The Basics Of Electronic Payment Processing

What are the advantages (and disadvantages) of accepting credit cards for your business?

"Switching over to credit card processing has been a no brainer...no more 'checks in the mail'... in just 3 months my phone orders are way up and my accounts receivable have increased by 170% " ChadM., Custom Audio/Video Dealer Today there are hundreds of thousands of small & medi um size businesses in this country who take orders via credit cards. In addition, every day in this country, there are hundreds of companies entering the world of e-commerce. They come from many industries including retail, internet, mail order, home based businesses, B2B, professional services, wholesale and mobile businesses. In many cases they are "taking the plunge" to accept credit and debit cards for the first time. Some are successful and some are not. As with any other business venture, the companies that do their homework typ­ically have a better chance at being suc­ cessful. To help you start your homework, let's look at the advantages of accepting credit cards for your business. 6 Benefits of Accepting Credit Cards

1. Convenience -You probably already know that accepting alternative forms of payment like credit and debit cards helps make it more convenient for people to pay you. This will increase your sales and profits. Some studies say by 30 -100% or more (Visa International).

2. Increases Your Credibility - Did you also know that advertising your acceptance of credit and debit cards increases your credibility? It's true. The public knows that a Merchant Account status is not always easy to get and will look at you as more of a solid company -here to stay. "Hmmm.. .doesn't accept credit cards? Is there some kind of credit problem I should know about this company?".

3. Increases Your Average Sales Order - Were you aware that your AVERAGE SALE AMOUNT GOES UP when you accept credit cards? Studies prove (and I am sure it's true of most of us) that when we are ready to make a purchase and we are paying with a credit card we are more inclined to purchase the "upgrade" product or service. Human nature seems to cause most of us to be inclined to purchase the "better model or service upgrade" when we can finance the pur­chase with a credit card.

4. Impulse Purchases Go Up - Did you also know that your willingness to accept credit cards also causes impulse purchases to go up? Customers are more likely to pur­ chase when they can use a credit card versus paying with cash or a check. For some reason human nature - especially in the US - causes us to think paying on credit is easier.

5. Increases Cash Sales -1 bet you did­n't know that the mere presence of credit card logos at your business location increases CASH sales. A fascinating study was explained in the book Influence by Robert Cialdini. This scien­ tific experiment documented that the mere presence of Master Card/ Visa logos will increase cash sales by as much as 29% in controlled studies - even though credit cards were not used! If your business accepts cash, this is an extra bonus of accept­ ing credit cards and advertising that you do.

6. Cuts Back on Bad Checks and Collection Costs. -

By accepting credit and debit cards through a reputable Merchant Account Provider, credit cards orders will be screened for fraudulent transactions. Some providers, like Cardservice International, will take extra steps on address verification, verifying the extra four digits on the credit card, and blocking selected credit card num­bers, internet protocols, names or addresses. These are extra safety measures you can take to find peace of mind that the orders you are receiving - particu­larly on the internet - are legitimate. When a cus­tomer is a "slow pay", a common collection technique is to call the customer and suggest they give you their credit card information over the phone right then to clear up the default. Without this option you would typically have to wait to see if the customer sends you a check like they said they would.

Disadvantages of Accepting Credit and Debit Cards

Like anything else, the benefits of increasing sales and profits by accepting credit and debit cards does not come without some risks. Sure, one disadvantage is that you have to pay a percentage of the sales that are paid to you with a credit or debit card in rates and fees. You also have to wait from one to three days for your money to post to your checking account. You should be aware of other issues also.

1.) Chargeback Risk

The customer who paid you with a credit card has up to six months to dispute the charge. Should they not be happy with the product or service, they would typically call you and negotiate a resolution. Should you decide to give the customer a credit than you will typically pay your Merchant Account Provider the same rates and fees that you paid when you accepted the charge - even though the money is flowing OUT of your account.

Worse yet, the customer may still be dissatisfied after calling you because you felt a credit was not justified. The customer may not call you at all. In any event, the customer has the right to dispute the charge and write a letter to the bank that issued them the credit card they paid you with. The bank will contact the Merchant Account Provider who will then contact you to "retrieve" the signed receipt or possibly other evidence of the sale. This is called a "retrieval request" and usually costs $10 or more. The Merchant Account Provider may "charge back" the amount which also has a fee of $10 or more. Consumer Protection Law will usually side with the consumer and not you.

