Credit Cards: Getting a Merchant Account

If you wish to accept credit cards, you must obtain a merchant account. This is a specialized bank account that corresponds with a credit card processing company (Visa, MasterCard, American Express, etc.). The best place to start is through your own local bank, or at a reputable company which specializes in merchant accounts for small businesses similar to yours.

When you apply for a merchant account, expect financial institutions or other service companies to scrutinize your business. In most cases, the application process will be similar to a credit application; but rather than just determining your credit-worthiness, they will want to determine that your business is real.

The most important aspect of such an application is that you be honest and complete about your business and financial affairs. Credit card companies accept a great deal of liability for credit card fraud and other losses; they want to know they can trust you. While the application process may seem like a hassle, it is this scrutiny that improves the credibility of legitimate businesses, especially in mail order.

Know your bank's policies

Merchants should familiarize themselves with the financial policies imposed by their banks. It's important to know which fees you will be paying from each bank. These fees are often negotiable.

Fees that are virtually unavoidable include: statement fees ($10 to $15 a month), transaction fees (fees charged per transaction -- about $0.30 each), minimum account fees, and "discount rates" (a percentage of your sale paid to your bank). Internet businesses pay higher discount rates than storefront businesses. Other fees such as installation and voice-authorization fees (for each time you obtain authorization via the telephone) vary at different banks.

Don't settle for less

Regardless of the size of a merchant's business or the number of times they've experienced fraud, purchasing or leasing equipment that provides immediate approval or denial is a wise choice, as opposed to the low-tech (but also low-cost) "knucklebuster" apparatus that requires the merchant to get approval after the sale is made and the merchandise is gone. Modern technology makes it easy to get on-the-spot authorization. Why take the chance of letting someone walk away with a piece of your work without being ensured that you will be paid for it? The "swipe machines" which provide instant approval cost more (usually $300 to $800), but they just might pay for themselves with one "denied" sale.

Don't forget to ask about chargeback policies

Some banks subject merchants to chargebacks (which occur when the merchants' account is charged for a disputed purchase). There must be a valid signature on the back of the card, and authorization for the purchase must be obtained before the customer leaves, in order to relieve the merchant of liability.

Required equipment

Some banks require that merchants purchase software for certain kinds of sales. Merchants who sell through mail order or the via the Internet are required to purchase the Address Verification System ($400), because there is no card or person present to verify the card's authenticity and/or the owner's identity. This system takes the entered billing address and phone number and matches it with the information on the customer's credit card account.

Most of the information contained in this column was excerpted from "Credit Card Processing in Two Steps" by Jim Joyner, TCR April 1999 and "Make Credit Cards Work for You" by Stacy Simon, TCR September 1999.

DECEMBER 1999:

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