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START YOUR MERCHANT SERVICES ACCOUNT By Wendy Byford The ebook companion to the elearning module Start Your Merchant Services Account with Wendy Byford & Gary Bauer
Start Your Merchant Services Account is the fourth module in The Financial Series of the Start Your Business small business advisory program. The module includes this ebook and an elearning lesson. This publication and the accompanying recording are designed to educate and provide general information regarding the subject matter covered. However, laws and practices often vary from state to state and are subject to change. Because each factual situation is different, specific advice should be tailored to the particular circumstances. For this reason, the reader is advised to consult with his or her own advisors regarding that individual s specific situation and should not to rely on any situation, regardless of the similarities, discussed herein. Any names, characters, places, companies and incidents are either the product of the author s imagination or are used fictitiously, and any resemblance to actual persons, living or dead, businesses, companies, events or locales is entirely coincidental. The author has taken reasonable precautions in the preparation of this recording and e-book, and believes the facts presented in the recording and e-book are accurate as of the date of publication. However, neither the author nor the publisher assumes any responsibility for any errors or omissions. The author and publisher specifically disclaim any liability resulting from the use or application of the information contained in the recording and e-book, and the information is not intended to serve as legal, financial, tax or accounting advice related to individual situations. Copyright 2008 MSP Financial, LLC Published by Chrysalis Business Systems, LLC All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without the written permission of the publisher.
Start Your Merchant Services Account 5 Start Your Merchant Services Account To Accept or Not to Accept Credit Card Payments If you are starting your first company, the decision on whether or not to accept credit card payments is not an easy one to make. On one hand, taking credit cards has several advantages for you and your customers: People are familiar with using credit cards for payments and usually have at least one credit card even when they do not have cash in their pockets. Customers do not have to check their bank balances before buying from you. You can process orders as they arrive by phone, fax or internet without waiting for payment to be mailed to you. Your staff does not need to spend time issuing late payment notices and chasing tardy customers. Customers tend to buy more when using a credit card than when using cash. You gain credibility in the eyes of your prospective customers if you can accept credit cards from a valid merchant services provider. The money is usually transferred directly into your bank account in 2-4 days, saving you a trip to the bank to deposit cash and checks and with no more delay than waiting for a check to clear. On the other hand, there are some significant drawbacks: The fees can be high per transaction, per month, per charge back and per enquiry. Your money may be held by your merchant services provider for a variety of reasons; such as when the average transaction amount or monthly total is much higher than you indicated to the merchant services provider when you opened the account. It is easier for a customer to dispute the charge with his credit card company than it is for him to call you and demand his payment back. Unless you have a signed order form and can prove that you fulfilled your part of the agreement, the credit card company often will come down on the side of the consumer. If you are small and new, it may be difficult to find a company that is easy to do business with and does not increase the fees after you have begun the process of applying for an account.
Start Your Merchant Services Account 6 If you are an attorney, special rules apply and you have to be very careful about co-mingling funds. While the drawbacks certainly give you things to consider, they should not on their own stop you from opening a merchant services account. You need to analyze your situation and the merchant services offering to decide whether or not the move would benefit your business. Analyzing Your Options When investigating whether or not to accept credit card payments, here are some of the things you should do. Firstly, if you are in a business where you do not need to offer credit card services immediately, you may want to delay signing up until you have been in business long enough to determine your average volume of sales each month. You will also want to determine the amount of business lost because you do not take credit cards, and estimate the amount of increased business you are likely to attract if you do take credit cards. If you have a small number of clients, each with relatively large sales, you may do fine being paid by check. However, if your contract is for a personal service that the client expects to finance using a credit card, you may lose the sale if you cannot accept this form of payment. Next, characterize your type of company. Will you have access to the credit card to swipe it into a machine? Will you need to key the numbers into a PC software program? Will customers key in their own information over the internet? Or will you have a combination? Will you need to produce a receipt? If you need a physical machine, does it need to be portable or will it stay in one place? If you will not have access to the customer s card, would having the customer purchase over the internet be better than your keying the card information into a PC program? When you have characterized you company, research a number of service providers and compare fees for the type of service you need, contract terms, length of time they have been in business, support capabilities, reputation and length of time it will take to deposit funds into your bank account. When you speak with their Sales Representatives, ensure they understand you are small, new and looking for the right service, not just a quick turnaround. Ask for references, including people who have had problems, and follow up. You want to know how well the problems have been taken care of.
