How you can begin accepting credit cards

Many small businesses don't realize how easy it is to accept credit card payments. In this column, Susan P. Butler, Small Business Advisor, explain how to set up a credit card merchant account.

Most credit card organizations, including Visa, MasterCard, and others, are associations among whose members are banks that issue the association's credit cards to individuals and businesses ("issuing banks"), and banks that acquire the right to receive payment for charges ("acquiring banks").

To begin accepting credit card payments, you need a merchant account with an acquiring bank, equipment to process credit cards or software to process information online, and a deal with a company that verifies the credit card information, processes the transaction, and deposits funds into your merchant account. You may then accept credit cards, obtain authorization for the charge, and receive funds in your account. Banks and independent sales organizations ("ISO"s) usually contract with credit card processors to perform these tasks, or will provide a list of companies for you to select.

Normally you pay a per-transaction fee for each charge (often between 20 and 60 cents), a discount rate (another fee) that is some percentage (2% to 4%) of the total amount charged by credit card, and initial set-up fees for various services, equipment, and software (ranging from US$200 to US$1,500).

Should you go through a bank or an ISO to set up your merchant account? That depends on your business, credit rating, and profitability. Banks generally charge lower fees, but are often hesitant to open merchant accounts for new businesses, small businesses, home-based businesses, or risky businesses (hello dot-coms!) because they must believe they can collect any chargebacks from you.

What's a chargeback? When a purchaser returns a product or challenges the amount charged, banks nearly always put a hold on funds until the parties resolve the dispute. For example, a client pays you US$500 by credit card and the amount is transferred to your merchant account. Later the client isn't happy with the service and disputes that charge with her issuing bank, which puts the amount on hold. If you've already spent that money, you may owe your bank US$500; it's "charged back" against your account until resolution.

This can be a problem for service providers since it's difficult to objectively determine whether the service was provided as promised. It's also a big deal to small businesses, because each held payment may represent that month's rent or utility bill. It's up to you to prove to the banks through some report or contract that you provided the services promised. You must also pay a chargeback fee to your bank, which may run from US$10 to US$25 per chargeback. If you have a large number of chargebacks, the bank could cancel your account and add your business name to a list that it shares with other banks, which essentially prevents you from opening a merchant account with anyone else; think of it as blacklisting. You may decide this collection process is too risky for your long-term business goals if you often encounter disputes.

If a bank considers your business too risky and denies your application for a merchant account, try an ISO. They charge higher rates because they accept some of the responsibility for chargebacks. They apply for a merchant account with acquiring banks on your behalf, and charge you a fee for the risk they accept. If you go through an ISO, most experts recommend that the merchant account be in your name rather than the ISOs. Some shady companies "factor" or "launder" accounts for bad-risk merchants in violation of credit card association agreements (and in violation of law in some places), charge exorbitant fees, and make it difficult for you to access your money.

Before signing up with anyone, compare the organizations' services, fees, and policies. Do they provide equipment, software that doesn't require any modification to your Web site, instant verification, online processing, or real-time services so you can call by telephone for verification if you don't want to accept information online? Do they have a seal of approval by a reputable business organization?

Beware of hidden fees for items such as installation, minimum account billing, voice authorization, bank setup, and daily closeout. Get a schedule of all fees and make sure you understand when and how they may increase, and under what circumstances new fees may be charged Understand policies regarding chargebacks, confidentiality, raising fees, providing notice to you about changes to fees and other terms, and when they may cancel your account with them.

For example, try to avoid agreements that require you to pay "fines" in addition to chargeback fees when the percentage of chargebacks exceeds a certain amount of your total sales volume. Be cautious about signing on with an organization that sells your information, and that of your customers, to other companies unless you understand exactly what information they're using and where it's going. Anticipate your cost by making sure the agreement doesn't allow the organization to change fees or terms without providing written notice to you of the change. what are some concrete things people should look for in these policies? In other words, what's good and bad? Just pointing out the parts of the policies isn't enough.

Credit card associations' Web sites, such as those of Visa and MasterCard, are a good places to start gathering information.


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