Charge it
By Jeremy Sacco - BuyerZone.com

As popular as credit cards are already – $3 trillion is expected to be charged in 2004 – their use is still growing. The exploding world of online commerce is playing a part, as is the increasing usage of credit cards in business-to-business transactions. If your business isn’t accepting credit cards yet, you might be missing out.

By accepting credit card payments, businesses who currently invoice all their customers can improve cash flow: payment times go from 30, 60, and 90 days down to three to five days. You’ll also reduce the hassle of sending late-payment notices. And surprisingly, in controlled scientific experiments, stores displaying their acceptance of credit cards saw cash sales increase by 29%.

Companies who thought their average transaction was too small to benefit from credit card processing may be surprised at how many customers will whip out the plastic for a $5 sandwich. And if you’re finding that third-party merchants like PayPal and cc:Bill aren’t cutting it for your web site any more, you might be ready to move up to the big time and establish your own credit card merchant account.

Setting up a merchant account
The terms and players involved in setting up a merchant account can be confusing. And there are definitely some lower-than-dirt scam artists out there who will try to stick you with unfavorable terms and tricky contracts. Here are the players you should know:

  • Banks - Your everyday business bank should be the first place you contact about setting up a merchant account -- many banks offer small business packages that include merchant services. Banks can be picky about accepting your application, though.
  • Independent Sales Organization – An ISO is essentially a credit card broker. They set up and service credit card merchants, but do not do the actual processing. ISOs are less selective than banks, but that comes at a somewhat higher price. They are also not strictly regulated the way banks are, so be particularly vigilant when evaluating potential suppliers.
  • Financial Service Provider – MasterCard and Visa require you to establish a merchant account through an intermediary. However American Express and Discover give you the option of applying directly to them.
You should also inquire at the various business associations and trade organizations you belong to – some of these groups offer good deals for small merchants through the power of bulk purchasing.

How much is it going to cost you?
The recurring charge you’ll have to pay is called the “discount rate”, which is somewhat misleading since it’s no discount to you: it’s the percentage of each sale that goes to your provider. The rate will be set according to your expected volume, risk of chargebacks, and average transaction size, but is typically 1.5% to 2% for in-person transactions, and 2.2% to 3.0% for phone and Internet transactions. In addition, a fee of $0.20 to $0.50 will be tacked on for every transaction.

In addition, there are an astonishing number of other fees that merchant services providers can charge: statement fees, annual fees, programming fees, Internet processing fees, customer support fees… essentially a range of arbitrary jack-up-the-bill fees. We cannot stress this enough: make sure you have a complete understanding of all the one-time, monthly and per-transaction charges you will incur before making your decision.

In most cases, you’ll want a credit card terminal or software to run your transactions. Prices have dropped considerably – basic models go for $150 to $400. If you’re shopping for terminals, you can get a free quote from multiple credit card terminal providers.

  • Some providers charge non-refundable application fees of up to $200 – nonrefundable even if your business is turned down for an account. Beware.
  • Providers will turn you down if they think your business will leave them holding the bag for fraudulent charges. Businesses that sell physical goods and those that do business in person are more appealing to providers. No matter what business you’re in, make sure you have good credit references ready. Some companies advertise high acceptance rates in an effort to impress – do not be lured; 99% acceptance rates are common among ISOs.
  • When negotiating pricing, focus on lowering the set-up and monthly fees if you expect to charge less than a few thousand dollars each month. For larger volumes, concentrate on reducing the per-transaction fees and the discount rate.

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