway, and processor are able to communicate with each other appropriately.
The authorization for credit card payments depends on a lot of systems exchanging data correctly. It's complex, but it all happens in just a few seconds, and is successful almost every time. The processor checks a list of criteria to make sure that you're not about to accept a payment that is likely to result in a chargeback. If the payment triggers any of the following alarms, payment will most likely be declined:
Suspicious usageThe card may be expired or reported stolenThe account may have been closed by the issuerThe card may have reached a daily funding limit, or is out of funds altogetherThere may be a processing issue with the data being passed between systems.
How do I get started with credit card processing?
First you need to have a merchant account. Providers may have different approval requirements based criteria such as:
How long your business has been establishedThe volume and the dollar value of your transactions.
It's also likely that you will have to provide:
Personal and company informationTax returnsIncorporation filingYour personal or business credit reports.
While almost every credit card transaction is processed successfully, it's the transactions that don't pass through the system as expected that most merchants remember. That's normal human behavior, though -- people are much more likely to complain about a bad experience than praise a good one. If you use your search engine to look for how to avoid these bad experiences, there are a couple of pieces of advice that come up over and over again:
Shop around before you buy.Find out what penalties you may face for early termination or cancellationMost providers guarantee "system uptime." A company that charges more, but guarantees 99.99999 percent uptime may be worth the extra when compared to a cheaper company that guarantees 97.0 percent uptime.Read your contract. Carefully. Have your attorney look it over. As with any contract which has financial implications for you and your business, have an expert look at it so you can be educated about what it means. Who provides merchant services?
The two parts of accepting credit card payments are setting up a merchant account to have those payments deposited into, and selecting a payment processor. Some providers offer both services, some don't. Your payment processor may require you to use a particular merchant account provider, and vice versa.
If the bank you use for your business banking doesn't offer these services, it will probably be able to direct you to a third-party provider. Third parties who sell credit card processing services are called Independent Sales Organizations (ISO) or Member Service Providers (MSP). In order to legally do business as an ISO/MSP, the organization must be sponsored by a member bank which can manage merchant accounts. That sponsorship must be disclosed publicly, so somewhere on your ISO/MSP's Web site you should be able to see text that says something like:
YourProcessor is a registered ISO/MSP of the following banks: HSBC Bank USA, and Wells Fargo Bank, N.A.-Walnut Creek CA.
Most ISO/MSPs will be able to provide online payment services along with your in-store payment service. However, if you only conduct your business online, you might be thinking about PayPal or cc:Bill as your online payment processor. If you select either of these companies, you and your business won't have to submit to a credit check. If you use PayPal or cc:Bill you will be subject to higher per transaction costs than with an ISO/MSP, but both companies are generally reliable, trusted, and well known to consumers.
There is an advantage to using PayPal or cc:Bill if you are likely to process only a few transactions every month -- for example, a boutique business that sells handmade paper through a Web site may benefit from this. An online-only company which sells rare books may end up paying more in PayPal and cc:Bill fees than they would have paid to buy shopping cart software for its Web site.
How much does credit card processing cost?
As with anything other purchase, it depends on what you're buying. Different companies charge different amounts for the same services -- your best bet is to take a look at our
comparison of credit card processing companies. Remember that this is a legal agreement, and you may want your lawyer to look it over and explain what can happen if things go wrong, or if being more successful than you forecast might result in higher costs from increased transaction volumes.
Pay close attention to your terms and conditions, because making a late payment, sending your data capture file a day or two later than you meant to, or exceeding an acceptable level of chargebacks may all trigger new charges and fees.
One of the largest up-front costs you'll see when setting up your credit card payment system is the cost of the terminal, which can range from a couple of hundred dollars for a standard card-present swipe terminal, up to a thousand dollars or more for a wireless terminal with a built in printer. If you include the terminals you want to use when you sign up with your card processor you may get a better deal (like buying a cellphone with a service contract). For some businesses, though, leasing is going to be the most attractive option. The length of the lease, and the type of terminal you want tend to be the main factors in the cost of leasing the equipment.
While it seems obvious that accepting more methods of payment would generate more income, the best way of figuring out how much extra you might earn is to talk to other merchants in your market. Your local Chamber of Commerce may be able to put you in touch with merchants who can share their experience with you.