Start Your Merchant Services Account 7 Best of all; ask for referrals from people you trust. Who do you know who is already in business and is using a merchant service provider? Ask what they like and what they would change. Ask about support. Find out if there were any surprises. If you have an IT professional on your team, perhaps that person has customers using an on-line service. Ask. Once you have narrowed down your analysis to 3 or fewer possibilities, spend time analyzing the numbers to ensure you understand every fee you will be charged and how that fee will vary depending on your volume, transaction type, average sale size, and the risk you pose. Be aware that you will pay more per transaction for card-absent sales than you will if you have physical access to the credit card and can get a customer signature on the receipt. Also be aware that you will pay more if the merchant services provider believes that your business poses more risk than others; for example, you provide a specific service rather selling a physical product. At the end of the analysis, you need to determine if you must increase your prices to accommodate this service and, if you do, will the increase in business outweigh any losses owing to the higher prices. Compare fees among the service providers you have short-listed and balance the fee against other services that are important to you, such as 24 x 7 support. Types of Credit Card Processing Companies During your analysis, you will find there are many different types of companies providing credit card processing. Their services are not all the same, so make sure that you are doing apples to apples comparisons as you review their offerings. Your bank, for example, may offer a merchant services package; however few banks do their own processing. Most outsource to a third party processor. If you are considering using a bank s services, make sure you know who will take responsibility for getting problems resolved. Failing to do this may place you in finger pointing hell. In addition, find out how long it will take to have your money drop into your account. If the bank says next day, ask the person you are speaking with if the bank does its own processing. For the majority of banks it will take 2-3 days to have your money credited to your account. Third party processors handle the credit card processing, including authorization, billing, reporting and settlement. They are often represented by an independent sales organization (ISO) that acts as a merchant services broker for one or more merchant services providers.
Start Your Merchant Services Account 8 ISOs generally provide not only set up but also service for the credit card merchant they represent. Since they are not banks, they are not as closely regulated, so be careful when evaluating them. Also, since ISOs are usually willing to assume more risk than banks will, their rates may be higher. Visa and MasterCard require you to go through a bank, third party processor or ISO to accept payment on their credit cards. American Express, as a Financial Services Provider, allows you to apply directly with them. So does Discover. As with many services, you may find that you will get better rates and better support if you belong to an industry association or small business group. You might also check out shopping clubs like Costco to see if they have services that cater to small businesses. Since some groups have large memberships, the merchant services providers they choose will try very hard to keep those accounts by ensuring that the members who use them are happy with the service and support they receive. After you have completed your investigation, before you sign the contract, go back to the beginning and reconfirm the need. If you are convinced that accepting credit cards is essential to your growth and profitability, take one last look at the fees per credit card supplier. American Express (AMEX) charges are generally significantly higher than VISA or MasterCard so you may be tempted to limit your transactions to these two cards. However, before you make the decision, know your target clients. Many small businesses prefer to use AMEX owing to the benefits they receive, while individuals prefer Visa or MasterCard because they can pay over time. As with everything else, tell your Bookkeeper what you are planning. It is important you know what he or she will need to record your sales, and that person may even have a referral for you to check out. How Credit Card Processing Works There are five basic steps in credit card processing 1. 1 AllBusiness.com Buyer s Guide to Merchant Accounts, http://www.allbusiness.com
Start Your Merchant Services Account 9 Step 1: Submit the credit card information If you are using a credit card terminal, the information is forwarded when you press send. If you are entering the information into a PC program, the information is forwarded when you hit enter or click submit. If your client is ordering online, the information is forwarded when the client clicks submit order. Note: Data that are input online goes through a payment gateway, which is the equivalent of a physical terminal. The secured data is forwarded to the bank that holds your merchant account. This is called the acquiring bank. Step 2: Authorize the transaction The acquiring bank forwards the transaction to the bank that issued the credit card, called the issuing bank, to be approved or declined. Step 3: Return the response The issuing bank sends a response code back to the acquiring bank. If the transaction was declined, the response will include the reason for the failure. Step 4: Register response The response is sent from the acquiring bank back to your terminal, your PC or through the payment gateway back to your website. Step 5: Collect approved funds The acquiring bank transfers funds from your merchant account into your bank account. The timing depends upon the kind of processing the merchant provider does real time or batch. Real time is riskier so the fees for this type of service may be higher than for batch processing. Types of Service One of the things merchant service providers assess is the degree of risk your business represents. Risk comes not only with the type of product or service you offer but also with the manner in which you take payments. Providers view the risk of fraud as being much lower when you have access to a physical card to swipe at a terminal. With the card in hand, you can verify that the person making the purchase is indeed the card owner by asking for additional identification and by verifying the signature.
Start Your Merchant Services Account 10 Purchases made by mail order, telephone order or fax collectively called MOTO and purchases made over the internet are considered much riskier. In these instances, you cannot see the card and the purchaser to check identification. To help reduce the risk, processors have developed and implemented preventative measures to help you verify the card holders information. Examples of these measures are address verification (AVS) and CVV2 (the 3 digit code on the back of the card). However, even with these measures in place, card-absent purchases are still riskier by nature than card-present purchases. Types of Fees Merchant Account Providers make money by charging fees. The issue you face is figuring out what the total charges against your account are likely to be for each prospective provider so you can make an informed decision. Fees fall primarily into one of three categories: 1. One time fees 2. Recurring monthly fees 3. Transaction related fees These categories apply whether you are dealing with card-present or card-absent transactions. One Time Fees There are several fees to watch for when you are getting set up. The first is the application fee, which may be as high as $200. Check to ensure that the fee is refundable in the event you are not accepted as a customer. There may also be an account activation or setup fee. If you are setting up to do internet sales there may also be a separate gateway setup cost or this fee may be included in the account setup fee. American Express has a fee separate from the merchant account setup fee. If you are doing card-present sales, your biggest cost will be the price of the terminal used to swipe the credit cards. Prices range from $150 for a basic terminal to $1000 for a wireless version. Given the cost, you might consider leasing as an alternative. Before you buy or lease, ask how the terminal will be kept updated in case changes are required. Also, be careful of long-term leases with early termination fees and any rate that is low to start with and increases later on.
