Q: I'm opening a gift shop and want to be able to accept
credit cards. I talked to the branch manager at my bank, but
he didn't seem to know much about how it all worked. He did
say that I would need something called "a merchant account"
and something else called "a credit card processor."
Beyond that he seemed as clueless as I am. I'm thinking about
going to another bank. Can you explain how that all works?
- Mary Ann G.
A: Mary Ann, I'm going to give your banker the benefit
of the doubt and say that a lack of knowledge regarding the
specifics of credit card processing is not necessarily a reflection
of the banker's competence. I have found over the years that
most bankers, no matter how experienced or knowledgeable about
the banking business they my be, don't really know much about
how credit card processing and acceptance really works. That's
because the task of accepting and verifying credit card purchases
is handled by third party service companies who process and
deposit (or settle) the funds into a bank merchant account.
The decision to accept credit cards is a wise one for any
retailer. I agree with financial guru Dave Ramsey's teachings
regarding the use and abuse of credit cards. Many people dig
deep holes with credit cards that are hard to climb out of.
But, from a practical business point of view, any retail business
that does not accept credit cards is leaving money on the
table. Research has shown that accepting credit cards increases
revenue and helps with cash flow since you receive the money
within a couple of days instead of waiting up to a week for
a check to clear.
Credit cards don't bounce, as some checks have a tendency
to do. Credit card users are also more likely to buy on impulse
and spend more when they do. Bad news for them, but good news
for you. If you have a social conscience concerning the use
of consumer credit cards, a retail operation probably isn't
the business for you.
To accept credit cards at a brick and mortar location you
typically need four things. The requirements may vary a little,
but the following applies in most cases.
You will need:
A way to enter the customer's credit card information
into a verification and processing system. This can be done
with a swipe terminal, point of sale system, or by calling
the credit card in by phone;
A credit card gateway company to verify the credit card's
validity and process the payments;
A credit card merchant account in which the gateway company
will deposit payments made to you; and
A business bank account into which the settled funds
will ultimately be deposited for your use.
Here's how the process works.
You make a sale and the customer pays by credit card.
Using a card swipe machine or telephone, you contact
what is known as a "gateway company" who takes
the card information you submit and verifies that the card
is valid and the charge can be made against the card account.
The gateway company returns an approval code for the purchase.
With a swipe machine or point of sale terminal the verification
process happens in a matter of seconds. If you're doing telephone
verification it can take a couple of minutes. You call the
gateway company, give them the credit card number and expiration
date and they give you an approval code that you write on
the credit card charge slip. Either way, the money is typically
deposited in your merchant account within 24 to 48 hours (less
fees, of course).
You'll also need to apply for merchant status with each credit
card company whose card you want to accept. To do business
with American Express and Discover all you have to do is fill
out an application, but to accept Visa and MasterCard you
must have a merchant account. A merchant account is a special
bank account set up for the expressed purpose of accepting
credit card payments processed by the gateway company. Merchant
accounts are usually associated with banks, though you can
also use credit card merchant account service companies to
perform the same function if you can not get approved for
a bank merchant account.
Applying for a merchant account at a bank is much the same
as applying for a loan. The only difference is sometimes a
loan is easier to get. There is the prerequisite paperwork
to complete and pledging of the first born, followed by an
approval process that can take up to several weeks. And you
are not guaranteed that the bank will approve your merchant account, even if
you have been a favored customer for many years. Banks have
strict regulations regarding the granting of merchant accounts
and if issuing you a merchant account in anyway puts the bank
at risk of losing money, you will be turned down. Banks always
make decisions based on economics, not relationships (no matter
what your banker tells you).
Requirements for qualifying for a merchant account varies
among banks, but in general the bank will look at the following
criteria:
How long have you been in business? Business longevity suggests
a history of stability, efficient management, and good financial
health.
What is your product or service? Does your product lend itself
to a high rate of returns and chargebacks? A chargeback is
a disputed credit card charge that is refunded to the buyer
and charged against your account. You are accessed a chargeback
fee that can be as much as $20 per event. If your business
lends itself to high chargebacks, you will not get the merchant
account.
How's your credit report? Banks always look at how much you
owe and how you pay your bills, so it's important to have
good financial and trade references. If you have a history
of late payments or defaults to vendors, it will count against
you.
What is your anticipated volume of sales and average transaction
amount? The more money you make, the more money the bank makes.
If you anticipate just a few credit card charges per week
it may not be enough to justify the merchant account in the
bank's eyes.
Is your business categorized as a "high risk merchant?"
High risk merchants are those with the highest instances of
credit card fraud and chargebacks. High risk merchants include
many types of internet-based businesses, telemarketers, travel
and cruise businesses, and membership clubs. Being a high
risk merchant dramatically decreases your chances of getting
a merchant account with a bank.
Being a high risk merchant doesn't mean that you can't get
a merchant account from somewhere else. Thanks to the growth
of ecommerce in recent years there are a number of alternative
companies that will provide you with a merchant account, sometimes
with more perks than a traditional account, but almost always
with higher fees.
Also, not all banks support internet merchant accounts. If
yours does not, shop around for one that does. We'll take
a look at accepting credit cards online in next week's column.
