Creating a Merchant Account

There is little doubt as to the value of being able to take credit cards as payment for your product or service. This merchant status requires you deal with a provider or electronic clearing house for the credit card transactions and a participating bank for deposit of your funds. The process simply involves finding a bank that will accept you as a merchant card customer.

The problem is that it can be difficult to obtain a merchant account if you do not have a store front operation or if the majority of your business is via mail order. Currently, most banks are simply not interested in working with you unless you are a "traditional" business owner. However, with the proliferation of mail order and home based businesses, many electronic clearing houses are associated with banks that cater to the mail order business. That's the good news. The bad news is that if you are not very careful, your merchant account will cost you a lot more than necessary.

This report provides information to assist you in evaluating various banks and ensure you are getting the best deal possible. You do not need one of the numerous "manuals" that sell for up to $60 and claim to "guide you through the process." The "process" is actually very simple ... you just need to find the best deal out there by using the information we've provided.

1. Finding a provider. First, try going to your own bank and ask if they will help. If they will, be sure and review the various charges discussed below. Be careful since many banks deal with agents who in turn represent an electronic clearing house. These agents are commissioned and are not looking out for your interests. If your bank won't help, check the yellow pages under "Credit Card & Other Credit Plans-Equipment & Supplies" or similar heading. You may also search the Internet which is how we found our merchant account provider. Most listings will be agents that represent an electronic clearing house or the clearing houses themselves. Remember, talk only to the electronic clearing houses. It may not be clear if you're talking with a clearing house or an agent, so ask! By the way, if you are not using the Internet, you should be! See the news release at the end of this report.

2. Transaction costs. There is a discount rate (expressed as a percentage of the sale) associated with each credit card transaction. This rate is always higher for mail order businesses, but you should not pay much over 2%. A transaction fee is also charged and this should be approximately 20-cents.

3. Hardware/Software requirements. You will need a terminal (or software) which allows you to enter credit card data and obtain authorization for each charge. The terminal connects to a telephone line and calls the clearing house; with software you need a computer and modem. This is an area where many providers make their money. Terminal costs can range from $300 to $2000 (the terminals are all basically the same). Software, usually by "IC Verify," is approximately $350. Many providers require that you purchase or lease equipment from them and will tell you cost is not negotiable. This is not necessarily true. One provider we initially contacted priced the terminal at $1200. Later they reduced the cost to $800. Finally they agreed to $400. You should not pay more than $375 for a terminal. In addition to the terminal you might want a printer to generate a "sales receipt" for the customer which you will mail with the merchandise or invoice. Typical printer costs are $150-250. You do not need a printer, however, since you can use a manual imprinter (usually furnished free) for receipts.

I recommend you purchase software. It's handier and no additional printer is required since you can use your computer system printer. Furthermore, there are no hassles with warranties, electronic failures and mechanical problems. Do not work with a provider if they will not allow software as an alternate to a terminal.

4. Questions to ask the perspective provider before committing. Each question is followed by a comment to assist you in determining a "satisfactory" answer.

Q: Are there any application fees?

A: There should be none although some providers charge up to $500.

Q: Are there any installation or programming fees?

A: There should be none although some providers charge up to $100.

Q: Are there any statement fees?

A: There should be none, although some banks charge a monthly statement fee of up to $10/month.

Q: Is there a minimum account billing?

A: There should be none, although some banks charge a monthly fee of up to $50 for accounts that do not meet the minimum.

Q: Is there a chargeback fee?

A: A chargeback occurs when a bankcard customer has their account credited for a prior purchase (i.e., merchandise returned under a guarantee). There should be no fees to you for this although some providers charge up to $10.

Q: Is there a voice authorization fee?

A: A voice authorization is utilized when your terminal or software is not available. The provider usually has a toll-free number to use for this purpose. There should be no charge but some will charge up to $1/call.

Q: What are the transaction fees?

A: These fees are in addition to the discount rate charge on each transaction. They can vary depending on the form of the transaction and in general bankcard numbers taken over the telephone are slightly more expensive. A fair fee is 20-cents per transaction.

Q: Is there a bank setup fee?

A: This is typical of a fee you will not find out about until the 11th hour unless you ask. There should be no setup fee but some banks charge up to $50.

Q: Is there a daily close-out fee?

A: You will normally "close-out" your transactions at the end of each business day. This is done by a simple transmittal to the provider via your software or terminal. There should be no fees associated with this.

Q: When is customer support available? Toll-free number?

A: Support should be available to you via a toll-free number during normal business hours.

Q: Is a reserve account required?

A: Some banks will require that you maintain a reserve account whose amount is determined by your estimated sales receipts. You should not deal with a bank that requires this reserve.

Q: When will funds be available?

A: That is, what is the time delay between a transaction and when the money is available in the bank? It should not be longer than 3-days.

Q: Is money deposited in my own local bank?

A: In some cases, the provider's bank will require that funds be placed in their bank, and not yours. If this is the case, you simply move funds from their bank to yours a few times a month.

Q: What is the equipment warranty and what assistance is available if the terminal becomes defective?

A: Warranty should be at least a year and if you are leasing, as long as the lease. A 'loaner' should be available if your terminal requires repair. (Note: We strongly recommend you do not lease. We didn't find a single supplier who had lease terms we felt were acceptable.)

Q: What credit cards can be processed?

A: Visa and Mastercard are usually processed. You can easily add Discover at no cost but there are additional fees associated with American Express.

Q: Is a manual imprinter available?

A: This should be included at no charge.

All the fees are negotiable. As a mail order business you may not have much clout with which to bargain, but the right provider will charge few, if any of these fees. The only charges you should incur are the normal transaction fees and cost of equipment or software.

Final Comment

We paid $367 for the software (which was our preferred approach) and a discount rate (for a manual entry; i.e., mail order) of 2% with a 30-cent transaction fee. If the credit card is "swiped;" i.e., you have the credit card in-hand and can pass it through a reader, the discount rate drops to 1.77%. The only other up front cost was about $15 to purchase checks from their bank with which to withdraw our funds. The rates you negotiate should be close to these figures.

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Robert Sullivan is the author of The Small Business Start-Up Guide, and United States Government - New Customer!. He frequently lectures on starting small businesses and appears on CNBC's "Minding Your Business" as a small business expert. His books may be ordered toll-free by calling 1 800 375 8439.

Robert also developed and maintains an extensive award-winning Internet website, "The Small Business Advisor," at http://www.isquare.com)