Should the order be a Mail Order / Telephone Order (MOTO) or an Internet order than your defense is very weak because you may not have a signed receipt. Make sure your "Descriptor" includes your phone number. This is the name of your business which the customer sees on the credit card statement they get showing the charge. If your phone number is included the customer will have a greater likelihood of calling you first to resolve the dispute. This could save you both a Retrieval Request fee and a potential Charge Back fee.

2.) Your Money Can Be Held Back By the Merchant

Account Provider An ounce of prevention may be worth a ton of headaches. When you filled out your Merchant Account Application you were asked the type of busi­ness you have, the monthly volume of sales you anticipate, and the average order size you anticipate. The rea­son Merchant Account Providers run a credit report on you and are concerned about your business type and sales volume is because ultimately the Merchant Account Provider has to make good your charge backs if you are not able to.

Should you declare bankruptcy, not ship your product, provide your service inadequately or even be running fraudulent credit card orders the Merchant Account Provider could really be hurt. Because of this, a "Loss Prevention" department will watch your processing activities and has a good idea of the types of businesses that have greater risk to the Merchant Account Provider. A Merchant (or the sales rep) may describe the business differently than it really is in order to get the Merchant Account Application approved more quickly. Once the Merchant Account Provider finds this out, they may hold your funds until everything is straightened out.

Spikes in your processing above your average daily approved sales volume estimate and much larger average order sizes than you were approved for will also concern the Merchant Account Provider. Trouble sometimes aris­ es when a Merchant is stacking up credit card orders waiting for their Merchant Account to both be approved and setup properly. The Merchant finally goes live and keys in a bunch of orders the very first day. Alarm bells go off..

The lesson learned is to make sure your business description, monthly volume estimate, and average order size (or average ticket) are all correct. If you have more than one business make sure you set up each business properly and separately. The expense to do this is not great compared to the risk. The right kind of credit card terminal, as example, permits multiple Merchant Accounts.

Make sure you keep your Merchant Account Provider informed. Are your sales seasonal - which could cause a spike? Did you make a large sale that you keyed into your terminal or software that is well above your estimate of average order size? Are you getting into another business all together? Save yourself some headaches and call first for advice from your Merchant Account Provider.

You also may want to look at the cost of NOT accepting credit and debit cards. Never mind all the hype about "My sales increased 500% because I started accepting credit cards." - although in some cases I have seen this to be true. DO think about the likelihood of getting even just a few "extra" orders for your product or service because you accept credit and debit cards. Based on your average order size, how much profit will you make on each of these "extra" orders. Add to that the savings on labor by possibly not having to send out invoices. What about the labor savings by converting to an elec­tronic check service so you just enter the check informa­ tion on the internet. Add to that using credit and debit cards as a collection technique for your slow pays. I know it sounds self serving because I am in the business but it is hard for me to imagine ANY business not choosing to offer as many payment methods as possible to their clients and customers. The question becomes one of choosing the best method of accepting credit and debit cards - not whether to accept debit and credit cards for your business or not.

What this guide is all about is giving you the education to make a decision on a Merchant Account Provider, a bank, or even a third party processor based on a cost benefit analysis and your service needs.

Who are the players? How does the money get in your bank account?

It's really quite simple. The customer wants to make a purchase with a Merchant (M) who has entered an agreement with a Merchant Bank (MB) to accept credit cards. The Merchant Bank though actually contracts with an Acquiring Processor (AP) to route the transaction. The merchant's service contact however is not with the Acquiring Processor directly or the Merchant Bank but the Merchant Service Provider (MSP) who really is an Independent Sales Organization (ISO). The ISO how­ ever does not want to be called an ISO and prefers to be called a Non-Cash Transaction Provider (NCTP). The NCTP also routes the transaction data to the Acquiring Processor and may or may not take the chargeback risk depending on what they have worked out with the ISO, the Acquiring Processor (AP) and the MSP (who can really be themselves) So... the M has a problem and calls the ISO who calls the MSP home office who checks with the AP. The AP calls the Issuing Bank (they get most of the money) who blames the ISO for the problem. The ISO blames the MP who blames the AP. It all, of course, ends up being YOUR fault. Simple, huh?

There can be as many as six parties participating in every credit card transaction.