Start Your Merchant Services Account 11 If you are doing MOTO transactions, a terminal is not required; however, you may need to purchase software for your PC to verify transactions and submit them to the provider. Budget approximately $150. To make life easier for your Bookkeeper, you may be able to find a third party that supplies a program to link into your accounting software so you can bill from accounting, drop an invoice to the client s email account, and forward the transaction to your merchant account provider in one smooth process. Some merchant account providers will permit verification by phone. Recurring Variable Monthly Fees The primary variable monthly fee on your merchant account will be the discount rate. This fee is a small percentage of each transaction, usually somewhere between 1% and 3%, charged by your provider. Rates vary depending on your company s assessed risk, average sales amount, transaction type, and the total volume. As explained above, card-present and card-absent transactions represent significantly different levels of risk. Consequently, most providers charge two different rates, depending on the type of transaction you are processing. Cardpresent transactions usually carry a discount rate of approximately 1.5% to 2%; card-absent transactions bear a rate of approximately 2.2% to 3.0%. You may find these rates referred to as qualified, mid-qualified or non-qualified. The qualified rate is reserved for the most secure transactions, usually a physical swipe. The mid-qualified rate applies to slightly less secure transactions; for example, when a retailer punches the card number into the terminal instead of swiping the card. The mid-qualified rate is usually 1% to 1.5% higher than the qualified rate. The non-qualified rate is applied to the least secure transactions; for example, keyed transactions with no address verification and MOTO transactions. These are generally 1% to 2.5% higher than the qualified rate. Discount rates also vary depending on the card presented. Debit cards offer the lowest rate, provided they are processed as debit cards in a device that accepts PINs. If they are processed as Visa or MasterCard credit cards, you will pay the appropriate rate. Diners club has the next lowest rate, followed by Visa/MasterCard, Discover Card, and American Express. Some providers charge a minimum monthly discount fee, for example $25, in case your computed monthly discount fee falls below this amount. Remember to factor this into your calculations if your volume will be low. Some providers charge tiered discount rates that fall as your volume passes certain levels; so if your business will have a high monthly dollar volume, look for one of these providers.
Start Your Merchant Services Account 12 In addition to the discount rate, your merchant account provider will charge a per transaction fee. This usually equates to one charge per order processed. Fees vary from approximately $0.20 to $0.30 for card-present transactions to $0.30 to $0.50 for card-absent transactions. Recurring Fixed Monthly Fees In addition to the variable fees outlined above, merchant account providers also charge a transaction summary or service/support/statement fee of approximately $10 per month. This fee usually includes customer support. If you are processing sales online, your gateway provider will also charge a monthly fee of approximately $10 to $25. This fee covers the use of the software and usually includes online payment cancelations and transaction reports. Miscellaneous Fees In addition to your one time and monthly fees, you may find you are being billed a number of miscellaneous fees. These include: Batching s added to each batch settled from your terminal or PC. Chargeback fees assessed when you reverse a charge, whether or not it is successful. Authorization fees assessed on each transaction sent to the acquiring bank for approval. This fee may be part of the discount rate. Voice authorization fees assessed on transactions authorized over the phone. The key is to question everything before you sign a contract. Putting It All Together Once you have done your homework, it is time to put all the pieces together and make your decision. At this point you should have 1. a good comparison of fees, provider to provider; 2. an understanding of how the process will work, what you are required to purchase terminal, PC software, gateway service etc. and who is responsible for putting it all together; 3. an understanding of how long it will take from the time you send the transactions to the provider to when the money will show up in your bank account; 4. an understanding of the conditions that would have to occur for the provider to withhold payment to you; and 5. a feel for how good or how poor customer service is for each provider.
Start Your Merchant Services Account 13 Make your decision, read the contract thoroughly, and get started. Good luck.
Start Your Merchant Services Account 14 Resources Merchant Account Providers Costco Wholesale Corporation store offers small business services. One of the services offered is a merchant services account, provided through Nova. First Data Independent Sales: James Deese, representative. Phone: 800.634.7221 Fax: 866.404.3590 Email: james@fdis-raleigh.com Additional Information Merchant Account Buyer s Guide 2002-2003 by Jack L. Kimball This is an excellent resource, provided as a bonus free of charge from Mr. Kimball. While we do not have an electronic version of the Merchant Account Comparison Worksheet, the paper copy will guide you through the information you should be gathering.