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- While I now understand the components involved with online credit card payment processing, how do I implement this on my web site?
Can you explain what a merchant account is and why I need one?
That is a great first question and a great place to start. A merchant account is a specialized account that allows a business to process credit card sales and have those funds deposited directly into a Merchant’s local business checking account usually within 48-72 hours.
A Merchant Account is set up with a bank registered to offer credit card processing through Visa and MasterCard. Merchant Banks usually contract with a Merchant Service Provider (MSP) or an Independent Sales Organization (ISO) to market services on behalf of the Bank. You can also sign up directly with a Bank, but, this is not usually the best route to take since most banks have tougher requirements to get qualified for a Merchant Account. You will have to pay a fee for this service, called a discount rate. Rates vary depending on the type of business you have.
Are there other options I can consider?
There are 3rd Party Services that will process Credit Card Transactions on your behalf, so, I would not recommend going one of these routes. Problems with 3rd Party Transaction Processors include higher discount rates, sometimes as high as 15-20% of your sales prices. But, you only get access to your funds two or three times a month, thus hampering your cash flow. Also, many customers dispute items processed through 3rd Parties because they do not recognize the company name on their credit card statement when the bill arrives 30 days later. This can end up costing you a significant part of your revenue. If you get your own merchant account, you can expect to receive your funds between 2-3 days from the time of the transaction. It will go right into your local business checking account and your Company Name and Phone Number will be on your customer’s Credit Card Bills. Set up your own merchant account so that you can control your money and not rely on a 3rd Party.
Do I need to accept credit cards?
YES, in today’s market I do not know too many successful businesses that do not accept credit cards. There have been many studies showing if a merchant accepts credit cards as a form of payment that the merchant can increase sales dramatically. Depending on the type of business, increases in sales can be anywhere from 15% to 100%.
Internet businesses have the largest increase because customers want to pay immediately and not have to call or wait for the merchant to contact them.
Some obvious reasons to accept credit cards are: merchants will move more expensive merchandise, have an increase in impulse buying, and give your business credibility. Giving customers the ability to pay with a credit card allows impulse buying. That will allow a merchant to move merchandise that a customer may not have funds available for in their checking account. If you want to give your business every chance to be a great success, you must take credit cards. Here are some more good reasons to take credit cards:
COMPETITIVE WEAPON – Customers will buy from a merchant that offers payment by a credit card and will often look to see if a merchant accepts credit cards before shopping.
COMPETE WITH THE BIG GUYS – Accepting credit cards levels the playing field with larger retailers.
PEACE OF MIND – Customers feel secure in using their credit card. If the service or product is faulty, the use of a credit card allows customers to dispute a charge and that makes them feel protected.
CONVENIENCE – Making it easy for your customer to pay you is probably the biggest reason to accept credit cards.
CUSTOMER LOYALTY – Customers will often shop at merchants where they feel comfortable or have shopped before. One important thing to remember is to make sure to add credit card logos to any marketing you do. Many potential customers looking for a service or product will look at a merchant’s advertisement to identify and find the right merchant. If the customer often has small amounts of cash, the deciding factor in determining which merchant to choose depends on if the merchant accepts credit cards. This allows the customer to finance the sale and make payments to their credit card company.
How do I get the money from a credit card sale?
This is another good question, and here is how it works. When you, the merchant, want to accept a credit card for payment, the following process occurs:
You submit a Transaction to your processor using your electronic terminal or Online Processing Software. Either option works the same way. The terminal or Online Processing Software communicates with the Visa/MasterCard Authorization to ensure that the Credit Card is valid and that the transaction amount does not exceed the cardholder’s credit limit. The authorization puts a “hold” for the transaction amount on the cardholder’s credit limit. That way, the funds are available to you when you complete the transaction. To complete the transaction you will close your batch at the end of the day with your terminal. By doing this, you are promising the merchant account provider, sponsoring bank, and issuing bank that you can deliver the goods and services expected by the cardholder.
With Online Software, you usually do not need to close your batch as transactions happen in Real-Time. From the time you close your batch, funds go right into your bank account. This process usually takes 48-72 hours.
Can I go to a bank to get my merchant account?