As a rule of thumb,
MerchantAccountProviders.com told us that, depending on the industry, businesses could expect to see a 15-20 percent increase in revenues. That increase was usually a direct reflection of an increase in transactions - businesses with higher ticket prices saw a larger increase than businesses with lower tickets. For example, a coffee shop wouldn't see a significant increase in transactions because most customers tend to have two dollars in cash to pay for their purchase. A company that sells LCD televisions would be more likely to see an increase in sales volume by adding credit cards as a payment method because most consumers don't carry that kind of cash.
When calculating the cost of your processing service, you should be aware that some fees may be at "introductory rates" and there are fees that you may not expect, but should -- examples of these are:
Per transaction fees for using the networkDiscount rate, which is the percentage fee per transaction based on the transaction amountGateway fees for online transactionsEquipment leaseVirtual terminal feesApplication feeMinimum monthly transactions penaltyFees for statementsChargebacksPCI compliance.
Again, pay attention to your contract, and know what the introductory and standard rates are.
According to a 2006 report prepared for the
Federal Trade Commission, existing account fraud in the U.S. totaled $15.6 billion in 2005. Some fraud is inevitable. When you think of identity theft it may only be from a customer point of view -- but remember that vendors also lose out when fraudulent transactions are processed. In the event of fraud, the cardholder usually reports the fraud to their credit card company (though in some cases the card issuer may inform the cardholder of suspicious usage patterns). If your company has received a payment through fraudulent use, you will be responsible for those fraudulent charges, and it may take up to 270 days for your processor to complete its investigation and correct your merchant account.
Chargebacks don't only happen for fraud -- they can be triggered if a business fails to send its capture file for processing within a prescribed time frame, usually seven days. Chargebacks, especially when the processor considers them excessive, can impact your cash-flow if your processor and/or merchant bank chooses to hold thousands of dollars in settled invoices as a "reserve" to guard against future high levels of chargebacks. These guidelines should be in your contract or referenced in your contract. Click these links to get the PDF files for the
VISA Operating Regulations and
MasterCard Rules.
Merchant Warehouse, a Boston-based ISO/MSP, talked to us about some of the things that can, and sometimes do, affect merchants using a credit card processing service:
Education is very important. You should spend time talking to your sales representative about how you plan to conduct transactions and the likely types of customers you will have. For instance, will you get a lot of rewards, corporate or debit cards? Do you want to accept PIN debit transactions? Will you be keying in a significant portion of your transactions? The answers to these questions can really help a good sales person to save you money.
Another point is to understand the basic math behind rates and fees. If one company offers a discount rate of 1.69 % and another offers 1.71% the difference is actually minute on a per/transaction basis ($1.71 vs. $1.69 per $100 transaction). It is, therefore, much more important to focus on minimizing expensive downgrades and ensuring you aren’t being charged unnecessary fees or monthly charges.
If you see a processing company advertising what seem to be surprisingly low rates without more details, you should ask the sales agent to explain further. It may be that the rate is for an introductory period and the company reserves the right to change it at any time. It could also be for a type of transaction doesn’t apply to your business. These are called teaser rates and are intended to do just that.
Perhaps most importantly, you should always try to avoid term contracts, termination fees and cancellation charges. The most reputable companies, Merchant Warehouse included, will set you up on a month-to-month basis. Further you should be very diligent when you read the agreement. If you have questions you should be able to get a straight answer and should have all rates, fees and commitments clearly in writing. Never just take a company’s word that "they never actually charge that fee."
Lastly, you should good look at the company you're thinking of working with. Are they reputable? Do they have a good BBB rating? Do they offer in-house support? Credibility matters, so you shouldn't be afraid to ask for testimonials from current or past customers from your service provider.
Questions You Should Ask Potential Vendors
Are any of the fees and rates we have talked about introductory rates, and what will those costs look like when all the introductory periods expire?What is my contract commitment, and what are the penalties for early termination?What kind of sales support is available, is it tiered?If I need out-of-hours support, will I be speaking to someone at the vendor company, or will that be outsourced, or redirected in any way?Can you offer testimonials from customers? Can I get in touch with them?
Information You Should Have On Hand When You Apply
The social security number of the executive signing the contract.
Show me a comparison of companies which can help me with:
Success!
Related Topics
