Swiping smartly: How to open
a merchant credit card account
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
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.
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,
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.
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
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."
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.
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.
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
Jay MacDonald is a contributing
editor based in Florida
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-- Posted: May 1, 2000