Accepting Credit Cards 1

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Reprinted with permission from Janet Attard* Copyright 2004. All rights reserved.
     
The Charge Card Dilemma
    
Credit cards are the payment method of choice in an ever-growing number of sales transactions each year. In the US, VISA transactions alone total $1.1 trillion a year. Consumers and businesses alike use credit cards to purchase equipment, clothing, office supplies, medical and dental services, car repairs, travel, and a wide range of products and services. In fact, businesses that don't accept credit cards often find themselves at a competitive disadvantage.
As one business owner puts it:
The more I sell the more I make. . . . Because I am so much like everybody else, I need to place myself so that I can sell more than the guy down the street. . . . Or, if I cannot beat them I have to at least join the "me too" club. Accepting credit cards falls into the "me too" category.

As convenient as it may be for people to charge purchases on credit cards, the widespread use of credit cards presents three major problems for small businesses:

• Banks often won't grant a merchant account (what you need to accept credit cards) to new businesses, Internet, or conventional mail order businesses.
            
• Small and homebased businesses often don't realize there are a number of third-party providers that will work with new and mail order businesses. Thus, they are easy prey for providers who charge high transaction fees and try to lock new businesses into expensive, noncancellable leases for equipment.
       
• Very small businesses are at risk for catastrophic losses if they are hit by a rash of charges on stolen credit cards.

Although there are no guarantees, by arming yourself with the facts in this chapter you stand a good chance of avoiding the pitfalls in obtaining merchant status and processing charge sales.

Won't it cut into my profits if I accept charge cards?

Accepting credit cards will increase your cost of doing business since you will have to pay the credit card company a percent of each sale and are likely to also have to pay an additional flat transaction fee plus some flat monthly charges. Thus, if you have a low profit margin, you may want to increase your prices overall to offset the credit card fees. You may find, however, that your sales volume and the dollar amount of each sale increases more than enough to offset the fees you pay the credit card company. In addition, if you have been used to billing customers and waiting 30 or more days for payment, letting customers charge purchases could reduce your billing costs and improve cash flow. You shouldn't expect to clear up outstanding bills by gaining merchant status, however. It is against credit card company rules to let customers charge unpaid bills to their cards. Only new purchases can be charged.
Finally, keep in mind that after achieving merchant status, some businesses find little improvement in sales, and a few actually lose money due to credit card fraud or consumer abuse.

How long does it take for the credit card company to pay me when I accept charge cards?

How soon you get your money will depend on whether funds are transferred to you electronically, held for a time against possible chargebacks, or mailed to you in a paper check. Generally, however, you can expect to get paid in 2 to 14 days.

How do I go about accepting credit cards?

To accept credit cards, you will have to apply for merchant status (also called a merchant account) through a bank or other financial institution, an authorized Independent Sales Organization (ISO), or the credit card company itself for certain cards. Once you are granted merchant status, you will need to buy or rent a device for imprinting or electronically processing the credit cards. If you are selling on the Internet, you'll also need a secure method of accepting orders and/or "shopping cart" software which lets customers enter orders on an order form, adding or deleting things from their cart (order form) as they shop.

Do I need a separate account for each credit card I want to accept?

No. Your merchant account provider should be able to arrange for you to accept all major credit cards. You may pay a different rate for charges processed through some cards, however.

Where do I go to apply for merchant status?

If you have been in business for two years or more, your business is not homebased, and you don't sell mail order, you may be able to get merchant status through the bank with which you normally do business. If you are a small mail order company, run a homebased business, are new in business, or operate certain types of businesses, your regular bank may turn down your request for merchant status, or not even be willing to talk to you about it.

Can I get merchant status without going through a bank?

You don't have to get a merchant account through normal banking channels. In fact, most startups get their merchant account through a third-party merchant services provider. These providers, which are also called independent sales organizations (lSOs), are intermediaries between merchant banks (banks that process credit cards) and businesses that want to accept charge cards from their customers. As the word sales implies, these companies sell credit card processing services and within certain limits can sell their services for whatever the market will bear. Most also sell, lease, or rent credit card processing terminals and provide other services such as check verification.

Why is it so difficult to get merchant status? Don't the banks or other companies want my business?

Banks want business, but they don't want risky business, and home businesses, new businesses, Internet businesses, and mail order operations all look like high-risk operations to credit card processors. Here's why: Federal laws give credit card users broad protection against unauthorized use and unfair credit practices. As a result of these laws, credit card issuers act as intermediaries in disputes between the consumer and the merchant. If a consumer claims she did not make a purchase or that a purchased item was inferior and the merchant won't replace it or refund their money, the credit card company refunds the cardholder's money in most cases and charges back (bills) the merchant for the amount of the refund. While merchants are supposed to be given a chance to prove the purchase was actually made or the goods were satisfactory, merchants say that doesn't always happen.
If the merchant is very small (as homebased operations often are), the company may not be financially able to make good on chargebacks, particularly if they are hit with someone buying merchandise with one or more stolen credit cards. If they go bankrupt (or simply close their doors and disappear, as some fraudulent businesses do), the credit card issuer has to absorb the loss. In addition, under VISA regulations, if the percentage of VISA chargebacks to a merchant account goes over one percent, the merchant bank may face stiff fines or possible loss of their ability to process VISA cards.

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