Yes, you can. But, banks have tougher requirements for approval and do not generally like new businesses. I suggest obtaining a merchant account with a company that specializes in offering merchant services. These organizations, known as Merchant Service Providers (MSP), specialize in providing merchant accounts for new businesses. MSP’s usually have less stringent approval requirements, lower fees, a better understanding of risk issues, and customer service departments that only handle inquiries about merchant accounts. You will probably not deal directly with a Merchant Service Provider, but rather an ISO that contracts with an MSP. These independent sales organizations specialize in marketing to new businesses soliciting merchant accounts. The ISO’s focus is selling you a terminal or software that will allow you to process credit card sales. The MSP also compensates ISO’s, but, the focus of the ISO is usually selling equipment or software. There are many reputable ISO’s in the bankcard industry. But, there are a few bad apples. I will explain how to choose the right MSP and ISO shortly.
Risk is the main concern of any bank or merchant service provider. Banks are more conservative and are highly regulated which gives the MSP and ISO an edge. Internet, mail, telephone or any business that does not see the credit card usually must use an MSP or ISO because banks will usually not approve these types of businesses. Also, many MSP’s and ISO’s offer several associated services, especially to online businesses, such as shopping cart capabilities and website design.
How do I find the right merchant service provider for my business?
Remember, I said ISO’s were the marketing arm for merchant account providers. Well, they will find you. You only need to ask the right questions to ensure the merchant service provider fits your business needs.
Now, here is where most problems start that could adversely affect your business. ISO’s use salespeople to sell their service and, like all salespeople, make their living from earning a commission when they make a sale. Most have no interest in your success and do not receive any extra money from the ISO. The industry is competitive and salespeople will sometimes not identify fees, risk issues, and other important issues that can affect your ability to accept credit cards. I will not identify specific instances that I have seen, but, please do not think all ISO’s or salespeople use deceitful tactics. Even so, it is worth saying to convince you to read and understand any contracts you sign and understand how the process works because you are responsible for your business. So, all these ISO’s are trying to promote their service as the best including the lowest price on terminals, the lowest discount rate, and the BEST service.
It is easy to get distracted in this whirlwind of who has the lowest price and the “best deal” and base your decision on cost alone. One problem with using the lowest cost as your deciding factor to determine who you choose to be your merchant account provider is and who will process your credit card transactions is that processor is also handling your money. That is right, your money. Price is important but should not be the only factor when choosing a credit card processor. Credit card processors are not all the same.
Processors may take all types of businesses but specialize in one specific field. For example, some processors specialize in Internet businesses while others have better expertise in retail businesses. Of course, you want to work with a processor who specializes in your type of business and will provide you the best service. Here are some good points to remember in choosing a merchant account provider:
Educate yourself on how the entire process works. Understanding how it works will allow you to ask the right questions.
Every business is unique. The credit card processor only receives information on the business that you supply. Be sure that the processor understands what you are selling, where you are selling and how you sell. This seems simple but, some merchants have discovered the hard way that the processor did not understand their business.
Find a bankcard professional. Someone who asks questions about your business, explains fees, how the service works, what equipment best fits your needs and why.
ASK QUESTIONS. There are no dumb questions when it comes to your money.
Read your Merchant Agreement. If you do not understand something, ask to have it explained.
Ask to have all fees identified and explained. Read the contract to identify all cost involved.
Do not decide on a processor based on the “best deal,” on fees, or equipment cost. All processors are very close in fees. For example, the difference between a discount rate of 1.79% and 1.89% on $10,000 in credit card sales is $10. Saving a few bucks and picking a processor that does not fit your needs could cost more in the long run.
When you decide that a terminal or online software program fits your needs, understand that they all do one thing, verify credit cards. Do not fall for bells or whistles that you may not need. Never lease equipment. Low cost or even free credit card terminals are available.
Customer Service. A professional bankcard person will provide good service and be there to help you when you need it. You will eventually need help with some type of issue. When you call your sales representative, will he answer the phone or ignore your need for help?
Processors use guidelines in approving accounts. Sales representatives know this and will sometimes not disclose information about your business. They may do this if he or she believes this may affect whether your account gets approved or not. Some representatives are only concerned with making a commission and not the success of your business. Understand, you are not usually dealing with the credit card processor. The processor only receives an application you sign filled out by a sales representative. The Processor assumes the information supplied about your business is accurate. The processor uses this information in approving and managing your account. If there is information that is not correct, there is a high probability that will end in the suspension or termination of your merchant account.
Understand fraud and security issues. Your processor has material on these two issues. This will save you money, guaranteed. Although very important, do not be too critical in evaluating processors. You will know which one is right based on your instinct and what feels right. Aside from logic, your intuition – that voice within you – may lead you to the right vendor.
What does my business need to open a merchant account and get set up to take credit cards?
