Credit Cards, Merchant Accounts, and Your Bottomline

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

---

How To Avoid Becoming A Victim of Identity Theft

With identity theft statistics currently at an all time high, and climbing, it just makes sense that we should all be doing everything we can to protect ourselves.One of the most prevalent yet... Read More

Bankruptcy vs. Credit Counseling: What Should I Do?

Credit Counseling and bankruptcy are both ways to relieve the stress of debt. However, they are very different and it is important to understand both before making a decision as to which is... Read More

How Can A Qualified Mortgage Consultant Help Boost Your Credit Scores?

Consumers interested in purchasing or refinancing a home will pay an interest rate based on current market conditions and their ability to pay back the loan. The borrower's income and debt ratios are... Read More

How to Deal with Hire Purchase Debt

WHAT IS HIRE PURCHASE/CONDITIONAL SALE?Although people often talk about "buying on HP", Hire Purchase Agreements are quite unusual these days. Cars are the most usual goods sold under Hire Purchase or Conditional Sale... Read More

Credit cards

If gold medals were awarded for marketing consistency, the credit card industry would be the Sarah Hughes of the business world. Major players Visa and MasterCard, who have maintained their steady rates of... Read More

Big Brother Knows Whats in Your Credit Report - How About You?

Whether you are aware of it or not, credit bureaus have been keeping tabs on you and how you use credit. When it's time for you to apply for a mortgage, credit card,... Read More

Credit Reports Inside and Out

The Credit Report is like your scorecard in the lending world. Every time you prepare yourself to acquire or purchase something that requires financial assistance from a lending institution, your credit report will... Read More

Improving Your Credit Report

Even if you think you have a wonderful credit report, be wary of the error factor. Just as you receive mail with your name and address misspelled, your credit report can have errors... Read More

Your Consumer Rights

If you have ever fallen behind on your debts you already know that dealing with your creditors can be a hassle. Sometimes it can be downright humiliating. It doesn't have to be that... Read More

Ways to Look Good without Selling Your Soul to the Credit Card Sharks

1. Buy clothes at thrift stores. BEFORE you buy them, however, hold the clothing to the light to make sure there are no tears, check the seams under the arms, make sure the... Read More

Bad Credit? No Credit? Yeah, Its a Problem.

Many companies use the slogan "Bad Credit? No Credit? No Problem!" The truth is that it is in fact a problem and there is no easy way to correct it. It takes a... Read More

What is Credit Repair and How Can It Help You?

There are millions of consumer credit reports on file from mainly three major reporting bureaus which include Trans Union, Experian, and Equifax. These credit gathering agencies store huge amounts of data about every... Read More

Rebuild & Keep Good Credit Ratings by Understanding Your Credit Cards

Secured Credit Card is similar to a prepaid credit card since the funds you are using are actually yours and not the issuer of the credit card. Generally people who apply for secured... Read More

Free Credit Report - Really

2005 marks the year that consumers will be able to get a free credit report each year. The roll out of the Fair and Accurate Credit Transaction Act signed into law by President... Read More

Addressing Bad Credit Card Debt

Spending HabitsSo you've just got your credit card. The first thing you need to be wary about is that a credit card is very easy to use - afterall you can shop in... Read More

5 Things Your Credit Card Company Keeps Quiet About

Credit Cards can bankrupt you if you let them run away from you. The various Credit Cards companies are in it for profit so they will not generally alert you to things you... Read More

Cash Back vs. Rewards Credit Cards

Ah, the sweet rewards of using credit!Not only do you get immediate gratification with the buy now-pay later plastic, but now, many credit cards offer rewards and incentives for using their card to... Read More

Credit Card Shocker

Have you ever looked at your credit card statement? I'm not talking about just making sure that all the transactions are correct. I'm talking about looking at the finance charges. I daresay that... Read More

Ethical Finance: Who Benefits From Our Spending?

On one hand consumers are being universally criticised for running up significant amounts of debt on credit cards, yet conversely many companies are capitalising on the growing credit card debt, from charities and... Read More

Different Ways to Borrow Money

There are many different ways to borrow money. Outlined below is a useful guide to some of most common ways of borrowing money.LoansThere are many loan companies offering to lend you money. They... Read More

What You Need to Know About Interest Rates

For all people shop around for the best rate, there are few who have taken the time to sit down and add it all up. After all, why would you bother? The answer... Read More

Your Credit Rating and How To Check It

There is a lot of confusion surrounding UK credit ratings, credit scores, credit blacklists, credit reports, and credit files. This guide to your credit rating aims to give you the facts you need.What's... Read More

Credit and Loan Help for Mortgage Loans

Mortgage loans are some of the most difficult loans to receive if you have bad credit because lenders focus heavily on your credit score and history of making payments on time. However, there... Read More

How to Order the Right Credit Reports to Repair Your Own Credit

In this week's article, I am going to offer some tips and insight regarding how to order the right credit reports needed to repair your credit.Believe it or not, a majority of the... Read More

Clean Credit Report: Easily Raise Your Credit Score 100 points

Clean Credit Reports, your credit report contains information about where you work, live and how you pay your bills (On time or not). It also may show whether you've been sued, arrested or... Read More

Negotiating Rates with Your Credit Card Company

Ok, let's face it, everybody hates high credit card rates, and they drain hard earned money out of your wallet. As a valued consumer, it is apparent that you learn how to negotiate... Read More

Dont Fall For A Scheme When Trying To Rebuild Your Credit History

For people with a spotty credit history or bad credit, getting approved for a standard credit card can be difficult, if not impossible.There are a number of credit card options that are aimed... Read More

How to Improve Your Credit Rating

So you got into debt, had problems but you got yourself back on your feet through hard work and sacrifice and how are you rewarded? A Bad Credit Rating.You would be forgiven for... Read More

Compare Credit Card Offers and Reward Yourself

Here's a simple system on how to pay zero interest and get tons of free stuff. Almost everyone uses credit cards. But only a few thousand people out there take advantage of what... Read More