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Swiping smartly: How to open
a merchant credit card account

Opening a merchant account"Benjamin, I have one word for you -- plastics."

That classic advice from the 1960s movie "The Graduate" is just as valid today for small businesses. If you're not accepting credit cards -- plastic -- you're losing sales, period.

"I think that a merchant card account is every bit as important as a telephone," says Robert Sullivan, author of The Small Business Start-Up Guide.

"It has been shown time and time again to have a major effect on your business," Sullivan says. "Get one as soon as humanly possible. Day two. Let's face it, we live in a plastic society."

Indeed we do. An estimated 157 million Americans, roughly three out of every four adults, are packing plastic, and merchants can benefit by serving them. Credit card sales are quicker than check transactions, you receive payment faster than checks and accepting cards is safer than dealing in cash.

Customers appreciate having the option to charge it, sure. But they also tend to spend more when they use plastic.

Simply put, obtaining a merchant credit card account can pump up your business. For a mere $200 to $500 upfront, you can be swiping in the profits. Here's how.

Finding a provider
First, the bad news. Most banks, even your own bank, may not be eager to put you into the credit card business, for any number of reasons: you're a small business, a new business, a home-based business, a mail-order company, or your credit is nonexistent or worse. Nevertheless, try them.

Now the good news. With the proliferation of mail order and Internet businesses, there are virtually hundreds of providers out there, including merchant banks, independent sales organizations, electronic clearinghouses and the commissioned agents who represent them. If you can't get a reasonable deal through a bank, try to work directly with a clearinghouse; you'll save yourself the agent's commission.

It may be helpful to ask other merchants about their account providers. A cursory study of Internet sites also will give you an idea of what's available. But beware: some processors require an application fee. Make sure that they will refund the fee if you are denied an account, and get it in writing.

Tip: Many business-based organizations provide merchant accounts and many of them are excellent deals. Plus, they're scaled to the needs of your industry.

How merchant accounts work
Here is how the merchant card account works:

If you are a storefront business, you will need a terminal or software to enter credit card information and obtain sales authorization. If you are a telephone, mail order or online business, you'll need the software.

Once you are set up, you will be charged a fee of roughly 20 cents to 30 cents and a discount rate of 2 percent to 3 percent per transaction. The discount rate varies; storefront businesses can expect to pay a lower rate due to the greater degree of security in face-to-face "card present" transactions. Phone, mail and Internet businesses pay more for "card absent" sales. Beware: if the "card absent" rate is more than a percentage point above the "card present" rate, you can probably do better.

Tip: Most accounts will set you up to accept Visa and MasterCard, with the U.S.-only Discover card included free, but it can be difficult to get an American Express account for small or new companies. If you want to accept American Express, open an account that accepts the others first. Usually, AmEx will green-light you immediately.

To lease or not to lease?
Equipment leasing is one way that account providers make money on small businesses. You can expect to pay anywhere from $200 to $1,500 for a storefront terminal; around $350 for the software. If you don't want to pay up front for a terminal, you can lease, typically at terms of $35 or so a month for 48 months. Be aware: Although many providers require that you purchase the equipment from them and that their equipment price is not negotiable, many times it is, especially if it seems unusually high.

Tip: Sullivan says buy if at all possible. "You don't want to end up paying $1,000 for a $200 printer. It might make more sense to go borrow the $200."

Finding the discount "sweet spot"
Set 2 percent as your target discount rate. Depending on other factors, including your credit history, type of business, length of time in business and percentage of sales made via phone, mail order or Internet, you may have to scout around. If the rate you are quoted is less than 2 percent, beware of high or hidden fees. If it's above 5 percent, walk away.

Remember: Where merchant card accounts are concerned, nearly everything is negotiable. If your business generates a high volume of charges, say more than 500 per month, you may qualify for a package deal that combines the transaction fee with the discount rate, then figures the percentage based on average sales.

Tip: If your average sale is $20, a difference of 10 cents on the transaction fee equals one-half percent on your discount rate. Use it to negotiate the best possible terms.

Avoid hidden charges
Sullivan warns against paying ANY of the following fees: application fee, installation fee, minimum account billing fee, chargeback fee, voice authorization fee, bank setup fee or daily closeout fee.

Being a good merchant
One final note about your obligation as a credit card merchant: Beware of chargebacks.

What's a chargeback? Here's the scenario: Cardholders who fail to get refunds from merchants call their credit card companies and ask that the charges be removed. The card companies take the charges off and put them "in dispute." The merchant is then issued a chargeback to pay the money back to the credit card company.

"The cardholder always holds the cards, so the merchant is the one that will always take the hit," says Sullivan. "You'd better have a really good reason why you didn't issue a refund. It behooves the merchant not to get to that point, because a chargeback fee can run $10 to $25 and it's a real black mark on you as a merchant. Too many chargebacks and they yank your account."

Tip: It is more blessed to refund than to chargeback.

Jay MacDonald is a contributing editor based in Florida
To comment on this story, please e-mail the
Bankrate.com editors

-- Posted: May 1, 2000


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