The only requirements to open a merchant account are the following unless your business falls into a high-risk category. I will explain high risk in a moment, but, here are the basic requirements to have a merchant application approved: A. Business checking account B. A web site or physical location C. No open bankruptcy D. A product or service that is not on a restricted merchant list. Many processors will work with you if you are willing to submit to special conditions if you have less than perfect credit or a risky type of business.
What makes a business risky to the processor?
There are a few reasons why a processor would consider a business risky and decline the application. I have listed reasons below that would lead an MSP to consider a business high risk.
High monthly sales volume – Merchants who process large ticket items (those over $500) and/or have a High Monthly Sales Volume (usually over 25K per month) pose a special problem to merchant service providers and the merchants themselves. Merchants that fall into this category need to be aware that Merchant Service Providers will be more thorough in reviewing Merchant Applications because of the high potential for Fraud and potential losses. They usually ask for more documentation upfront including copies of Tax Returns and Financial Statements. This extra documentation helps legitimize your business.
Derogatory credit – In the not too distant past, it was virtually impossible for a person with a poor credit history – or no credit history – to receive a merchant account. Heavily regulated banks were subject to strict controls over their activities and rarely saw fit to grant merchant accounts to those without a sterling credit history. Today, it is much easier to find a company willing to give a Merchant Account to a Merchant with a poor personal credit history or even no credit history. The requirements and terms of service may vary a little from ISO to ISO. If you fall into this category, expect to pay a slightly higher Discount Rate and prepare for a Reserve Account.
Type of business – Each merchant service provider restricts certain types of business that they have had problems with in the past. There are too many types to list here but your ISO will know if you have a restricted business. Some types of businesses that may be on an MSP’s list are adult related businesses, international merchants, higher ticket items that are not sold in a retail environment, business opportunities, credit repair, and multi-level organizations. MSP’s consider these types of businesses to be risky due to the high possibility of chargebacks. There are some MSP’s that specialize in higher-risk accounts but will charge higher rates, require a reserve and/or delay fund deposits for 2-3 extra days.
I am starting to understand how all this works but I am going to open an online store
Online stores are extremely popular these days. Merchants can continue to work at their day job and work on their online store in the evenings. This allows merchants to ensure their store is a success before quitting their jobs. There are a couple of ways to accomplish this but perhaps the most efficient, convenient way – and, depending on the circumstance, the most cost-effective – is to use real-time processing via a gateway. This process entails your customer inputting his/her credit card information on a secure (SSL-encrypted) site, and in real-time. The MSP receives this information from the gateway. Just as cars use a tunnel to get from one place to another, the gateway serves as that tunnel to transmit information from the customer to the credit card processor. At first, within seconds of the customer submitting his/her credit card information, the acquiring processor either authorizes the transaction or declines it. Receiving an authorization code only reduces the credit limit of the card but there is not a charge to the card. Subsequently, the approved customer’s information becomes “captured” resulting in the customer’s credit card being charged for the authorized amount. This capture becomes part of the merchant’s batch and travels through the gateway again. The acquiring processor then knows to complete and settle the transaction. Settlement takes place as funds resulting in a credit to your checking account.
Will I also be able to accept check payments on my web site?
Yes, make sure that the merchant service provider knows your interest to offer this important payment option to your customers, and can accommodate this service. On the web page order form, you can have one section where the customer may put in his/her credit card information and another section where the customer may put in the check information required (e.g., routing number, account number, etc.). The merchant service provider can tell you all the checking information that is necessary to collect from your customers. The checking information goes through the payment gateway just like the credit card information travels.
While I now understand the components involved with online credit card payment processing, how do I implement this on my web site?
If you designed your website, you can easily add another page called the “Order Form”. If you rely on the expertise of your web designer, the designer can do this in fifteen minutes or less, unless you need special customization that may entail more time. But, an order form is relatively simple to add. Remember, you still must have a secure server with certification, a gateway, and a merchant account. The shopping cart software is optional (though highly recommended) and can integrate into your website by you or your designer with the instructions provided by the shopping cart provider.
Here is the good news: by choosing the “right” merchant service provider; you can have access to its secure server and its gateway. There are merchant service providers who have their own secure server, their own gateway, and their own shopping cart, and do not rely on other companies to fill those needs. In other words, you can find a “one-stop-shop” solution. You must ask any merchant service provider if they have their own gateway or outsource it to another company. If they depend on another company for the gateway, you will be dealing with at least two organizations (i.e., the merchant service provider and gateway company), and they must work together.
Horror stories abound about the lack of coordination between service companies, leading to lots of headaches, heartaches, and possibly, financial woes for you. Use one merchant service provider that provides all the essentials.