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Credit Cards, Merchant Accounts, and Your Bottomline
By Tim Knox
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: Maryann, 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: (1) 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; (2) A credit card gateway company to verify the
credit card's validity and process the payments; (3)
A credit card merchant account in which the gateway
company will deposit payments made to you; and (4) A
business bank account into which the settled funds will
ultimately be deposited for your use.
Here's how the process works. (1) You make a sale and
the customer pays by credit card. (2) 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.
Small Business Q&A is written
by veteran entrepreneur and syndicated columnist, Tim
Knox. Tim's latest books include "Small Business
Success Secrets" and "The 30 Day Blueprint
For Success!" Related Links: http://www.smallbusinessqa.com
http://www.dropshipwholesale.net
Article Source: http://EzineArticles.com/
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Credit Cards, Free, objective information articles and rate quotes for consumer bank products such as mortgage rates, home loans, CDs, auto loans.
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