The Issuing Bank

The issuing bank extends a credit card account to a cus­tomer after verifying the applicant's creditworthiness and "issues" the consumer a credit card (bankcard). The merchant's payment will eventually come from this bank. The Issuing Bank who gave (issued) the consumer a credit card actually ends up with a good part of the discount fee that the Merchant pays for the privilege of accepting credit cards. See "Interchange Fee" in the Glossary. This is why we get calls during our dinner hour to sell us another consumer credit card.

The Consumer

The consumer makes the purchase by presenting their credit card at the Merchant location. They use a bankcard (credit card) from an issuing bank and provide this information to the Merchant by the Merchant swip­ing the card on a credit card terminal, or in the case of a phone / mail order by the Merchant keying the transac tion.

The Merchant

The Merchant offers goods or services for sale. A Merchant needs both a Merchant Account (which means they have been approved for the chargeback risk) and a method of communicating the credit card information with a credit card terminal, PC based software, or internet based software. The days of taking batched credit card slips to your bank are essentially over.

The Merchant Bank

The merchant bank provides merchants with an online Merchant Account (to accept "card present" transactions with a terminal or "card not present" transactions). This bank may contract with an Acquiring Processor to move the credit card transaction through the payment process, or it may function in this capacity itself. The Merchant Bank and the Acquiring Processor may also contract with an Independent Sales Organization (ISO) to find the Merchant in exchange for a part of the processing fees.

ISO (Independent Service Organization):

a firm or organization which solicites offers to process non-cash and credit card transactions, usually in exchange for transaction fees or a percentage of sales.

The Acquiring Processor

The Acquiring Processor routes the transaction through the electronic financial networks for processing and settlement, delivering the payment to the merchant's online account once it has been obtained from the credit-card holder's account with the issuing bank.

(For a complete listing of all the terms relevant to the Merchant Account Industry including internet terms go to the Glossary of this Guide.)

Credit Card Transactions Step By Step

You may be surprised at the number of steps involved and at the critical role played by an Acquiring Processor such as First Data. Credit card sales that are processed through a terminal also complete the same process as described below for an internet transaction but the security issues are not as detailed.

l.)A consumer decides to buy something - On the

internet the merchant's commerce-enabled Web site prompts the customer for credit card information as well as "bill-to" and "shipping" addresses.

(At the storefront location the Merchant simply swipes the credit card on the POS system magnetic stripe card reader or credit card terminal for an authorization that the funds are good)

2.) On the internet the customer enters the informa­tion into a form secured by the SSL (Secure Sockets Layer) protocol - SSL encrypts the transaction data and sends the secured form over the Internet to the merchant. The form should appear on a webpage with HTTPS . The "S" means the page is secure. If there is no "S" in the HTTP than the consumer should NOT enter any private information including credit card information. In addition, email is not a secure method of sending credit card information. If a form is being sent to the Merchant via email with the credit card informa­ tion than this is a huge red flag. Credit card information should also not be stored on the server of the Merchant as this opens the Merchant to both hackers and employee theft.

3.) Using the payment software incorporated into the merchant's Web server, the encrypted transaction data is now sent to the acquiring processor, (i.e. First Data Merchant Services), for authorization - The

merchant can send the data via an Internet gateway serv­ ice, which will reformat the information so that it is compatible with the acquiring processor's systems. Alternatively, in cases where the merchant has installed software on its Web server, which is compatible with and approved by the acquiring processor, the transaction data can be sent directly to the processor via a private dial or leased line.

(At the storefront location the POS system or credit card terminal communicates through a dial up phone line connection. More and more Merchants are moving to an internet connection.)

4.)Whether a storefront or over the internet, the acquiring processor then communicates the transac­ tion data to the consumer's (issuing) bank - The issuing bank now authorizes a certain amount of money and issues an authorization code, or declines the transaction. The authorization decreases the customer's available credit, but does not yet put a charge on his bill or move the money to the Merchant. At this point, the Acquiring Processor will communicate with the Merchant's Web site, which will notify the consumer that the purchase has been approved.

(At the storefront location the POS system or credit card terminal receives an approval code back from the Acquiring Processor that the funds are good.)

5.) Once the transaction has been authorized, the next step is a capture - After authorization and prior to capture, the Merchant is still able to "void" a transaction without paying discount fees. The capture uses the information from the successful authorization to charge the authorized amount of money to the consumer's credit card. In line with bank card (VISA®/MasterCard®) association rules, a merchant may not capture a transaction until the goods have been shipped. So there may be a lag time between authorization and capture.